Anatomy of a port financing transaction



Pamy J.S. Arora, Executive Vice President, The Cornell Group, Inc., Washington, D.C., USA


Exploring the changes in the size and nature of large-scale investments in ports, and the critical elements needed to secure financing

Billion dollar investments are no longer uncommon in worldclass ports today, where five years ago the average port investment was less than a tenth of this amount. Is this a self-destructive, metoo phenomenon with each port vying to outdo its competitor(s) in adding capacity to attract a diminishing number of ever larger container carriers, or are there fundamental economic drivers fuelling this investment spree? The answer lies in reviewing the underlying economics of these billion-dollar transactions, and understanding why the international investment community is so eagerly financing them.

Are billion dollar port investments rational?

Historically, between 1990 and 1998, a total of $9.2 billion was invested in 112 privatised ports worldwide, and over 85% or $8 billion was concentrated in ten countries in Asia and Latin America. Six East and South Asian countries accounted for the 70% or $6.3 billion of these investments, most likely because many of these were Greenfield investments, while the Latin American investments were modernisation investments (Figure 1). On average, Asian investments hovered in the range of $100 to $140 million per port, while worldwide the average was significantly lower at $83 million per port.

Even as recently as three years ago in the United States, where several large competing ports are within six “steaming” hours away from one another and competition for carriers is intense, only four out of fifty-one public ports have averaged about $250 million in investment per port – primarily for expansion of capacity and modernisation of existing facilities (Figure 2). Then, it would appear that almost overnight the stakes have suddenly been raised five-fold, and $1 billion+ port investments are springing up in every region of the world, from Long Beach in the United States, to Jebel Ali in the United Arab Emirates and Qingdao in China.

Drivers of mega-dollar port investments

While some ports have been caught unawares by the surge in container traffic at their ports over the most recent three years, and are reacting to an immediate scarcity of capacity in their particular markets, a closer look indicates that these mega-investments are in fact driven by significant, more stable, longer-term economic benefits. The principal drivers of the increase in billion dollar ports investments include:

1. Major world-class ports have experienced an unprecedented increase in container traffic between 2002 and 2004:

• Total container traffic of top container ports with traffic in excess of one million TEU increased to 220 million TEU in 2003, an increase of 13 percent over 2002. By 2020, container traffic is projected to increase by a further 350 percent.

• The major Chinese mainland container ports, representing over 25 percent of world container traffic, grew by an average of 30 per cent per year.

Growth at major world-class ports in 2003 was an astounding 20 percent to 60 percent, and was similarly impressive in 2004: Port Tanjung Pelapas grew by 31 percent in 2003; Dubai showed an increase in container cargo of 23 percent in 2003; Salalah increased container traffic by 60 percent over a one-year period; Major U.S. Ports’ container traffic increased by 15 percent to 20 percent over one year.

2. According to a special survey of major east-west container carriers conducted by The Cornell Group, Inc., carriers want deeper, faster and bigger ports. Contrary to “conventional wisdom” and lament of several ports, tariff levels are less important (Figure 3).

3. The containerised port business, particularly if privatised and operated by an experienced professional operator, is very profitable, even in countries with a higher level of political and economic risk. The projected Internal Rate of Return (IRR) of large port investments, after adjusting for country risk, is estimated at over 25% percent for several recent port transactions.


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