Governments face increased pressure to take more interest in foreign port investment, finds Martin Rushmere
Protectionist sentiment and nationalism are muddying the waters over increased international concern about terrorism and underhand attempts by countries such as China to steal technology and intellectual property.
Governments in developed countries are being pressured by political sentiments to pull on the reins of free trade and international investment. Blanket, often vague, regulations are being discussed that will apply to infrastructure in general, lumping ports with unrelated assets such as power stations.
This is now extending to the UK. Industry insiders say that the government wants to include ports in the list of assets coming under the umbrella of a proposed infrastructure watchdog. This agency will have the power to veto asset sales to dubious buyers, be they outright commercial enterprises or fronts for government operations, on political and national interest grounds. The topic has become more urgent in light of Brexit, with a formal, public announcement being delayed until Brexit is firmly on track.
Practical considerations and definitions of what is a "strategically sensitive asset" are causing friction between policy makers and officials. Analysts say that probably the most complicated is the prevalence of crossholdings and multiple layers of ownership. Sovereign wealth funds, hedge funds, private equity funds are often interlaced, with authorities finding it difficult to work out eventual owners and the percentage shareholdings.
The different types of administration and legal standings of ports in Europe, the US and Asia also have an effect. Frans van Zoelen, chairman of the International Association of Ports and Harbours legal committee, notes that European ports are almost all owned by public authorities – be they the central government, local authorities or municipalities. “Are they willing to sell to a foreign private entity or state? The answer is definitely ‘no’. The exception of course is Piraeus in Greece, where the government was strapped for money and where COSCO bought a majority shareholding, while the UK went on a different path under Margaret Thatcher and privatised its ports.”
Initial alarm over COSCO’s investment in Piraeus has been replaced by a degree of envy, as the container traffic has grown substantially from just over 3m teu in 2015 to 3.47m teu in 2016. Analysts see the takeover as being a shrewd strategic chess move. Netherlands Institute of International Relations says that Rotterdam and others stand to lose because Piraeus is right next to the China-Europe railway - one reason for computer maker HP setting up a distribution point there.
Mr van Zoelen says governmental attitudes in Europe to commercial deals involving privately-owned terminals are much more relaxed. “Governments stay out of these and their only interest is seeing that the general regulations, such as labour arrangements, and anti-monopoly policies are followed. We have not noticed any increased scrutiny on strategic or national security grounds.”
Which is in distinct contrast to the US. Both ports and terminal operators have come under closer scrutiny since a controversy over DP World offering to buy a number of terminal operations in 2006. A political outcry of “national security” derailed the deal and DP withdrew the offer. Since then there have been no significant foreign transactions.
To some observers, this is a strong indication of foreign reluctance to slog through the business procedures and then be rejected by the overall agency for foreign investment in the US, the CFIUS (Committee on Foreign Investment in the United States). This is made up of 16 federal departments.
Explain Jim Brennan and Brad Julian, managing partners at Capstan Consulting: ”Two of the most important provisions are whether there is a foreign interest in any acquisition and whether the shareholding is minority or majority.
“Transactions are examined to see if they involve a country on which the US has placed sanctions and if they involve a country that is hostile to a country that the US is trying to protect, such as Israel.’
A rock and a hard place
Applications for approval are voluntary, but there is a catch. If a deal is allowed to go ahead, the government cannot challenge the decision. If no application is made, the government can change the terms or forbid the investment.
The burden of getting approval lies with the buyer. The main port transaction in the pipeline involves the proposed sale of Ports America’s operations by investment fund owner Highstar Capital, which has attracted foreign interest. “The regulatory burdens, including any CFIUS involvement, are all with the buyer and not Ports America or Highstar,” says a person familiar with the matter.
In a client briefing, US specialist trade and commerce law firm Foley&Lardner says: “There have been indications that the new administration will favor an informal “reciprocity” test for foreign investment - i.e., that countries that do not allow a comparable investment in the same sector would not see CFIUS approvals." This is a mindset that could have special resonance for China, which often restricts foreign investment by other countries, including the US.
“The implication of these developments is that while the number of transactions definitively killed by presidential action may not increase (as it is rare for companies to pursue transactions where the committee indicates strong concerns),” says the client briefing, “it is likely that an increasingly stringent review process will result in more companies backing off of transactions that encounter resistance from the committee.
“National and economic security concerns will also likely lead to US companies increasingly selling to safe buyers, as sales to US purchasers or those in NATO countries are less likely to run into CFIUS opposition (or may not need CFIUS filings at all),” says Foley&Lardner .
Outright political involvement in port strategy is already apparent at the state level; as has happened with Jacksonville and Everglades ports in Florida, which suspended their Cuba marketing drive after veiled threats from the state governor. What has incensed port and maritime observers is that cargo airlines are stepping up their Cuba involvement free from political pressure.
No show stopper
The UK is likely to experience much less political involvement, at least for the moment, says Richard Ballantyne, chief executive of the British Ports Association: “The ports are highly competitive and like to attract foreign investment. It’s a fair bit calmer than in the US and though it remains to be seen what the government’s reaction would be if a Chinese company made a bid for a port, I don’t think it would be a political show stopper.”
Many countries are waiting to see the outcome of Australia’s Critical infrastructure Centre, set up earlier this year, which is compiling a register of strategic public and private national assets. This is complementary to the Foreign Investment Review Board and follows a 2015 law that included ports in the list of assets needing government approval for acquisition by foreign buyers – introduced largely because of hostility to a 99-year lease on the port of Darwin granted to China's Landbridge Group.
International legal firm Clifford Chance says in a note to clients that in principle the assets register will clear up investor confusion about needing government approval for sales. The development of the Strategy and the formation of the Centre is consistent with and adds to the strengthening of foreign investment rules in this area and is aimed at ensuring that future proposals involving Australia's critical infrastructure assets are considered in a more cohesive and comprehensive manner.
As with the US, Australia is concerned about cyber espionage and terrorism and possible disruption to essential communications and transport. Cyber security specialists have long been saying that ports could vastly improve their electronic security through the use of digital systems such as blockchain technology.
“Most people immediately shy away from this notion because of the association with Bitcoin,” says a consultant. “We keep telling customers that blockchain is a technology allowing secure, instantaneous available of data to everyone on a network. Bitcoin is merely one of the ways that blockchain can be used. Bills of Lading can be much improved by using blockchain and there are many other uses that ports can put it to.”
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