Unlocking market value

Port authorities of many shapes and sizes are increasingly facing a common challenge: how best to minimise the use of public budget for port development and port operations, without losing public control?

This article puts forward a two-step approach. Step 1 regards transferring assets to the private sector; Step 2 regards refinancing the remaining assets with private capital through corporatisation of the port authority. Public bodies stay in control by exercising their rights as shareholder and landowner.

Port authorities can be found in the most diverse forms around the world, ranging from small task-executing units within public bodies to corporatised entities with legal and financial autonomy. Public bodies are often struggling with the modernisation of port management and institutional positioning of their port authorities. Roughly speaking, institutional reform encompasses a few basic stages:
· Identification of port related assets, tasks and responsibilities;
· Establishment of a separate body and assignment of these tasks;
· Decentralisation by granting financial and operational autonomy;
· Separation of regulatory and management functions;
· Commercialisation of the port management function by introducing commercial accounting systems and financial objectives;
· Access to the long-term capital market; and
· Conversion of the port authority to a publicly held share company

Reducing public capital by reallocation of assets
The first step concerns the reallocation of assets between the port authority and private operators. All port authorities have to consider their business model once in a while and adopt it to changing circumstances. The main consideration is which type of assets and services the port authority will provide and which it will leave for the private market.

In the so-called landlord model, the public sector retains ownership of land and port infrastructure, and the power to regulate the use of it, while the private sector provides the cargo handling services. This model results in balanced risk allocation and equal incentives to optimise performance. Transferring port superstructure and related risks from port authority to private operators has become proven technology for alleviating public budget and improving port efficiency. The reallocation process is implemented by concession agreements and tender processes.

Reducing public capital by corporatisation of port authorities
In the second step, public budgets can be further alleviated by corporatisation of port authorities, followed by refinancing on the capital market. Corporatisation entails the establishment of a new legal entity and transferring tasks, activities, assets and liabilities to this entity, along with granting legal and financial autonomy. As a result, the port authority can participate in port management and transactions effectively for its own risk and responsibility.

Corporatisation enables port authorities to take out loans from the capital market tailored to their actual need for finance. In Articles of Association and a Treasury Statute, the powers for the port authority to act on the capital market will be regulated. Their actual ability to do so depends on several conditions, applicable to every borrower on the market. When considering granting loans, banks check on risk profile, competitive position, track record, collateral and future cash flows in order to fulfil debt service.

Corporatisation of port authorities brings along all kinds of issues in the fields of finance, accounting, applicable legal regimes and governance. Generally speaking, this is caused by the replacement of laws and regulations designed for management of public bodies by those designed for management of private companies in a business environment. The most relevant issues concern:
· Valuation of the company. This valuation is of great importance for the equity position, the ability to refinance former public loans or even to make available a super-dividend or earn-out to the (public) shareholders of the company;
· Tax issues related to the transfer of assets and liabilities to the newly established company;
· Drafting of the opening balance sheet, including assessment of financing needs and financial structure;
· Transfer of the right to use the land to the corporatised port authority by some kind of long-term lease agreement, so the port authority can sublease land to terminal operators.
· (Re-)financing, taking into consideration changes in creditworthiness, collateral and cost of fund. The company itself will become the borrower, ultimately without the backing of public bodies. Since financing will be based on the creditworthiness of the company instead of the quality of the former governing public body, the cost of fund will probably rise and debt service capacity and collateral become more important.
· Defining the new governance structure in Articles of Association, management board regulations, new decision-making procedures and internal authorisations;

And how to stay in control?
Corporatisation implies transfer of responsibilities to the newly established company and granting of legal and financial autonomy. This seems to erode public responsibility and raises the question of how to stay in control.

Staying in control is a matter of well thought-out structuring of the corporatisation. Public bodies will retain ownership of the company and the land. Their direct executing role is replaced by rights in their capacity of shareholder and landowner. Public bodies can stay in control over the port authority via:
· Rights based on general corporate law, such as appointing and dismissing members of the board, approval of the annual accounts, shares transactions, large reorganisations, etc;
· Rights laid down in articles of association of the port authority, such as approval of the annual budget, remuneration of the board and approval for large investments, loans, awarding of sites, etc;
· Rights laid down in the land lease agreement with the port authority, concerning use of land, payments for this, performance indicators, breaches of contract, (early) termination, etc.

All kinds of ports and their stakeholders can benefit from the corporatisation concept. Executing tasks in a more businesswise environment will enforce compliance with higher standards of management and generally improves performance. Public bodies can significantly limit their risk exposure with regard to port management and investments.

For this risk limitation, the price is basically reflected in higher financing costs, since financing will be based on the creditworthiness of the company instead of the quality of the former governing public body. This higher financing cost can be offset against the benefits of higher efficiency, higher market orientation, shorter decision-making procedures and a finance portfolio that better matches financing needs.

Port authority managements might be concerned about increased financing costs due to (soft) public loans being replaced by private debt, but this market discipline is precisely what drives management to higher efficiency. Management can find comfort in more degrees of freedom for entrepreneurial management of their ports. Port users such as liner service operators, stevedoring companies and shippers will benefit from higher efficiency and higher market orientation of their port authority.

Corporatisation of port authorities is supported more and more by policymakers and is considered the next trend in modernisation of port management.

Jos van de Leur, Paul van Eulem and Wouter van Nus are advisors at MTBS, Maritime & Transport Business Solutions, an international finance and strategy advisory based in Rotterdam