Coping with shifting operational sands

US ports are showing increased interest in public-private partnerships. Credit: US Coast Guard US ports are showing increased interest in public-private partnerships. Credit: US Coast Guard

Barry Parker explains the financial strategies for ports caught in strategic crosshairs of lower trade flows and increased bargaining power on the carrier side

The transitions discussed at this year’s American Association of Port Authorities (AAPA) annual Planning for Shifting Trade conference went well beyond cargo flows.

Speakers at the event who examined the financial dynamics of the port industry, particularly the importance of infusing ‘private’ (non-governmental) funding into port-related projects, included Franc Pigna from Aegir Port Property Advisors and Henry Juan from Seabury Maritime’s Port Finance group. Together, these two experts delivered a potent message, and presented a toolkit for managers and planners at ports grappling with sea changes in economic and logistical dynamics.

Mr Pigna painted a macroeconomic view of annual teu growth of around 4% expected through to 2021, which contrasts with levels of 11% in the early to mid 2000s, before the global recession. He noted that greater market concentration, with carrier mergers and alliances, has decreased the relative bargaining power of ports – while larger vessels have brought about a different type of concentration, where short bursts of peak activity are complemented by lengthy stretches of underutilisation.

As the proportion of carrier spending on terminal costs has increased, Mr Pigna’s analysis pointed to a likely impact on port fees from the intense “pressure to reduce terminal handling costs”. These struggles come against the backdrop of a worldwide gap in government funding of all manner of port-related infrastructure, pegged at $550bn worldwide, with $170bn in the US alone.

Model changes

Mr Juan, a long-time investment banker, followed up on Mr Pigna’s presentation, offering a detailed brief on the changes needed to port authorities’ business models to enable them to better cope with decreased availability of public funding amid the shift in negotiating power away from the ports. Mr Juan’s team has developed expertise structuring public-private partnerships (PPP), which, for landlord ports, “takes the form of establishing private funding arrangements to transfer the operations and beneficial ownership of the port to a private party....” with directed capital improvements bringing concurrent benefits of job creation, development of the port, and growth in service capabilities.

Citing moves towards PPP, typically with long-term lease concession structures, at major ports on the US East and West Coasts, he added that: “Debt finance can be from tax-exempt municipal bonds, bank loans, private activity bonds and from TIFIA loans.” TIFIA is a US government programme under which intermodal freight transfer facilities are now eligible for direct loans (or guarantees), after recent legislative changes.

On the equity side, he said that the rates of return from port projects are too low for Private Equity (PE) funds; on the other hand, infrastructure funds (willing to accept lower returns) are a viable alternative. Mr Juan recommended the Request for Qualifications (RFQ) process for procurement, which he says is “more expeditious, cheaper and allowing for respondent bundling...” than traditional Requests for Proposals.

Property use

Mr Pigna suggested that concessions and privatisations will take on more of a funding role in ports in the future, noting that “privatisations are where the capital is”. But there may be financial solutions that reach beyond the well-trodden PPP route; indeed, social theorists have suggested that property in private hands equates to greater economic potential. With this in mind, and where the need for capital (for expansion and/or modernising a port) exceeds the government’s ability to fund, a radical option, complete privatisation of the port authority, is a possible solution. Mr Pigna cited examples ranging from Rotterdam to a group of ports in Australia where changes in the structures of ports have successfully occurred.

Clearly, competitive pressures and operational demands will force changes, concluded Mr Pigna. “Ten years from now,” he said, “the ports industry will look, be operated and structured decidedly differently from what we see today; all resulting from the ongoing demand to expand and modernise its infrastructure to significantly raise cargo throughput and velocity from the same footprint and from having no choice but to become self-reliant in funding its business.

“This port revolution, which has already started, will have as a key element a more strategic use of its largest asset: property.”

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