Key words: arrendamentos portuários, restrição orçamentária intertemporal, modelo de precificação.

Palavras-Chave: leases of port areas, port intertemporal constraint, pricing model.

Recommended Citation

Resumo

The aim of this paper is twofold. The first one is to propose a pricing model of port real asset and the second is to establish

grounds for agreements between the lessees and the ports. The pricing model is based on the port’s time budget constraint and

opportunity cost of infrastructure. The lease fee includes a fixed part and a variable part that is indexed to the intensity of cargo-

handling. The less cargo is handled at the leased area in a given year the less lease revenues the port will obtain. The port lease

model proposed in this paper looks more like a public-private partnership and differs from concession or permission grants. The

agreement between the port and the lessee should occur by means of securities that can be traded in the Brazilian stock market.

These securities can be traded with investors; in the port’s perspective, securities can be viewed as a source of funding.

Rocha, C. H., Gartner, I. R. and Cavalcante, L. R. (2011) A model of lease of port areas: a new contribution. Journal of Transport

Literature, vol. 5, n. 3, pp. 4-15.

Carlos Henrique Rocha, Ivan Ricardo Gartner, Luiz Ricardo Cavalcante

Abstract

Este artigo tem dois propósitos. O primeiro é oferecer um modelo de precificação de arrendamentos portuários. O segundo é

estabelecer um contrato entre o porto e o arrendatário que possa ser negociado em bolsa de valores; o contrato é um papel

negociável nos mercados monetários e de capitais. O modelo apóia-se na restrição orçamentária intertemporal do porto e no

custo de oportunidade da infraestrutura portuária. O modelo é do tipo parceria público-privada (PPP), pois queda na

movimentação de cargas na área do arrendamento, devido a questões sistêmicas (macroeconômicas), por exemplo, faz o porto

obter menor receita de arrendamento.

This paper is downloadable at www.transport-literature.org/open-access.

■ JTL|RELIT is a fully electronic, peer-reviewed, open access, international journal focused on emerging transport markets and

published by BPTS - Brazilian Transport Planning Society. Website www.transport-literature.org. ISSN 2238-1031.

* Email: chrocha@unb.br.

Research Directory

Journal of Transport Literature

Submitted 12 Aug 2010; received in revised form 31 Oct 2010; accepted 10 Dec 2010

Vol. 5, n. 3, pp. 4-15, Apr. 2011

A model of lease of port areas: a new contribution

[A model of lease of port areas: a new contribution]

Universidade de Brasília (UNB), Brazil, Universidade de Brasília (UNB), Brazil,

Instituto de Pesquisa Econômica Aplicada (IPEA), Brazil

B T P SB T P SB T P SB T P S

Brazilian Transportation Planning Society

www.transport-literature.org

JTL|RELITJTL|RELITJTL|RELITJTL|RELIT

ISSN 2238-1031

1. Introduction

The limitations of the Brazilian port system have been an obstacle to the expansion of the

country's exports. To that end, investing in the port system is a prerequisite for fostering

economic development in the country.

However, the public resources available are not enough to carry out the much-needed

improvements in the sector (Tovar & Pereira, 2006). Given that limitation, there is room for

private entities to participate in port operation (Marchetti & Pastori, 2006). Law No.

8630/1993, also known as “Ports Law”, encourages private participation in modernizing

Brazilian ports by means of port leases preceded by a public tendering process. Brazilian

public ports are now typed as a land-lord. In addition the Ports Law broke the State's

monopoly in port operation. The overall aims of that Law were the following (Marchetti &

Pastori, 2006; Tovar & Pereira, 2006):

a) Promoting the sector’s decentralization by means of dispersing the ports’ decision-

making governance to states and municipalities.

b) Allowing port operations to be conducted by the private sector.

c) Fostering investment in port superstructure and modernizing port operations;

encouraging the private sector to acquire more productive new equipment so as to reduce

vessels' waiting time and length of stay at the port.

d) Allowing private dedicated terminals to handle third party cargo; before this law was

enacted, private terminals were exclusively used for own cargo.

e) Encouraging competition how? in the sector so as to reduce port handling tariffs.

f) Adjusting the amount of workforce needed in port operations so as to meet the new

technologic and production standards.

A few changes were introduced in the administration and operation of the Brazilian port

system in order to meet these objectives, among which the following should be, underscored

(Marchetti & Pastori, 2006):

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

5

a) Creation of the Port Operator (OP) character, which is a legal person that is qualified

for conducting port operation activities at the port, such as load and unload cargo from

vessels to trucks and trains and vice versa.

b) The role of the Port Authority (AP) was clearly defined: it is responsible for managing

assets, auditing lease agreements, carrying out maintenance services at the port as well as

catering for its efficiency, investing in dredging, infrastructure, information systems and so

forth. The Port Authority Council (PAC) was created. PAC appreciates annually the port

budget, reports on infrastructure investments, balance sheet and income statement and

authorizes leases of port areas. A Labor-Management Body (OGMO) was established,

providing workforce to the Port Operators.

Leasing established in the Ports Law is an agreement drawn up between a lessee and a lessor.

The former is the user of the property installation or equipment involved and the latter is the

owner of it. The agreement stipulates that the lessee has the right to use the asset and in return

has the obligation to make periodic payment to the lessor (Blatt, 1998; Lima & Di Augustini,

2001). In Brazil, leases of public port areas come under the jurisdiction of the National

Agency for Waterway Transportation (Antaq), created in 2001.

The Brazilian academic literature has paid little attention to this matter, leases of public port

areas. For example, one of the few recent academic papers on ports is Ervilha et. al (2008).

An exception is made by Rocha (2005), who proposes a pricing model based on a two-part

tariff. Rocha’s (2005) model, however, lacks precision in three important aspects. First, it

assumes that all port costs are covered by lease revenue. Second, it disregards the opportunity

cost of port infrastructure (Haralambides, 2002; Jansson & Rydén, 1979). Third, the author

does not take into account in his model expenditures with investment.

The international literature does not provide a model for pricing port areas. However, authors

such as Haralambides (2002), Jansson & Rydén (1979) and Musso, Ferrari & Benacchio

(2006) argue that the pricing port area models have to take into account the recovery of port

costs, mostly, investment costs.

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

6

Given the limitations described so far, the aim of this paper1 is twofold: first, to put forth a

pricing model for leases of port areas and installations; and second, to propose a type of lease

agreement between the port owner (i.e., lessor) and the lessee. The agreement recommended

in this paper can increase the liquidity of investment in infrastructure and leverage resources

for investing in ports.

This paper is organized in the following way. Section 2 puts forth a pricing model for the

leasing of port areas. The opportunity cost of lease port areas is given by their intrinsic

features. Section 3 proposes a type of lease agreement that could be adopted by Brazilian

ports. Finally, we present paper’s conclusions.

2. A model for pricing port infrastructure

We assume a port’s intertemporal budget constraint function such as:

0)1(

)()(

1

=+

+−++∑

∞

=tt

P

ttttt

r

GMSRTRA

(1)

Where, during the period t , tRA is the estimated lease revenue, tRT , is the estimated tariff

revenue, tS represents subsidy provided by the government, tM stands for the port’s costs,

tG corresponds to investment in dredging and Pr is the port’s opportunity cost of capital2 (the

risk free rate and for sake of simplicity it is assumed the same over the years). Equation (1)

has supposed that port´s life cycle revenues and costs are equal; equation (1) can be seen as a

perpetuity.3

1 This paper improves the arguments in Rocha & Cavalcante (2010). 2 It should be said that the port´s opportunity cost of capital is not the same as the opportunity cost of port infrastructure. We deal with the latter opportunity cost in Section 3 below. 3 A perpetuity is an annuity that has no definite end, or a stream of cash payments that continues forever (Brigham and Houston, 1999).

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

7

Now let us assume that:

(i) RARARARA t ===== ......21 .

(ii) RTRTRTRT t ===== ......21 .

(iii) SSSS t ===== ......21 .

(iv) MMMM t ===== ......21 .

v) GGtGG ===== ......21 .

After substitution of these definitions into equation (1) we have:

0)1(

)()(

1

=+

+−++∑

∞

=tt

Pr

GMSRTRA

(2)

Again, this can be seen as a perpetuity, so:

0)()( =+−++

Pr

GMSRTRA

(3)

Multiplying both sides of equation (3) by Pr and making the right simplifications to get:

0)()( =+−++ GMSRTRA (4)

Now, from equation (3) we can obtain RA residually as below:

)()( SRTGMRA +−+= (5)

Thus, the port’s budget equilibrium requires that the expected lease revenue annually equals

equation (5). That is, equation (5) says that port’s lease revenues should grant part of port’s

investments, excepted dredging investments.

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

8

3. The opportunity cost of port areas

Authors such as Fávero et. al. (2008), Nogueira et. al. (2000), Maia et. al. (2005) and May et.

al. (2003) have used the method suggested by Lancaster (1966) to solve, in practical terms,

matters regarding opportunity cost of real assets.

That approach is based on the intrinsic features of the asset or on the asset’s attribute vector.

Attributes of port areas (real estate) include the following, among others:

a) Accessibility (e.g., road, rail, water, pipeline).

b) Proximity to environmental protected areas.

c) Type of cargo handled.

d) Covered or uncovered area.

The lease fee is comprised of two parts, one fixed and one variable. In alignment with the

work of Rocha (2005), the fixed part is represented by a proportional average based on the

size of the leased area. On the other hand, the variable part is a function of the opportunity

cost of port infrastructure, which, in turn, is dependent upon the port’s attributes as mentioned

above.

The annual lease value of the area k (considering that the port has K areas to lease so that

∑=

=K

kkkK

1

) for the time lease horizon is shown below:

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

9

Year (t) Annual leasing value ($) Equations

1 RARA

K

kTAA kk θαα )1(1 −+=

(6)

2 )1()1(2 gRARA

K

kTAA kk +−+= θαα

3 23 )1()1( gRARAK

kTAA kk +−+= θαα

… … …

N 1)1()1( −+−+= Nk

Nk gRARA

K

kTAA θαα

where θk is the opportunity cost of port infrastructure of the area k, 11

=∑=

K

kkθ ; kθ is a function

of the port area k attributes, each area has its own attributes and because of this there exist

different areas in the same port have different opportunity costs. The parameter α

corresponds to the fixed fraction of the total lease costs; α is established by port public

authority. The parameter g is cargo annual growth rate in the leasing area. The parameter g is

jointly estimated by the port authority and the port area k lessee annually; g can be zero, less

than zero and greater than zero.

The parameters θk ( Kk ,...2,1= ) may be obtained by means of multicriteria methods such as

weighted matrix and methods that meet dominance principles (Fasal, 1972; Barton, 1989). It

should be mentioned that the application of any such methods ensures that 11

=∑=

K

kkθ .

Obtaining θk is an empirical matter.

The first term on the right side of equations (6) is the fixed part of the lease price and the

second one corresponds to the variable part. The fixed part corresponds to the lease revenue,

which aims at covering costs regarding the dock’s conservation and maintenance conditions,

docking and navigability conditions, the port’s access ways (road and rail), pipelines (ducts)

and supply installations as well as other port facilities. The variable part should cover

expenditures with investment.

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

10

Thus, the lessee should pay an annual fee to the port regarding the lease of the area k, as

shown above. That fee is calculated according to equations (6). Such proposition dissipates

the business risk between the lessee and the port, according to the principles that govern

public-private partnerships (PPP), as noted by Enei (2007), Finnerty (1999), Gatti (2008) and

Wynant (1980).

So as to further clarify this argument, consider the following scenario: if, due to systemic (or

macroeconomic) reasons, in a given year, cargo handling intensity in a given leased area k

drops, the amount the lessee is supposed to pay in that year will also decrease. That scenario

characterizes a cash deal, with no withdraw, which is taken on by the port. Remuneration

received by the port is linked to the private partner’s (i.e., lessee) performance, provided that

the agreed standards are honored.

3. Structure of the lease deal

In Brazil, there is a pressing need for new and improved port infrastructure. However, public

ports cannot afford to take on the necessary investments (Lacerda, 2005; Rocha & Britto,

2010).

We argue that port leases can serve as a funding mechanism. It is proposed that the lease

agreement be underwritten as a preferred non-callable bond with guarantees. The following

assets can be included in the agreement as collateral: movable property, real estate and lease

proceeds. Assets pledged as collateral may be owned by either the lessee or conglomerate

firms, or they may belong to third party entities (e.g., insurance companies).

So as to minimize risks, the underwriting should include a clause that details the reasons for

which the lease can be cancelled. In addition, the underwriting must include a safety clause

that mandates the port authority cannot cancel the lease for reasons other than the ones agreed

previously.

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

11

That security’s face value is zero and pays uniform annual coupons, that are equivalent to

tkTAA ( Nt ,...,2,1= ); which are calculated according to equations (6) above.4 Coupons begin

to be paid at the end of year 1+m ; where m refers to the project’s term of maturity. In

addition, coupons that have not been paid in previous years are owed; if the coupon is not

paid at all the lease agreement may be cancelled out.

Transactions between the lessee (i.e., issuer) and the port (i.e., holder) must be carried out

over-the-counter by institutions duly authorized by the Brazilian Financial and Investment

Papers Regulatory Board (CVM). It is important to highlight that the lease deal can be traded

at the Brazilian over-the-counter market, where the following securities are already traded:

subscription bonuses; stock market indices; call and put options; subscription rights,

subscription receipts; real estate receivables certificates; miscellaneous securities etc.

(Cavalcante & Misumi, 2008).

The safety clause included in the lease deal underwriting allows the port to trade with

investors. That transaction will also take place over-the-counter. Due to reasons regarding risk

exposure, business, credit and regulatory matters,5 transactions between ports and investors

should be conducted with substantial abatement.

Finally, the model proposed here allows the resources to be anticipated so that the port can

perform the desired investments. It is worthy mentioned that Rocha & Britto (2010) have

suggested securitization operations of leases of port areas and installations for that purpose.

4 The fee’s annual value will be monetarily inflated according to the indicator stated in the agreement. 5 The level of exposure to regulatory risk is closely linked to the term of the lease (project).

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

12

Conclusions

This paper proposes a model for pricing leases of port areas and installations so as to fill the

gap left by the literature.

The model proposed is based on two basic elements: (a) the port’s intertemporal budget

constraints; and (b) the opportunity cost of port infrastructure.

It is a two-part tariff model as the lease price is comprised of a fixed part, which is invariable,

and a variable part that is indexed to the intensity of cargo-handling at the port. Thus, the less

cargo is handled at the leased area in a given year, the lower the total price of the lease will be

in that year. That is why the port lease model proposed in this paper looks more like a public-

private partnership (PPP) and differs a lot from concession or permission grants.

This paper puts forth the idea that the agreement between the port and the lessee should occur

by means of a security that is negotiable in the Brazilian stock market; more specifically at the

over-the-counter market.

Because operations take place at the over-the-counter market and given certain clauses

included in the lease deal underwriting, it can be traded with investors. Therefore, in the

port’s perspective, lease agreements can be viewed as a source of funding.

Acknowledgments

This research initiative received financial support of the University of Brasília’s Foundation

for Scientific and Technologic Undertakings (FINATEC-UnB).

Revista de Literatura dos Transportes, vol. 5, n. 3 (2011)

13

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