Time to get real on forecasts

There is the basic challenge of assessing a market’s overall demand growth. Just like macroeconomists struggle to predict a country’s GDP or the next recession, trade economists face big challenges when looking into the future.

The ability to switch liner calls or cargo from one port to another is also particularly challenging. This makes the task of demand forecasting for any given port doubly difficult.

Factoring in a range of variables (such as new port projects, future vessel sizes, varying parcel sizes as alliances constantly change, hinterland connectivity developments) can present a Rubik’s Cube like task.

Given the inherent complexity of trying to make an even-handed forecast of a port’s cargo flows 10-20 years into the future, there is quite a lot of room for interpretation and scope for persuasive and convincing “project boosters” to build very positive scenarios to attract investors and lenders. Indeed, some parties contend there is a systemic bias towards
“positive forecasting”.

How many times have you heard of consultants being persuaded by port promoters to ‘bend it like Beckham’ to make the traffic more suitable to attract investors or creditors?

Equally, there can be elements of consultants taking projects down the road with an eye to maintaining billing…

Even creditors are often susceptible to unrealistic turnover predictions. With an eye to meeting their lending targets, experience shows they can accept unrealistic forecasts – especially if they can get sovereign guarantees to cover their risk – passing the buck back to the taxpayer.

Indeed, taxpayers are generally the most vulnerable to such bias towards rosy-tinted cargo forecasts. Often, government institutions (like port authorities or regional governments) use over-optimistic forecasts to obtain financing (for developing hinterland roads/rail and port infrastructure) from multilateral institutions like the EU, EBRD or IFC.

The multilaterals provide grants or loans – either way, a tax payer somewhere pays.

How to counter such bias? An obvious answer is less public funding for port projects. The private sector is capable of investing and meeting most needs of shipping lines with less (but more judicious) government support.

Further, one can imagine independent central government watchdogs with a critical supervisory role. When over-enthusiastic port authorities or regional governments present their expansion plans – based on being located “at the centre of the world” – then the watchdogs may point out that it might also be “in the middle of nowhere”!

Too much capacity too soon can ruin a market – making the chance of achieving fair and reasonable returns ‘mission impossible’ for the sector’s serious long-term investors.

Certainly, this message comes through in the article focusing on the Adriatic in this issue. An allied message is that if government wants the private sector to take up projects they have to be bankable and flooding the market with too much capacity too soon is in no one’s interest.

Another example, also discussed in this issue, is the Anaklia Port Project which is now foundering following the exit of a key consortium member. This is clearly a project based more on hope and aspiration than genuine need.