Courtesy of Wikipedia
There are no universal rules about how long the life of a concession should be. Economic theory on regulation indicates that the longer the life-span, the more incentives the private concessionaire has to make adequate investments to enhance the assets, since profitability will be dependent on the state of the facilities.
However, the longer the period between two concessions, the less information the regulator may have on cost and demand conditions. Therefore, there is a trade-off between incentives and information for regulating a concessionaire optimally…..
50 years is a long time. Most people over 50, won’t see the end of the lease. Only 6% of those now between 40 and 50 years old, will be around go see it revert back to the state. An egg, fertilized tonight, will be moving around as a 50 year old when this port lease expires…..
Can a lot change in 50 years? Let’s look back… 50 years ago was 1963… Let that sink in…. If our ancestors had leased the port in 1963, while John F. Kennedy was president, while Lyndon Baines Johnson was Vice President, while Robert Kennedy was Attorney General, it would still be in the lessor’s control…. What would it be? Would it have grown as it did as as public entity? Kinder Morgan is an energy company… How many of these are still around? Amoco, Getty, Esso, Sinclair, Atlantic, Texaco, Gulf, Pure, Phillips 66, ….
A quick reminder of our local refinery may drive home the point. Originally Delaware City refinery was started in 1956 and as of 1963 was owned by Getty… In these 50 years past, it has gone through a progression of Texaco, Star Enterprises, Motiva, Premcor, Valero, and after a brief shut down, it is now run by PBF Enterprises… I wonder how many of the original promises that Getty made to get approval and the refinery built, are still edified in the practices of the current owner?
Kinder Morgan says it has no plans for Liquid Natural Gas… but, what about its third owner, its fourth, its fifth? The only thing constant is change…. When people tell me Kinder Morgan is going to be around a long time, I tell them that early last year, El Paso Gas was saying exactly the same thing….
Bottom line, none of us would lease our house out for 50 years locked at today’s low rent prices, yet that is what we are doing with Kinder Morgan. We are giving them a cut throat bottom rate for 50 years with no renegotiations….. And speaking strictly for myself, if I were Kinder Morgan, … those last 15 years I would put as few pennies as I could into my investment, knowing full well, I’d soon just be turning it over to the state in 2064…
Which means, that after the end of 50 years the State receives an beat down, unmarketable entity, and not the same shining port we are giving up today: the number two largest fruit port of the entire world…..
So, what do other ports lease for?
As one can see, only one port is leased out for 50 years: La Harve in France. The average lease on the chart above, is 23.3 years. Furthermore, in such agreements it is very common to have penalties and fines to guarantee adequate compliance with the terms of a concession agreement… Concession contracts have long lives, and therefore it is important that port authorities are able to establish strong positions from the start of the concession, and be allowed to perform regular inspections to verify assets are being kept in top condition. The potential threat of fines must be written into the contract to ensure compliance.
It is because concession contracts have long lives that it is important the port authorities are able to establish strong positions from the start of the concession. Re-negotiation of a concession contract is probably the rule and not the exception, and should not be perceived as a failure. Since concession contracts are typically long-life documents, it is impossible that at the moment of drafting the contract the parties can foresee all possible future contingencies….
Bottom line, the excessive length of this contract for this small port is odd, and is definitely laid out in the favor of the renter, who in this case will be Kinder Morgan. At this point, without balance embedded deep within the contract, we are really doing nothing more than selling our first born daughter to the very first man who comes along….