Beyond the book value

In the modern economy, the market value of many firms far exceeds the book value of their tangible assets; indeed in most cases, the real value of a company is many times the sum of its physical properties. This understanding has led academics on a quest to identify those ‘resources’ that both generate and sustain this considerable surplus in the real value of businesses. The search looks to indentify the ‘intangible assets’ (in terms of accounting) or ‘intellectual capitals’ (in terms of management).

Identification of those intellectual capitals not only aids understanding of value production in a firm, but it also facilitates further improvement and enrichment of those assets, and allows for calculation of the real value of the business in the market, which leads to more promotion in its favour.

Intellectual capital is a novel concept in modern management. The actual term was first coined by Thomas Stewart in Fortune magazine in 1994; the concept itself had previously appeared in association with other names in works of researchers in the 1980s. The first explicit corporate practice of the notion was recorded by Leif Edvinsson in Skandia AFS, a Swedish insurance company, which led to development of intellectual capitals management for the firm. Then, from the early 2000s, intellectual capital management was acknowledged as an inaugurating discipline in management.

Although various definitions and models have been proposed for intellectual capital (IC) management, they all focus on a common concept: the significance and value of invisible resources of the modern firm. An early definition describes IC as “Knowledge that can be converted to value” (Edvinsson 1991). In a more elaborate definition, ICs refer to “the sum of all resources, capabilities, relations, and network, whether intellectual like knowledge, or emotional and interpersonal like attitude, culture, and values, that enable an organisation to create and maximise value” (Al-Ali,2003). The more generally accepted definition suggests that IC is “the sum and synergy of a company’s knowledge, experience, relationships, processes, discoveries, innovations, market presence and community influence” (Bontis, 1996).

Intellectual capitals are classified in three main categories:

• Human capitals, which refer to the know-how, capabilities, skills, expertise, intuition and attitudes of the employees of the organisation.
• Structural (or organizational) capital, which includes the organisational capabilities that have been developed to meet market requirements, such as patents. It is also “that knowledge that has been captured/institutionalised within the structure, processes, and culture of an organisation” (Petrash 1996).
• Relational (or customer) capital, which encompasses connections outside the organisation such as customer loyalty, goodwill and supplier relations. It is also described as the perception of value from the view of a customer doing business with a supplier of goods and/or services (Petrash 1996).

It is estimated that 50%-90% of the value created by modern firms (depending on the nature of their business) is attributable to their intellectual capitals (Al-Ali,2003). However, there must be a synergistic interaction between the firm’s ICs to create value in them. Ensuring that the ICs work well together is the very essence of intellectual capital management as an avant-garde discipline in the new millennium.

Port values

In the context of the global economy, the economic value of ports and their terminals is far more than the investment or cash flows made into them. In terms of pure business, port activities generate revenue through port, transport, and logistic services. Yet even at this level, the port’s revenues depends on many ICs in terms of strategies, planning, human resources, governance, customer relations, marketing, analytics, and so on. In terms of the market capitalisation of terminal operators, their market value is much greater than the sum of their book value, their assets and their liabilities; they rely heavily on their ICs to create value.

At a higher level, ports also act as harbingers of development in the global economy as port activities have a direct influence on delivery of goods in market and their finished cost for supply to the end market. Enhancements in the delivery time and transportation costs of delivery, and/or the transformations in the function or nature of goods can produce added value for the port.

Ports also facilitate and attract employment, international and local trade, industrial clustering, concentration of supply chains and logistics in their region. Therefore, the strategic value of ports and the critical role they play in the global economy is far beyond the summation of the book value of their assets, or even the revenue they can bring to the national economy.

These factors are core in the evolution of ports over the past 50 years. Half a decade ago, the first generation of ports depended on the supply of labour and capital for profitable operations. Then, the sector relied on stevedores and longshoremen and was labour-intensive. After the 1960s, a second generation of ports evolved with a greater reliance on heavy investments in extending infrastructure and superstructure to lessen the reliance on a labour force. The ports of this era of evolution were quasi-manufacturing capital-intensive complexes.

However, a third generation of ports emerged in the 1980s to support the transformation of the maritime transport sector. Standardisation, speed, improved communications, co-ordination and co-operation within ports and among stakeholders all served to underline the importance of ‘know-how’ as the core competence of this generation of ports. In other words, ports started on the ‘knowledge economy’ path over three decades ago.

Chain of command

In the mid 1990s, the emergence of international terminal operators around the globe gave rise to a fourth generation of ports. These ports focused mainly on maximising their integration with supply chains. This target has been pursued through the exploitation and exploration of ICT achievements – analytics, social networks, enhanced transaction processing systems, and so on – and the fostering of co-operation throughout the supply chain. In this knowledge economy era where classic resources such as capital, labour, and land are in global abundance, ports are more and more reliable on intellectual capitals.

Income statements from some of the world class international operators, such as APM Terminals, PSA International, HPH, and DP World, reveal that intangible assets currently account for around 25% of total revenues. For example, the financial statements of APMT indicate figures of $1.2bn and $1.1bn for intangible assets in 2014 and 2013 respectively.

However if you refer to the notes of such statements, you will find out that these assets refer to terminal concession rights, port use rights, good will, software development costs, entity disposal costs, and so on. They do not represent the capabilities that enable a world class international operator to enter into global port markets and become entrusted to take over and operate the strategic port/terminal resources and trade flows for foreign nations.

Those capabilities are ICs and include, but are not restricted to, knowledge, insight, skills, expertise, processes, info-structures, networking systems, culture, strategy, political relations, technology, brands, contracts, trade secrets, and customer loyalty. International operators are in a unique position as they have the means to administer and adjoin these invisible and invaluable resources synergistically in their terminal network on a worldwide scale. This can then be modelled holistically and systemically as intellectual capital management: a discipline that in spite of implicit practice in the port sector has been virtually unacknowledged over the last decade.

Mehdi Rastegary is the head of research and development at Sina Ports and Marine Services Co in Bandar Abbas, Iran, and an instructor at IRI Ports & Maritime Organization. He can be contacted on rand-bnd@spmco.co.