Interview: KCT divestment will strengthen the Port Authority - Shirley
The balance sheet of Jamaica's principal maritime agency, the Port Authority of Jamaica (PAJ), will be stronger going forward, given that fees from the concession for the Kingston Container Terminal (KCT) and other statutory revenues that will accrue to it will exceed the current operating surplus.
The negotiated concession fees will also be enough to service the KCT debt and contribute to other KCT-related obligations of the Port Authority, said chairman and chief executive officer, Professor Gordon Shirley, in an interview with Sunday Business.
KCT provided nearly half of the Port Authority's revenue during the financial year ended March 2014.
However, according to Professor Shirley, the grant of a 30-year concession to Terminal Link/CMA CGM Group to finance, expand, operate and maintain KCT, which is expected to take effect in a few months, is not expected to result in a reduction in the net operating surplus. The consortium will operate the port concession through Kingston Freeport Terminal Limited.
"The net operating surplus from KCT operations was approximately US$18.9 million (J$1.96 billion) for financial year 2013/14 and it is expected that the annual concession fee (fixed and variable) and other statutory revenues generated from the terminal operations will exceed this amount," he said.
He added that while the Port Authority's gross revenue from the KCT operations would be reduced, so too would the operating expense as the gross flows and all the expenses will now be for the account of the concessionaire.
The concession guarantees an upfront payment of US$75 million (J$8.6 billion), in addition to a fixed annual payment of US$15 million as lease for the port facilities and a variable fee of eight per cent of gross revenues payable monthly, which Professor Shirley said will add greater stability to the Port Authority's net revenue. The US$15m translates to J$1.7 billion at current exchange rates.
Stronger balance sheet
The Port Authority said KCT's gross operating revenue was J$9.3 billion in financial year 2013-14 while operating costs amounted to J$7.3 billion. The operating surplus of J$1.96 billion before the deduction of interest costs of J$1.56 billion for loans used to fund KCT development, and depreciation cost of J$1.34 billion relating to KCT assets, resulted in a net loss of J$940 million for financial year 2013/14.
"I think the financial statements going forward for PAJ will be more stable, will be stronger. The balance sheet will be stronger going forward, which gives us the basis for investing in other projects relating to the maritime sector," Shirley told Sunday Business in an interview.
According to the Port Authority's annual report for financial year ended March 2014, consolidated container terminal operations accounted for J$10.16 billion or almost 50 per cent of total group revenue of J$20.38 billion.
The terminal operations intake include J$1.5 billion of revenue earned from security services provided at the port by a subsidiary of the authority, and $500 million in fees associated with the terminal operations at KCT, Montego Bay and Ocho Rios.
During the fiscal year, container moves at KCT totalled 833,309 in comparison to 964,673 during the previous year - a decrease of 13.6 per cent.
Shirley said the Kingston Freeport concession agreement does not guarantee any rate of return on the investment being made at KCT, the first phase of which is expected to focus on improvements to the port's infrastructure over five years at a cost of US$259 million.
"The investor is going to make certain investments and we get a certain return. You could argue that it is our side that is guaranteed a return in the sense that we have the upfront fee, the annual fixed payment and the variable component," said the port chairman.
"They are taking the risks in the sense that it is they who are responsible for bringing the volumes. As the volumes grow the returns obviously will improve because of the structure of this transaction which has a high fixed cost component."
Asked whether penalties are built into the agreement for failure to meet time lines, Shirley said the Port Authority expects the investment to be undertaken within certain time frames, and if the concessionaire fails to meet them the duration of the contract could be reduced.
"The concession agreement includes specific performance requirements by the concessionaire, which represents the absolute minimum level in respect of the technical project requirements for phases one to two - improvements, operational project requirements, including expected performance standards which is line with the industry standards; health, safety, security and environmental project requirements that are in conformity with the ISPS (International Ship and Port Facility Security) Code and laws of Jamaica," the Port Authority explained.
The concessionaire is also required to provide US$15 million as performance security.
"There are various remedies ranging from monetary damages, shortening of the length of the concession terms or termination of the concession that the PAJ is entitled to pursue in the event of the concessionaire's failure to complete the capital works, including dredging," the port agency said.
Shirley said he was confident that the phase one investments would start rolling out more or less immediately after financial closure of the concession contract, which is expected within six to eight months dated from the signing a month ago on April 7.
As to whether the Port Authority has any financial obligations under the concession, he said they would be involved in reinforcing the quay walls at Gordon Cay - given that the building codes have been enhanced since the agency constructed that infrastructure in the 1990s - so they can withstand natural disasters.
He said that with the concession, the structure and operation of the Port Authority will evolve, but "our basic objectives will remain the same. We have a regulatory function ... our goal is to regulate the industry in a way to ensure that we have continued growth in the transhipment business and in the ports generally."
The Port Authority is not contemplating the privatisation of its other functions - which includes management of the island's cruise piers - but is planning to invest substantially in the Falmouth, Ocho Rios and Montego Bay cruise and cargo facilities in the near term.
Shirley said a decision has not yet been made about the most efficient way to treat with Kingston Container Services Limited, the subsidiary which provides personnel services and managed the KCT.
Port Authority at yearend March 2015 was close to $41 billion in debt, much of it linked to expansion projects for KCT over several years.
The agency said the concession fees negotiated with Kingston Freeport "are sufficient to service the KCT debt and contribute to other KCT-related obligations of PAJ, including maintenance dredging. In addition, charges such as port dues and harbour fees (statutory income) remain with the PAJ in order to fulfil its regulatory functions".
Other non-KCT loans will continue to be serviced from cash flows from the different operations. The Port Authority said, for example, that loans for the development of the Falmouth Cruise Port will be repaid from the revenues earned from that facility.