Tips for safe harbour against port construction risks

By Cao Shan and Lu Yuchen, City Development Law Firm

Port construction is closely connected to a country’s politics, economy and trade, and changes in the external environment will directly affect decision making on port investments. On the other hand, as the construction period and payback period are relatively long, the possibility of various uncertainties arising increases and the stability of the projected returns decreases. This column will discuss preliminary
suggestions for risk prevention.

曹珊,建纬律师事务所高级合伙人; 卢昱陈,建纬律师事务所律师助理 Cao Shan is a senior partner and Lu Yuchen is a paralegal at City Development Law Firm
Cao Shan is a senior partner and Lu Yuchen is a paralegal at City Development Law Firm

Systemic risks

Force majeure. The requirements of ports regarding natural conditions are stringent, with wind direction, precipitation and sea conditions greatly influencing port operations, and in times of war, port cities can even become military targets. Prevention is key in the case of force majeure risks, and accordingly, careful thought is needed when choosing the location. The project company may also take out property insurance to shift risk onto the insurer.

Political risks. These include political instability, government confiscation or forced acquisition of the project, premature revocation of the project company’s concession, changes in tax policies or import-export restrictions. Political risks are beyond the control of the individual or an enterprise so prevention is the best policy. First, even if the profit rate is high, it is better to avoid constructing a project in a country or region where political risks are great. Second, when entering into the agreement, the private party should strive to procure the provision of security by the local government against political risks such that, if a political risk arises, the government will bear the majority of the losses. This is because a port construction project is unlike a pure commercial project in that a port, as an international logistics platform and a base for the entry and exit of foreign vessels, has a foreign element and impinges on the sovereignty of territorial waters and the economic security of the state. Accordingly, the political sensitivity of a government to a port project may be greater than for the construction of other infrastructure.

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