A dose of realism

Analysts and consultants note that, despite banks and lenders pulling in their horns after the financial recession, many investors are still looking for high returns coupled with a quick exit.

Returns on investment of 20% are being sought, when 15% is practical, while ludicrous recoupment periods of as little as 10 years are demanded.

“Greed”, is what Martin Blaiklock of Independent Port Consultants attributes it to. “They are looking at multiples of 15 to 20 on EBITDA (earnings before interest, tax, depreciation and amortisation) when 10 is more realistic. Ports are not the same as investing in Wal Mart. Knowledgeable and sensible investors look at as much as 20 to 30 years to get back their money.”

Nigel Nixon at Nigel Nixon Consultancy reckons some investors are looking for easy returns. “There is still a tendency to look for a quick exit.” He says that although the investment and project climate in the last couple of years has worsened considerably, container ports in strategic locations continue to attract interest. “In the right location, there is an amazing investment opportunity.”

Jos van de Leur of Maritime and Transport Business Solutions says that loans are being made at about 150 basis points above bank rates, compared with 50 basis points before the meltdown of 2008.

Banks have cut back sharply, as much as half, on loan periods. “Anything over 10 years makes them take a deep breath," says one analyst, while the number of institutions involved in port finance has halved. Says Mr van de Leur: “Previously, risk assessment was a bit too easy but now they are taking a closer look at cash flows and are less willing to grant loans.”

Public-private partnerships are undoubtedly becoming the most popular method for both ownership and development. Mr van de Leur advocates greater reliance on “corporatisation” of port authorities, which become separate legal and administrative entities able to raise their own loans (see PS December 2010). He says the ensuing higher financing costs (the new entity will not have the same creditworthiness as the old port authority, as it still has to prove itself) will be cancelled out by greater efficiency and awareness of market conditions.

“Greater use of the landlord model goes along with a country’s or region’s economic development," says Mr van de Leur, “and also depends on the degree of political will of a public body.”

Political will is very much uppermost in Nigel Nixon’s thinking. “Too many ports are owned by public bodies because there is not the political will to change to private ownership. The situation stays the same because of historical, not logistical, reasons.”

He advocates as much private ownership as possible, with more opportunities opening up in BRIC countries.

For Martin Blaiklock, the public-private partnership method is a convenient way for governments to shove the cost of port development “off balance sheet”, because of the long timescale involved.

“With almost all ports, existing or new, the public body or government or what-have-you pays for wharves/jetties etc, which take up between 65% and 75% of the total cost of development. This should appear on the authority’s balance sheet but whether it does is a very good question – I suspect that in the US and to some extent in the UK it does but not in Europe.

"The buildings, cranes etc– the ‘topsides’ – make up the other 25% and are paid for by private investment. It must be borne in mind that financial institutions will only lend for this part.”

Andrew Griffiths, a managing consultant at BMT Hi-Q Sigma, says port operators’ EBITDA margins remained constant in 2009/2010. For the four biggest terminal operators the margins are: PSA – 29% for both 2009 and 2010; HPH – 33% for 2009 and 30% for 2010; DPW - 40% in 2009 and 38% in 2010; APMT – 18% in 2009 and 23% in 2010.

Mr Griffiths says the asset valuation for terminals has been 15%-18% on the initial rate of return. “Because some PPP projects were concluded prior to 2008 some of the financial projections were overstated and unrealistic and as a result the concession has had to be renegotiated.”

Mr Blaiklock notes that insurance companies and pensions funds have learnt their lesson in the last couple of years and have largely stopped funnelling money through fund managers and are investing directly.

Mr Griffiths adds that these investors “are attracted to ports due to its long term consistent return on investment. The most recent example has been the sale of the DP World port portfolio in Australia to a consortium led by Citibank.”

Meanwhile, willingness to invest in the potentially biggest market, China, is tempered with caution.

Says Nigel Nixon: “While China has a remarkable knack of defying logic, major Western investors are wary. They want to know if the project will be viable in 20 or 30 years’ time and whether the design and construction are the same as in the West.

Investment is also going the other way, with China getting stakes in Europe and elsewhere. “One of its main principles is to get involved in ports that help its trade – so that the goods can get to market easily and efficiently," says MTBS' Mr van de Leur. “Their recent stake in Greece is an example of that.”

While financial institutions may have taken a hammering in other spheres of investment, ports could be the one area where they have been at their most prudent.

Martin Blaiklock has an anecdote to support this. “Consultants brought in by one investment bank to assess the viability of each division found that the project finance department (which included ports) was the only one making money, because deals take twice as long as conventional loans and the due diligence and checks are so thorough.

“Around the world, ports funded through PPP have not gone bankrupt for financial reasons, although they may have failed for other reasons. There is a resilience in these deals if they are properly done, but it must be remembered that PPP is not a quick fix.”