The business model is straightforward: Authority to decide and administrate matters of port management, safety and security. Local laws and regulations dictate the constraints in which the Port Authority operates.
Economic reality is also straightforward: ports provide a wealth of opportunities to generate sustainable revenues, employment and taxes. The economic ‘multiplier’ is attractive at approximately 20 times revenues of the Port Authority; in fact it is sufficiently attractive to decide on long term investments and create ports where they did not exist before.
Economic value of Port Authorities is less transparent. Port of Rotterdam generates EUR 455 mln (2006) in revenues with net profits before interest and taxes of EUR 174 m; Port Authorities are not the biggest generators of revenue in the Transportation Value Chain if compared to global stevedoring companies or logistic service providers. This is due to limitations in (geographical) coverage and the traditional business model of a Port Authority.
Port statistics are expressed in terms of TEU and millions of tonnes of imports, exports and transhipment, also the number of ships inbound and outbound, split between dry and liquid bulk and so forth. Total Invested Capital and Total Debt are usually provided but financial information and benchmarking is more difficult to find. Clearly Port Authorities are not presenting their financials like Publicly Quoted companies.
Are Port Authorities benefiting from financial visibility, an enlarged business model and strive for bigger revenues?
Composition of revenues
Revenues can be split in two distinctly different drivers:
1. Recurring rental income based on real estate lease agreements
2. Charges to ship owners that make use of the port infrastructure
Main economic driver for Port Authority Management is to attract more cargo through their port. Additional cargo will provide incremental charges immediately. The revenues derived from real estate lease agreements also benefit from additional volumes, subject to making economic use of the space.
Real estate lease agreements provide a major component in the underlying economic value of the Port Authority, if space is leased out on poor terms and condition, this will reduce the economic value. Alternatively if space is well managed relative to growth forecasts and on sound financial terms, this will boost the economic value.
Surprisingly, no additional income drivers in the P&L appear to be the result of a targeted business model outside the first two categories.
Investment projects and financing
Traditional investment projects are derived from the need to provide deep sea access and excellent connectivity, moving the business from inner cities with ‘old ports’ to coast line or even outside the coastline. Opportunities to convert old ports into residential real estate development areas provides for a source of funds for new developments.
Port Authorities decide on investments based on (1) the relative position amongst its neighbouring ports and (2) forecasted growth potential. The economic multiplier (estimated at 20 times gross revenues of the Port Authority) supports Government funding via loans and or investments. Environmental obstacles are bigger worries in Western Europe for port expansion plans.
Connectivity between the different modes is a necessity; Port Authorities are primarily responsible for the right balance between the capacity at quay side and the infrastructure to and from the quay side. The speed at which cargo moves to its final destination potentially threatens the port to be dubbed ‘congested.’ In economic terms, congestion stands for lower valuation and the need for shippers to use another port.
Regrettably the decision power of a Port Authority is limited to the space over which it has jurisdiction; the infrastructure outsidethe port area is an essential part of the Transportation Value Chain, but: decisions are diffused over many stakeholders that have no economic interest in the port activities.
Also regrettable is the lack of a Transportation Authority for decisions related to the Transportation Value Chain from sea port to consumer, including all modes. Today the lack of such an authority makes the movement of cargo and supply of products to the consumer markets inefficient.