99-Year Leases and Chinese Port Investments

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On Monday, the Law Amendments Committee sent Bill 85, which grants new powers to the Cape Breton Regional Municipality (CBRM), back to the Nova Scotia House of Assembly without amendment.

Neil Davidson

Neil Davidson

One of the powers Bill 85 will grant the CBRM is the ability to enter into a 99-year lease, which our mayor argues is necessary to allow the Sydney harbor container port project to proceed.

The 99-year lease requirement seems to have originated with our self-styled “port developer,” Albert Barbusci, the former advertising executive who heads Sydney Harbour Investment Partners (SHIP), which has been granted exclusive rights to develop the Port of Sydney until 2021.

But I wondered whether a 99-year lease is standard in the shipping industry, so I asked Neil Davidson, senior analyst for ports and terminals with Drewry, the maritime research and consulting firm. He told me by email:

The typical length of the port/lease concession depends on the precise nature of the deal. For example, in a case where a public port authority builds the infrastructure (quay walls etc) and a private terminal operator provides the equipment and runs the terminal, the deal might only be 20-25 years typically (albeit with scope for extensions). The deal length reflects the typical life span of major items of equipment like gantry cranes.

However, if the private sector is being expected to invest in the infrastructure as well (which has a much longer life than equipment), then 40-50 years is more typical.

Longer leases/concessions are less common and I would say that 99-years is rare, but again it depends on what is being asked of the investor (for example if “beyond the terminal” investments like building a breakwater are required, it might tend towards the 99 years).

Basically, the closer the private investor becomes to being a port authority (i.e. the landlord and investor in all of the port’s infrastructure), the longer the lease that is necessary to allow the deal to be financially viable.

A 99-year lease, then, is rare, that’s a piece of information worth knowing. But it does seem like the private investor in the Sydney deal will come close to being a port authority — acting as landlord and investing in all the port’s infrastructure (with the possible exception of the railway, which still seems to be a public responsibility).

There may well be a case for a 99-year lease — but there may equally well be a case for a 40-50 year lease (which, for the record, the CBRM would still require increased powers to enter into). I have never heard either case made, we’ve simply been informed a 99-year lease is a prerequisite for this project and everyone — including the Minister of Municipal Affairs — seems to have accepted it without question.

 

Strategic asset

In fact, the 99-year port lease seems to be a distinctly Chinese phenomenon.

If you google “port 99-year lease,” the first results you get concern a Chinese company, Landsbridge, paying AUD$506 million for a 99-year lease on the Port of Darwin in Australia’s Northern Territory; our own China-linked port marketers eyeing a 99-year lease in Sydney, Nova Scotia; and China signing a 99-year lease on Sri Lanka’s Hambantota port.

Turloch Mooney

Turloch Mooney

The Port of Darwin deal raised red flags in Washington, with then-President Barack Obama complaining that Australian PM Malcolm Turnbull had not consulted the US, which uses parts of the Port of Darwin to train Australian troops, before leasing the port to a Chinese company with alleged links to the Chinese military.

Security concerns also surfaced over the $1.3 billion Hambantota port in Sri Lanka, which was built by CCCC with Chinese loans. Sri Lanka struggled to repay its debts, and in 2017 signed a deal giving the China Merchants Port Holdings Company an 85% share of the port on a 99-year lease for $1 billion. India, alarmed at China’s growing presence on the Indian Ocean, expressed concerns about the deal, prompting assurances from Sri Lankan Prime Minister Ranil Wickremesinghe that the port would not be used as a “military base” by any foreign country.

And then there’s the Sydney, Nova Scotia deal.

I emailed Turloch Mooney, a Macau-based senior editor for global ports and maritime trade with the research and consulting firm IHS Markit, sending him a link to a story about the Sydney project and asking what he made of it.

The first thing he told me, interestingly, was that he had “not heard anything in China about this deal.” He then went on:

The right boxes would need to be ticked to make the project worthwhile from a commercial point of view, including realistic levels of demand to support a phased project development plan going forward, the right contract terms (the ownership interest mentioned in the article may be important to CCCC), possibilities for additional investment, and so on. Canada is not an official Belt and Road country but the large Chinese infrastructure companies and state-owned port and terminal operators make significant investments in countries that are not on the official Belt and Road routes, for example Latin America. An investment of this size by China in the development of a strategic asset in North America would face some scrutiny and possible political hurdles. [emphasis mine]

CCCC is listed on the Hong Kong Stock Exchange and the commercial terms of the deal and creation of shareholder value are important. Its parent company is supervised by the State Council so you cannot rule out objectives beyond the direct commercial objectives of the deal — most probably similar to the high-level objectives of Belt and Road, which are primarily aimed at supporting changes in the domestic Chinese economy, supporting economic growth and addressing some important security concerns in the country. Chinese port interests in North America are limited and will likely continue to be limited, so a large project in Canada may be interesting in terms of the creation of a global ports footprint.

So, given just the bare bones outline of the Port of Sydney deal, a ports analyst based in China immediately assumes “an investment of this size by China in the development of a strategic asset in North America would face some scrutiny and possible political hurdles.”

And yet, rather than being subject to scrutiny or political hurdles, the project is being actively promoted by our political representatives at all three levels (not to mention a former Canadian prime minister whose role as a Port of Sydney promoter stirred some controversy this week).

If this deal has any chance of actually materializing (a big “if,” especially given that a Macau-based ports analyst had never heard of it), wouldn’t a little more scrutiny be in order?

 

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