No ‘strings’ please

This has various manifestations, such as retention of an equity stake ad infinitum; retention of an equity stake for sale to the purchaser on a specified date; setting long-term investment requirements; executive voting rights on the Board; imposition of long-term cargo volume guarantees; rigorous tariff controls; and/or application of extensive key performance indicators.

Where this is arguably most inappropriate is where the main – and sometimes the only – criteria for deciding who wins is the cash offer for the port or terminal.

To the incoming investor this, understandably, is like government ‘having its cake and eating it.’

It is not a multi-criteria analysis bid where the incoming investor is awarded points for different elements in its business plan and satellite aspects such as commitment to pursuing good environmental policies and/or commitment to cost benefit aspects, such as providing passenger ferry terminal facilities at low or zero cost. Experience and innovation are effectively ignored and cash is king.

Would it not be a far more intelligent approach on behalf of government to go down the multi-criteria analysis bid type of approach at the outset, which would lead to a much more rounded discussion about the future of the business and its economic impact? All the more so as, to be honest, there is inevitably a lack of understanding on the part of government, even at port authority level, about the commercial, financial and operational drivers of port businesses. Why else is port or terminal privatisation scheduled in the first place?

This lack of understanding could be mitigated by a judicious use of advisors but this does not always happen. For example, management accountants hired to provide financial projections and return calculations do not understand the industry and thus rely on input from the government. Leading to a situation of ‘garbage-in/garbage-out’ when conducting financial modelling.

Outside help

One route to avoid such an eventuality is to secure the services of an experienced port technical advisor. However, history tells us there is not enough recognition of the need for this on the part of port authorities and other involved government bodies. In a consultancy context, there are also only a limited number of parties that are good at this, despite plenty more claiming to be.

Even with the right technical advisor in place government has to listen and often it is hard for technical consultants to overcome entrenched attitudes which do not take enough account of their expert views.

There is also the reality that where government wishes to retain an interest in a port business or strong control over it that this desire may have nothing to do with creating an architecture to sustain the business going forward. It can, for example, stem from a belief that port businesses operate best where government is in control and a general lack of commitment on the part of some interests to relinquish full control of port assets.

The base line in this debate is that privatisation without strings has shown itself worldwide to be the best and most successful approach. A win:win for the investor, government and host country as a whole. This is by far the best approach to port privatisation with government performing arm’s length functions.