Can ports and terminals benefit from government stimulus packages?

Governments keen to show that they are pro-active in the face of the current economic crisis have been making impressive announcements of their proposed financial commitments to restore their national economies by means of stimulus packages.

With the global trade slowdown being translated into lower volumes of commodities and finished goods passing through ports, and the financial crisis hitting the ports and terminals sector hard, the economic stimulus packages which are being rolled out by governments over the world have been attracting the attention of potential recipients in the ports and terminals sector. But can ports and terminals realistically benefit from these stimulus packages?

China’s State Council announced in November 2008 that a Yen4trn ($586bn) stimulus package would be put in place to deal with the economic difficulties facing the country. The package will be targeted towards supporting public works, social welfare and tax reform. One of the main spending targets will be infrastructure projects such as railways, roads, airports and the power grid. The Chinese government has also proposed a reform of the VAT system.

Meanwhile, the US has announced a $787bn stimulus package, which was signed into the American Recovery and Reinvestment Act of 2009 in February 2009, and seeks to limit imports and encourage infrastructure spending on American products and services. The funding will be applied to “the sectors of the economy that need it the most”.

Potential ports and terminals recipients have also expressed interest in projects where governments have taken initiatives (other than direct financing) to stimulate the interest of private investors in the ports and terminals industry.

For example, public-private-partnerships are emerging in the US where two possible port privatisations are anticipated, in the ports of Oakland and of Virginia. In Korea, the government is acting as an intermediary to buy distressed ports and terminals for resale to the private sector.

More creatively, the Brazilian government is using the money earned through the privatisations of various Brazilian ports to create an investment vehicle to be applied to the country’s ports and terminals.

The announcements made by the various governments offering financial stimulus are broadly divisible into two categories (a) infrastructure improvements designed to create or preserve jobs, and (b) infrastructure improvements aimed at preparing for future anticipated demands in trade.

Projects also differ in the extent to which they are targeted with Asian governments more likely to target particular infrastructure development projects. Some governments have clearly stated that the money will be assigned to specified projects based on need.

Many of the infrastructure projects which are targeted focus on the logistics aspect of ports and terminals, such as intermodal freight connectors, maritime highways, railway investments, and projects related to the interface between ports, roads and rail. This is the case in the US, where the railroad industry and alternative energy sectors will benefit from the stimulus.

Infrastructure-centred projects have attracted some criticism from some port authorities, for example Canaveral Port Authority, which has commented that the projects which are targeted were not necessarily stimulus projects, as they are not out of the ordinary and do not particularly help to create jobs.

In a declared effort to create or save jobs, some governments are taking initiatives to modernise and liberalise the ports and terminals sectors. For example, the Spanish government is working on legislation aiming to give ports authorities more freedom to set their own tariffs, in order to increase competition between the various ports, and boost productivity and efficiency. This is a wise initiative bearing in mind the pressures of competition from the global markets in which the ports operate. Such changes have, however, met some resistance from local port unions who claim that this will not improve job security, as the government will only guarantee that 25% of dock workers will have long term employment contracts.

Although the ports and terminals sector might benefit from the funding which will be allocated to infrastructure projects and liberalisation, the sector will more certainly benefit from value-added tax (VAT) and other tax reforms. For example, the proposed reform of the VAT system by the Chinese government, allowing companies to deduct purchases of fixed assets, and reducing their tax bills, will certainly benefit ports and terminals since it will apply across the board rather than being focused upon specific targets.

Some governments appear to have expressed their intentions to target specific types of projects. Other governments are focusing on revising their current laws in order to create a better commercial environment in which the ports can operate.

Part of the difficulty in understanding the various stimulus plans which are being announced is that most of them, perhaps with the exception of the US, are at this stage generically presented. It is difficult to understand how much of the funding will be made available to infrastructure projects, the proportion of funds that will be allocated to ports and terminals, and how to gain access to the funding.

Although the US stimulus package appears more highly developed and transparent than other packages, the finer details even of this package are still being elaborated and approved through the various levels of applicable federal legislation. This will certainly attract a lot of attention and lobbying from the various industry players, as the government may allow itself a large amount of discretion in targeting projects. The main risk at this stage is that the original plans get watered down in political bargaining.

In an effort to guarantee that the allocation of taxpayers funding is transparent, the US government has set out information about federal grant awards and contracts together with a proposed distribution methodology. It will however be for federal agencies to set the precise allocation of funds.

Other plans have progressed little from the announcement stage.

The feeling is generally that although great announcements have been made, the plans are not as precise and targeted as port operators may wish them to be, partly because they were unravelled at a time when showing the government’s proactive initiatives was the priority.

For a large part, the question of accessibility to these plans will be determined through a political bargaining process, and the outcome is still highly uncertain.

For the time being, it appears that other than in the US, port operators are unlikely to see the benefits of the new economic stimulus packages which are being rolled out by many nations. Potential ports and terminals recipients are thus advised to review existing funding plans, as these offer clearer eligibility guidelines and more certainty in terms of accessibility.

Ports and terminal operators may also simultaneously approach governments with creative ideas of how to improve infrastructure, create jobs and justify government funding via newly announced stimulus packages but the route is far less certain to be successful.

Mark Wandless is a partner and Cécile Schlub is an assistant solicitor within the Ports & Terminals Group at international law firm Holman Fenwick Willan. For further information please visit www.hfw.com or contact Mark Wandless at mark.wandless@hfw.com and Cécile Schlub at cecile.schlub@hfw.com.