‘Ports of money?’ – a reflection

Introduction

It is now almost 30 years since Associated British Ports was privatized and a number of ports in the UK were sold into the private sector. Since then, there have been investments by the private sector in ports and port operations in many countries. Well, has this transformation been a success? Has it improved customer satisfaction? Have such initiatives proved ‘value for money’?

From an operational point of view, one could probably argue that private sector intervention has had a significant impact on the commercial effectiveness and efficiency of such ports; as a banker, however, I am unqualified to comment further, except to provide a subjective opinion. Against financial criteria, the answer has been mixed, some successes and some under-performances! One positive outcome, nevertheless, has been the development of new port facilities to support the increasing volumes of international seaborne trade.

The past 30 years have seen many developments in financial technology, in general, with a plethora of risk mitigation, hedge funds, and capital market derivatives offered to customers. Unfortunately, many such financial instruments have had marginal value, particularly in the current economic downturn, possibly to the extent of resulting in disaster for some incautious investors!

Financing projects

The underlying technology to finance port projects has not changed significantly over this period. The options open to port developers are to raise debt, – the cheaper form of funding in comparison to equity, – either against:

(a) corporate or government guarantees as security, or

(b) the underlying project’s cash flow projections, generically described as ‘project financing’.

In some regimes, the latter mechanism has been extended into public service concessions known as Public Private Partnerships (PPPs). In essence, however, such PPPs are tantamount to having the same structure as ‘project financing’, except there is a terminal date (pardon the pun!) to the commercial service contract or concession.

Two conclusions can be immediately drawn from these 30 years’ experience:

  • ‘project financing’ techniques are inherently complex, so it takes twice as long to seek and secure a suitable package to fund the project, which in turn results in commensurately higher up front costs. (Note: this negative feature can often be offset by the greater certainty with respect to construction costs and the implementation timetable); and
  • port facilities comprise two distinct types of asset: (a) jetties, breakwaters and storage areas. This infrastructure is primarily steel and concrete, which have a useful life of 50 to 100 years, and (b) cranes, equipment and warehouses, whose useful life is shorter, – albeit not short, – of around 10 to 20 years.

It is one of the tenets of financing projects, – and indeed for financing generally, – that long-term assets should be funded by long-term finance. (Note: this was what Northern Rock, a UK housing finance bank, got disastrously wrong in 2008!). Hence, for funding equipment, the market, meaning commercial banks, can usually satisfy demand, not so for infrastructure.

Given that 70 percent or more of the costs of a new port may be spent on infrastructure, this creates a significant funding problem for new green field ports. 50 to 100 year debt is just not available.

Evaluating PPPs

It comes as no surprise, therefore, that experience has shown that the ‘landlord model’, where the state or government provides the infrastructure, either funded out of budget or by loans secured by government guarantees, with the private sector responsible for financing the equipment, has been found to be an optimal structure worldwide. Successful examples of this can be found in Tangier, Sokhna and Rotterdam, Amsterdam, amongst many others throughout the world.

Two questions arise, nevertheless:

  • can the landlord model be applied for private intervention across the sector? Yes, if the private operator can control the technical, commercial, and financial risks. This works for a container, minerals or oil and gas terminal, but not so for a general purpose cargo port, where guarantees of traffic are difficult to quantify; and
  • has the port developer made allowance for the additional costs for ‘access infrastructure’ – meaning the road or rail connections on land, or port access from the sea? I am amazed at the number of times that my colleagues in IPC inform me that developers have planned new ports when continuous dredging is required for access, which is a costly operating burden, or when the plans ignore the costs for new and necessary investment in road and rail connections to transport goods into and out of the port! Further, the cost of access infrastructure may often represent a significant proportion of the costs of the port itself. Lenders are, by nature, risk averse and will shy away from such opportunities if this aspect is not addressed in the plans.

 

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Martin Blaiklock, project finance consultant, Independent Port Consultants (IPC) Ltd, Surrey, UK
Edition: Edition 54

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