Ports had better get their SOx on to tap into the relatively widely available pool of investment funding from international and public banks and agencies. Bean counters with sharp financial brains have to be prepared to make equal room at the table for Green experts if a project proposal is to stand a decent chance of persuading an agency to open its wallet.
Wallets are certainly ready to be opened. Ports are particularly attractive for lenders as they are seen as both economic engines and ripe fields for bearing environmental fruit. Job creation is particularly tantalising, as it applies to executive, technical and ordinary labourers. Politics comes into play – ports know that politicians will go public in their support for a project if a combination of jobs, environment and social/community enhancement is involved.
While financing institutions are guarded in their official assessments of the investment climate, sticking to variations of the theme that “if it helps the community and is a sound proposition, then we will look at getting involved”, there is a palpable sense of bullishness in their tone and they are keen to get more involved.
Ravi Bugga, senior manager for transportation at the International Finance Corporation, says: “Ports are less cyclical and more predictable than shipping lines. Ports are fixed assets and essential and relatively inelastic in comparison.”
A striking feature of the change in approach to ports, as with all infrastructure, over the past 15 years is the huge emphasis on environmental controls. Port executives report that proposal documents sometimes call for more detail on emissions reductions than financial performance.
Specific targets of SOx and NOx reduction are almost mandatory, linked to emissions from terminal and yard equipment and explanations of how these will be improved, and cross-referenced to the reductions in greenhouse gases.
The Asian Development Bank states flatly: “Projects must also have clear development impacts and/or demonstration effects that go beyond the benefits captured in the financial rate of return.” The Nordic Investment Bank is much the same: “All projects financed by the Bank should strengthen competitiveness and/or enhance the environment, the two pillars of NIB’s mandate.”
Stefan Fridriksson, senior manager, business development at Nordic, says: “More efficient and environmentally-sound transport facilities such as ports, are seen as being one of the sectors contributing to the competitiveness of the countries and therefore favoured by the Bank. Feasible harbour projects, especially involving increased competitiveness of our member-countries including environmental factors, are welcome in our lending portfolio.”
The bank is open to involvement with government, the private sector and public-private partnerships, depending on the type of project.
“As the bank is owned by the member governments, the bank prioritises the interests and investments being made in the realm of its member countries,” says Mr Fridriksson. “This, however, does not exclude financing from time to time port-related investments that are located outside of this defined region, but only as long as member-country interests are involved, such as a regional transport corridor perspective or investments by Nordic/Baltic companies in other parts of the world. “
In the case of the International Finance Corporation, the World Bank’s project finance offshoot for developing countries, ports need to get up to date with paper work and form filling. The IFC sticks to the Equator Principles in project finance – sustainability, fairness, child labour and exploitation are among them. And, from January this year, the agency has brought in new Sustainability Framework guidelines, which are mostly general regulations on standards but which also contain the following requirement: projects have to reduce “greenhouse gas emissions for reporting to IFC from 100,000 tons CO2 to 25,000 tons CO2 per year”.
All projects are classified into one of three environmental groupings – high, medium and low – in terms of their likely environmental impact.
To further prove how strict the corporation is on environmental restrictions, Mr Bugga says: “There are no specific benchmarks such as Initial Rate of Return or Return on Investment. If it’s a dog, we will know it’s a dog.
“Each project is unique and treated on its own merits. We tailor each project around the needs of the client.”
In contrast, Nordic considers both the financial rate of return and the economic rate of return in assessing the worth of a proposal. “Public service considerations related to long term infrastructure may be predominant in some cases while private investment considerations may dominate in others,” says Mr Fridriksson.
There have been some hopes that Norway’s Norges Bank Investment Management (a unit of the state’s Central Bank and which looks after the national pension fund) is investing in ports, following an extension of its investment authority to put a maximum of 5% of the portfolio into real estate. However, the fund denies this. Senior communications advisor Bunny Nooryani says: “NBIM is not mandated to invest directly in infrastructure.” However, this still leaves open the possibility that it will invest in a company which owns or operates ports.
Elsewhere, the Asian Development Bank is taking a new look at its sectoral lending through its Strategy 2020. Until now, more than 80% of its lending has been to government projects. The new policy looks at five sectors, with ports coming under infrastructure, which account for 80% of lending. Guidelines are economic growth, environmentally sustainable growth, and regional integration.
Lending for ports and water transport represents 6% of total ADB support for the transport sector (airports are 2%).
Xiaohong Yang, lead transport specialist in the East Asia Department, says: “We are seeking opportunities to support private sector led-investment in the ports sector, particularly related to container and bulk cargo terminals and to privatising public port facilities in a fair and transparent manner.” Private sector development strategy has three aims: (a) creating enabling conditions for business to flourish and an environment conducive to pro-poor growth; (b) generating business opportunities; and (c) catalysing private investments.
The bank’s loans to ports were highest between the late 1970s and the 1990s because of containerisation. The private sector then joined in and the overall amount of ADB sovereign lending declined.
“Port development remains crucial for promote trade and sustainable economic growth in Asia-Pacific”, says Mr Yang. “Most of our water transport and port operations are to support private sector-led investments. ADB can also provide equity investments, help mobilise co-financing from other sources on favourable terms, provide credit enhancement instruments and invest in transport project funds.
“The specific levels of possible direct exposure depend on our internal rating of the project but as a general guide, we can finance up to a maximum of 25% of the total project cost (up to 50% for smaller projects) and this is then also capped by a maximum dollar amount depending upon the risk rating but is typically in the range of $100m to $250m. Typically our shareholdings are in the 5%-20% range.”
The bank can also use other financial instruments to get funding from commercial sources. These include political risk guarantees and B-loans which can be provided in amounts above and beyond the direct financing limits.
For major investments, a detailed Environmental Impact Assessment has to be presented, including comprehensive plans to mitigate potential environmental impacts. “In the port sector typical environment concerns are loss or damage to fisheries and fragile coastal habitats, deterioration of water quality, disruption of community livelihoods, and alteration of coastal physical processes,” says Mr Yang.
There is no minimum size or value of a public sector port project – the Kuching expansion project in Malaysia was $5m while the ADB provided more than $300m for the Colombo Port Expansion in 2007.
The Sri Lankan project is seen as being particularly successful. Lower freight costs are expected to result in annual savings of $82m by 2015, and faster delivery times will create annual savings of $49m by 2015. Transhipment traffic is expected to bring in direct net annual income of $77m to terminal operators by 2015.
Another success story has been $31m to Bangladesh to increase the capacity of the container terminal at the port of Chittagong and raise international port security and environmental standards.
Financing for Poti in Georgia was cancelled when the port found a different backer. No recent port proposals have been rejected.
“Infrastructure operations will emphasise public–private partnerships and private sector engagement,” the bank says in its 2020 plan, and lead to “a larger role for the private sector in financing infrastructure, either as a project sponsor or an institutional bond or equity investor.
“An estimated $4.7tr will be needed over the next 10 years for the region’s infrastructure requirements. This figure comprises $3.1tr for new capacity and the balance for capacity replacement.”
The bullish outlook for port financing generally is indicated by the Nordic Investment Bank. “The Bank does have room for higher exposure to feasible port projects having relevance for the Bank’s mandate.”