Running the risk

Port investment is matching oil exploration – in the drive for profit and revenue momentum, investment is going to regions where the risks are greater, because all the obvious targets have been developed. And as oil exploration has found, the risk/return curve is steeper and more prone to sudden changes.

This is resulting in hard stares among financial controllers, disrupting the traditionally smooth yield curves. Present values are becoming more guesswork, which is irritating investors and causing them to lean on terminal operators. So much so that bullying is taking place and unwise decisions are being made.

"Younger managers who can see the problems with a venture are being ignored by executives," says an international consultant. "I have pointed out perils of specific proposals and been told to shut the **** up, in those exact words. This didn't happen before. Executives are taking more chances."

A third dimension is stirring up the matrix in the form of greater leverage. Analysts report that balance sheets are being loaded with debt, as much as 5 to 1 compared with equity, creating instability. Investment banks and capital funds are blamed for making the situation worse, because they have little idea of the specialised nature of port operations and assume the principles are the same as any other business.

Others are adding to the volatility by jumping out of vessel ownership, which has proved dismal, and taking a gung-ho attitude by trying to recoup losses in ports and terminals.

The consequence is that emerging markets continue to be the focus of interest, with South America undergoing the closest scrutiny and most activity. "It's no coincidence that there has been a recent surge of development in the region," says one analyst. "Brazil's VALE has garnered the most attention over its ore carriers going into China, which masks a huge frenzy of interest among the top terminal and port investors. They are itching to get into there and surrounding countries and only dithering by the authorities, along with related logistics issues, is holding them up."

Walter Kemmsies, chief economist of Moffatt and Nichol, agrees. "Latin America is the best prospect, Brazil in particular because it is underperforming and has the lowest ratio of exports to GDP of Asia and Latin America. ANTAQ (the government regulator) is putting up 40 ports for development, along with roads and river facilities."

Africa's joining of the list in the last year has surprised many observers, but to others the continent is an obvious target on the risk/return curve. One analyst cautions that although more investment is going into individual ports, roads and railways remain in conditions that range from "poor to deplorable". Nigeria as usual is attracting most curiosity, but unstable political conditions and sudden policy changes such as the end to the domestic fuel subsidy make it a finely balanced investment decision.

Mozambique is seen as a much more dependable investment, with the focus being on mineral and raw material exports – although a huge amount of basic construction has to be undertaken.

In general, Africa is rated at the most extreme spot on the risk/return line. A further source of uncertainty stems from the dependence of many countries on foreign aid for infrastructure, which is itself unpredictable and can change according to political whim in the host countries.

None of which is deterring investors. As Mr Kemmsies notes, food processor Nestle has long-term plans to build a whole host of factories, which has stirred up more interest in port developers.

Meanwhile, little has changed about the perceptions of China. Despite all the clamour over its seemingly relentless economic charge, scepticism prevails among port analysts. "It's a dicey prospect at the moment at best," says one. "The domestic consumption economy has still not developed and infrastructure is shaky. If you do want to look at ports, zero in on export-orientated sites."

India is causing frustration because of the huge bureaucratic processes involved (some economists say that the civil service is the biggest in the world in terms of officials per head of population) and corruption that is partly related to the low pay rates in the civil service. "Investors are still being caught by surprise at these problems," says an executive of a port operator, "and fail to take them into account. Timelines and rates of return are affected accordingly."

Analysts are in agreement that the return on any investment should be 10%-20%, the yardstick that has been in use for the last five years. (Port operators have the same assessment, but say nothing officially).

"Generally, investors expect very good returns from ports and terminals i.e. double digit IRR for a start," says Neil Davidson of Drewry. "Investors are looking for opportunities which present the best growth prospects, but also in business climates which offer a reasonable degree of certainty i.e. no sudden changes in government policy, not too much volatility in prices etc." Complicating matters is the continued interest (some would say interference) from investment banks in ports, with the accent on much shorter periods of investment and higher rates of return.

Container terminals continue to lead the pack as the most preferred form of investment, but only just.

"In general, container terminals remain the most attractive investment opportunities, as they generally combine the best growth prospects with attractive EBITDA margins," says Mr Davidson." However, there are breakbulk, dry bulk and liquid bulk terminals which can also be attractive and profitable, albeit usually not with such high growth prospects as the container sector."

Breakbulk is rapidly coming into its own, particularly in the US, where farm products are the only source of increased exports, while gas/oil is getting a boost in the form of shale (fracking).

Mr Kemmsies is bullish on this. "In the US the price is $3.50-$4 per 1 million BTU, compared with as much as $15 in Asia and $8 in Europe. And remember that gas in Europe is all about Russia, which makes security of supply risky."

The principal rule in deciding what type of operation to invest in and where is diversity. Sticking to one activity or area is seen as bad practice; container operators are becoming much more involved in other sectors, while regional players are thinking global.