Transport Report: Picking a winner
Globalisation is redefining the port industry. The clear trend
towards the global ownership and management of port terminals is
weakening the power of state-owned port authorities and determining
the course of privatisation.
?It is becoming increasingly difficult for authorities to retain competition between terminals within ports,? says Dan Clague, head of transport at ABN Amro. ?Because competition is now between different ports. This is forcing port authorities, as well as global operators, to invest in ports, which in turn leads to full scale privatisation.?
?Number one port company on my list is Hutchison,? He says, ?Its scale, its reputation, and the geographical diversity of its operations always make it an attractive proposition.? Clague began his working life in shipping before joining the banking world, and he is probably one of the most vocal advocates of total port privatisation. The argument goes that from a bank's point of view the retention of state control over a port makes it far more difficult to attract investors. ?Because there aren't many port companies listed on the stock market it is a lot more difficult for me to get the capital from the institutional investors,?says Clague.
It may also be due to the fact that some of the port companies that do have stock market listings have attracted considerable attention by performing below expectations. The most prominent example is Associated British Ports (ABP), which has come under some heavy fire from both the shipping and financial press.
The City has remained highly sceptical of ABP's performance, often citing the view that since privatisation ABP management does not seem to have been able to adjust to the commercial environment. ?It's difficult to find anyone who has anything positive to say about ABP,? Clague confirms. ?Its very being has actually halted the UK port market, while in fact it should be a national champion in the way that ECT is in the Netherlands.?
According to conventional privatisation theory, and given the favourable climate of the recent UK economy, ABP ? floated on the stock exchange as far back as 1983 ? ought by now to be posting higher growth margins than it currently does. ?It's impact on the UK port sector, if you compare to the other UK port companies, is that it has dragged it down,? claims Clague. ?It makes it harder to raise funds on the international capital markets for UK deals because the first thing investors look at is ABP.?
Mersey Docks & Harbours Company (MDHC) on the other hand, comes in for praise, ?A great company that has consistently delivered.?
The jury, of which Clague is a member, is still out on ABP's new ceo, Bo Lerenius. Part of the problem stems from the vagaries of UK port privatisation. While it has resulted in five major private port companies, it has also resulted in a vast number of trust ports, the most notable of which is the highly successful Dover.
Trust ports are run by a board of governors whose remit is that the profits of the port have to be reinvested into the port to the benefit of it and the local community. Rather than being accountable to shareholders in the case of a private company, it answers to its stakeholders ? the travellers and owners of the freight which pass through the port.
In other words, the state continues to own Dover, and Clague asks why should that be? ?Its competitors are commercial, its customers are commercial, so why is the taxpayer's cash still tied up in it? It is in Dover's long term interest to open itself up to market forces.?
The response from Dover Harbour Board is that while it does not disagree with the principle of privatisation, it does not believe that it is in the best interests of its stakeholders to have a private company running the port which would then take money out of the revenue and distribute it amongst shareholders.
These type of arguments have a tendency to go in circles: A private company would run a port more efficiently which would generate more revenue, but wouldn't be obliged to invest a certain amount back into it. The UK government has recently launched a new report entitled ?Modernising Trust Ports', and holds Dover up as an example of how they ought to be run. So for the time being it looks as if Clague's wish is unlikely to materialise.
Yet there also seems little doubt that his is the way that the port industry is going. The sale of Rotterdam-based ECT last year, in which Hutchison and Rotterdam Municipal Port Management (RMPM) each took a 35% stake, demonstrated the willingness of a port authority to get involved in private operators. ABN Amro Participie ? a consortium of private investors brought together by the venture capital arm of the bank ? took a 28% stake. The remaining 2% was bought by ECT employees.
Hot on the heels of that came the creation of NV Mainport Holding Rotterdam (MHR). A subsidiary of RMPM, but with far greater independence from Rotterdam city council, MHR could be seen as the first tentative steps towards the privatisation of Rotterdam something that Clague also argues for. ?There are all kinds of assets at the port that would perform better in the hands of private operators. Obviously one would need to take away some of the statutory duties such as harbour maintenance. But if you hived those off into residual government-owned bodies, there is enormous scope for more private participation.? It is not, however, a view that finds many supporters in the Netherlands, where a strong sense of a public port ownership exists.
?ECT is arguably the highest quality port business in the world,? says Clague, ?and it is great to have Hutchison take a stake. It can only be a good thing for Dutch business.? He was also cheered by ECT decision to withdraw from its somewhat disastrous involvement in Trieste, ?It's good news because it has reduced a serious area of uncertainty and will therefore contribute to the profits of ECT.?
ECT took a 30-year operating concession at the Molo VII container terminal in Trieste some 18 months ago and is reported to have suffered losses amounting $8 million over this period. Under the terms of the contract, it ought to have handled 225,000TEU by June 1999 ? the end of the first year of operations. In reality throughput only reached 175,000TEU. The target set for the second year of operations was 265,000TEU. By December `99 ? midway through the year and two weeks before ECT announced that it was leaving ? throughput was at 98,000TEU. The port authority is furious, claiming that ECT has failed to fulfil any of its commitments, and is planning to sue the operator to the tune of $12.6 million.
Nevertheless ECT's prospects remain good, and Clague is optimistic about the forthcoming hub facility at East Port Said, which it is developing in conjunction with Maersk Sealand. ?Shipping lines nearly always see it as some form of competitor advantage to have a stake in a port,? Clague says, ?Whether that's a good or bad thing depends on the specific region. I don't see for instance, why Maersk should need to operate its own terminal in an area where there are already good operators, such as Rotterdam. In the case of Algeciras, Salalah or Said the situation is different. There was nothing there before and the level of expertise required is not going to be provided locally. But to operate in somewhere like Rotterdam just seems to be a waste of capital, which could be much better deployed on the line's core competency ? transportation ? and results in an overall reduction of effectibility.?
The East port Said project also reflects his view of privatisation, since effectively RMPM/MHR will hold a 17.5% stake in the facility. If things proceed as planned it will also hold a 50% stake in the proposed transhipment terminal at the Dutch port of Flushing. ?I think Flushing is a very exciting project,? he says, ?its strategic location is superb.? But he also argues that we are unlikely to see many banks lining up to actually finance the project, ?Take the case of Malta Freeport. It is an interesting project because it represents the first privatisation of a pure transhipment port. But financial investors are far less inclined to pump cash into it because the revenues are not backed by long-term contracts with lines. Yet the costs, such as rental of land remain fixed and the cargo is very price sensitive. Essentially the margins and returns may not be what most investors expect ? transhipment has a far thinner profitability than gateway traffic which means that the earnings ratings are much lower, and that is the fundamental factor.?
?It is becoming increasingly difficult for authorities to retain competition between terminals within ports,? says Dan Clague, head of transport at ABN Amro. ?Because competition is now between different ports. This is forcing port authorities, as well as global operators, to invest in ports, which in turn leads to full scale privatisation.?
?Number one port company on my list is Hutchison,? He says, ?Its scale, its reputation, and the geographical diversity of its operations always make it an attractive proposition.? Clague began his working life in shipping before joining the banking world, and he is probably one of the most vocal advocates of total port privatisation. The argument goes that from a bank's point of view the retention of state control over a port makes it far more difficult to attract investors. ?Because there aren't many port companies listed on the stock market it is a lot more difficult for me to get the capital from the institutional investors,?says Clague.
It may also be due to the fact that some of the port companies that do have stock market listings have attracted considerable attention by performing below expectations. The most prominent example is Associated British Ports (ABP), which has come under some heavy fire from both the shipping and financial press.
The City has remained highly sceptical of ABP's performance, often citing the view that since privatisation ABP management does not seem to have been able to adjust to the commercial environment. ?It's difficult to find anyone who has anything positive to say about ABP,? Clague confirms. ?Its very being has actually halted the UK port market, while in fact it should be a national champion in the way that ECT is in the Netherlands.?
According to conventional privatisation theory, and given the favourable climate of the recent UK economy, ABP ? floated on the stock exchange as far back as 1983 ? ought by now to be posting higher growth margins than it currently does. ?It's impact on the UK port sector, if you compare to the other UK port companies, is that it has dragged it down,? claims Clague. ?It makes it harder to raise funds on the international capital markets for UK deals because the first thing investors look at is ABP.?
Mersey Docks & Harbours Company (MDHC) on the other hand, comes in for praise, ?A great company that has consistently delivered.?
The jury, of which Clague is a member, is still out on ABP's new ceo, Bo Lerenius. Part of the problem stems from the vagaries of UK port privatisation. While it has resulted in five major private port companies, it has also resulted in a vast number of trust ports, the most notable of which is the highly successful Dover.
Trust ports are run by a board of governors whose remit is that the profits of the port have to be reinvested into the port to the benefit of it and the local community. Rather than being accountable to shareholders in the case of a private company, it answers to its stakeholders ? the travellers and owners of the freight which pass through the port.
In other words, the state continues to own Dover, and Clague asks why should that be? ?Its competitors are commercial, its customers are commercial, so why is the taxpayer's cash still tied up in it? It is in Dover's long term interest to open itself up to market forces.?
The response from Dover Harbour Board is that while it does not disagree with the principle of privatisation, it does not believe that it is in the best interests of its stakeholders to have a private company running the port which would then take money out of the revenue and distribute it amongst shareholders.
These type of arguments have a tendency to go in circles: A private company would run a port more efficiently which would generate more revenue, but wouldn't be obliged to invest a certain amount back into it. The UK government has recently launched a new report entitled ?Modernising Trust Ports', and holds Dover up as an example of how they ought to be run. So for the time being it looks as if Clague's wish is unlikely to materialise.
Yet there also seems little doubt that his is the way that the port industry is going. The sale of Rotterdam-based ECT last year, in which Hutchison and Rotterdam Municipal Port Management (RMPM) each took a 35% stake, demonstrated the willingness of a port authority to get involved in private operators. ABN Amro Participie ? a consortium of private investors brought together by the venture capital arm of the bank ? took a 28% stake. The remaining 2% was bought by ECT employees.
Hot on the heels of that came the creation of NV Mainport Holding Rotterdam (MHR). A subsidiary of RMPM, but with far greater independence from Rotterdam city council, MHR could be seen as the first tentative steps towards the privatisation of Rotterdam something that Clague also argues for. ?There are all kinds of assets at the port that would perform better in the hands of private operators. Obviously one would need to take away some of the statutory duties such as harbour maintenance. But if you hived those off into residual government-owned bodies, there is enormous scope for more private participation.? It is not, however, a view that finds many supporters in the Netherlands, where a strong sense of a public port ownership exists.
?ECT is arguably the highest quality port business in the world,? says Clague, ?and it is great to have Hutchison take a stake. It can only be a good thing for Dutch business.? He was also cheered by ECT decision to withdraw from its somewhat disastrous involvement in Trieste, ?It's good news because it has reduced a serious area of uncertainty and will therefore contribute to the profits of ECT.?
ECT took a 30-year operating concession at the Molo VII container terminal in Trieste some 18 months ago and is reported to have suffered losses amounting $8 million over this period. Under the terms of the contract, it ought to have handled 225,000TEU by June 1999 ? the end of the first year of operations. In reality throughput only reached 175,000TEU. The target set for the second year of operations was 265,000TEU. By December `99 ? midway through the year and two weeks before ECT announced that it was leaving ? throughput was at 98,000TEU. The port authority is furious, claiming that ECT has failed to fulfil any of its commitments, and is planning to sue the operator to the tune of $12.6 million.
Nevertheless ECT's prospects remain good, and Clague is optimistic about the forthcoming hub facility at East Port Said, which it is developing in conjunction with Maersk Sealand. ?Shipping lines nearly always see it as some form of competitor advantage to have a stake in a port,? Clague says, ?Whether that's a good or bad thing depends on the specific region. I don't see for instance, why Maersk should need to operate its own terminal in an area where there are already good operators, such as Rotterdam. In the case of Algeciras, Salalah or Said the situation is different. There was nothing there before and the level of expertise required is not going to be provided locally. But to operate in somewhere like Rotterdam just seems to be a waste of capital, which could be much better deployed on the line's core competency ? transportation ? and results in an overall reduction of effectibility.?
The East port Said project also reflects his view of privatisation, since effectively RMPM/MHR will hold a 17.5% stake in the facility. If things proceed as planned it will also hold a 50% stake in the proposed transhipment terminal at the Dutch port of Flushing. ?I think Flushing is a very exciting project,? he says, ?its strategic location is superb.? But he also argues that we are unlikely to see many banks lining up to actually finance the project, ?Take the case of Malta Freeport. It is an interesting project because it represents the first privatisation of a pure transhipment port. But financial investors are far less inclined to pump cash into it because the revenues are not backed by long-term contracts with lines. Yet the costs, such as rental of land remain fixed and the cargo is very price sensitive. Essentially the margins and returns may not be what most investors expect ? transhipment has a far thinner profitability than gateway traffic which means that the earnings ratings are much lower, and that is the fundamental factor.?
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.