Interesting openings

It’s no secret that the smart money is on port and terminal developments in the BRIC (Brazil, Russia, India & China) and African regions – but doing business in these markets brings its own challenges, warns Samantha Roberts and Mark Wandless, partners at Holman Fenwick Willan, specialist ports and terminals lawyer.

For example, Brazil is investing heavily to improve its ports and terminals infrastructure, developing oil and gas fields and port projects as fast as it can. To support this, the country has recently published new rules defining future port concessions in order to benefit from international investments reflecting a surge of outside interest in the country.

Samantha Roberts outlines one of the issues. “In many emerging economies, you find that standard form concession agreements are offered to bidders during the tender process, but they don’t necessarily reflect the underlying commercial situation on the ground – for example the land law regime applicable in the relevant state.

“Land issues are a perennial problem. A concessionaire should seek to register their right to a piece of land for development and obtain the requisite consents – but in some less developed countries there may simply not be the legal regime to do this so as to adequately protect a concessionaire’s interest,” says Ms Roberts.

Mark Wandless adds that there is often work to be done to get the right risk allocation and protection for the operators and investors in tender situations in BRIC countries – it simply isn’t the same playing field as more mature markets provide, and there may well be greater risks for investors necessitating detailed legal advice.

Further, Mr Wandless points out that post-credit crunch, terminal investments in developing countries are not being done by just the “usual players”, who are spending time refinancing operations they are already committed to.

“Eighteen months ago, container terminals were seen as good long term investments resulting in high EBIDTA valuations. Despite the downturn, investors are still looking at terminal assets as good investments, as long as they can purchase them at the right price.”

The principal difficulty is getting the right finance deal on brownfield site acquisitions, since financiers are looking for more secure returns. Mr Wandless explains: “This has left the field open for some new investors, who are not maybe the ‘usual industry players’, to take the risk – but they are being very prudent.”

Another development from the credit crunch liquidity crisis is that managed funds are beginning to come into the terminal market, seeking minority or 50/50 stakes. It is a very interesting time in this sense, says Mr Wandless.

“It is actually a good place for funds to be right now,” adds Ms Roberts. The potential benefit of having a minority stake in a mature terminal business was evidenced in 2006 when PSA acquired a 20% stake in Hutchison Port Holdings. The deal sent a very strong message to the industry that 100% equity ownership is not necessary to be a successful terminal operator and funds have been quick to respond, often to help operators release some capital. All this is giving container terminals a different investment profile.

Funds, while extremely cognisant of financial and investment issues, typically have less experience of terminal operations and may want to put in a chief financial officer who doesn’t have much inside knowledge of the terminal business. This can clash with an operator’s choice of chief executive – who will have the relevant industry background.

For investment funds, there are also the intricacies of sorting out issues like due diligence and shareholder protection provision for minority equity investors, whether this is enshrined in shareholders’ agreement or local law.

Despite this, it is fresh capital, and something that the port operations may – in the medium to long term – benefit from.

While ports and operators in the Euro zone haven’t quite reached the tipping point of making new investments yet – they are generally looking at efficiencies, improving existing asset performance, and reviewing contracts – BRIC countries are looking at new investments. “The revising of terms and conditions that were entered into during the boom years with an eye to getting a better contractual arrangement is another management task that needs careful legal advice,” advises Ms Roberts.