A balancing act

It is becoming increasingly clear that post-financial crisis there are strong grounds for the majority of ports to adjust their demand forecasts and, following this, that it is a natural step to revise their capacity expansion plans.

Failure to do this can result in the disastrous scenario of too much capacity too soon and where the private sector is involved this can, in turn, have a toxic impact on forecast returns on investment.

Practically speaking, if new capacity continues to be added apace, when there has already been a significant dip in traffic and volumes are taking time to recover, then there is a potential disaster in the making.

The astute port authority will realise and implement, in a timely fashion, a port master-plan update or demand forecast review to be incorporated in the master-plan in order to properly understand and respond to the new development climate.

This is not an option – it is common sense and a strategy that private sector terminal operators expect to happen in order for a positive development climate be maintained whereby they can achieve the required rate of return on investments made. It has to happen in the case of existing terminals to maintain a win-win and, in the case of new projects, to guarantee their viability.

Difficulties sometimes creep in where it is a “small pond” and battling egos and politics are involved. These factors should be ignored – achieving a sensible return on investment is the only common sensible path to follow.

Further, this is expected by the financiers to a project who increasingly look for lenders to exercise sensible risk management. They will not be pleased if financial returns on a loan are not achieved including in the case of soft loans.

There is also the reality that the private sector is not stupid – if, for instance, a terminal is brought to the market when there is really no need for it and the incoming investor is expected, by way of concession and royalty payments, to repay the larger proportion of development cost as well as pay for the “top up” equipping of the terminal then the investor will recognise that under this scenario it will be very hard to compete with any existing business offering similar facilities.

In order to achieve the required return on investment it will be necessary to charge more, but any shipping line will look for a discount where it knows there is too much capacity on offer. Taking up tenancy in such a terminal will therefore be regarded as too risky a proposition.

Conversely, if the port authority decides to absorb part of the development cost making it feasible for a terminal operator to take up residence alongside an existing operator then the authority will trigger a debilitating rate war that will not only negatively impact the two or more operators but the authority itself. The so-called “road to ruin”.

It should not be forgotten that in the international ports sector there are a number of major examples of precisely this scenario occurring – and it has literally taken years for rates to recover. It is a lesson well worth learning.