An exam question for your Master’s degree in port economics could be “Compare and contrast the financial performance of the members of the P3 and G6 alliances and other container shipping lines with those of the container terminals they use in ports across the world”. An echo of this question came in the closing session of the recent Terminal Operators Conference in Singapore. There the panel of experts (see later commentary), including my good self, was asked, “What will Container Terminals have to do to address the difference in performance between them and their users?” The ever so polite and implicit plea from the shipping lines being “we lose money so why shouldn’t you?” This led to a lively debate but the truth is that though the container shipping lines are the users and direct clients of the terminals they are not, most of the time, the decision makers behind calling at that port. The decision makers in this instance are the shippers and they base their decisions on overall cost.

Note the careful use of words “ports” in one sentence and “terminals” in another. It is here perhaps the core of the answer to the Master’s degree question posed. Terminals are often subject to relatively modest competition within a port. Terminal operators take great pains to try and ensure that supply and demand for container handling in a port are in rough balance and will be maintained in rough balance whenever possible. They have a need to ensure this because they are often investing heavily in the terminals that provide that capacity.

An interesting question arises though, is this management of demand really in the best interest of the economy of the host port or perhaps more appropriately the host country (or put in a more geographically correct port hinterland)? Surely there is an argument that ensuring terminals compete and reduce rates to the minimum they can offer is in the best interest of the economy. An example of this in action perhaps was Brisbane where they encouraged the existing operators to add capacity and reorganize the operations prior to seeking bids for a third terminal.

There is a startling fact that the rates of return quoted as being required by container operators are 12% and more depending on the nature of risks they perceive as being taken. However, when this is compared with the rates of return other investments offer at present in low single figures, it would be easy to feel that the operators are being greedy. This view may be encouraged when you look at the amounts paid for large port assets by infrastructure investors and their apparently low financial returns. The recent sale of a long term lease on Newcastle Port in New South Wales implied a multiple of 27 on earnings; put it another way, it implied a far lower return on investment was being accepted by the purchaser. A landlord port is of course not a direct comparison for a terminal operator but nevertheless it does provide an indicator for the sector.

Do the operators need to review their positions? Why should they when they are getting those high returns? Until the operators cannot deploy their capital effectively into projects and gain these returns,one should predict that there will be no change. Further, with such a change, their shareholder would have a right to complain about their managers. However, given the disparity in returns between carriers and terminals, between landlord ports and terminals, and between terminals and other classes of assets surely some other thinking is required from Port Authorities on how to mobilize and finance their ports for the benefit of the economy rather than the operators? For those interested in ideas please contact us for more details of ideas and thoughts.

Over the last few months we have been examining the ports and terminals around the Bay of Bengal and found some interesting things. First, a surprising lack of competition in the container shipping sector. Too many slot charters and slot exchange deals to foster real competition. The total volumes here of course are an important element in reducing the potential for competition but nevertheless it was a shock to understand how consolidated you can make these services look depending on the vantage point taken.

Second, the impact of bigger ships may have a curious side effect; the rich get richer and the poor get left behind. Large ships are helpful to generate large volumes of containers and have the potential to reduce transport costs. However, if you cannot fill enough of those ships your port is pushed back toward hub and spoke style operations and potentially higher transport costs for your containers. One of the key benefits of container terminal developments for the economy can be direct calls. But the experience of Laem Chabang, one of the more successful transshipment ports, is that larger ships lead to a reduction in direct calls. One application of this impact may be in understanding the role of the recently opened port expansion in Colombo, the outer harbour development. A big “miss” from India’s perspective has been the failure of most Indian ports, excepting JNPT, to attract direct calls. The trend to bigger ships combined with the availability of more capacity (and more capable capacity) in Colombo may make attracting such calls even harder and make the development of India’s Cabotage trade even less likely.

Connected to the direct calls and coastal container distribution in India, a third interesting subject to have come out of the Bay of Bengal work is the long distances between container terminals on the west coast of India. The distances are far larger than on a not too different coast in terms of population; China. Why this is and how to resolve it is something we are working on further!

Semi-connected to the second and third points, in our next newsletter I hope to have a look at the three most obvious ports where floating container terminals may be the best or indeed only solution should the port and in effect the state or region wish to try and deal with their container connectivity issues: Chittagong (Bangladesh), Kolkata/Haldiia (West Bengal) and Thilawa/Yangon (Myanmar).

For those of you paying attention the last couple of weeks has been an interesting time in Greek Port Privatization. When is a shortlist not a shortlist? When the newspaper say it is a shortlist and the bidders tell you they merely expressed interest! The “shortlist” of bidders for Piraeus Port was announced by the Hellenic Republic Asset Development Fund (HRADF) according to several new agencies and more discretely other decisions were taken that taken together make it less likely that that open bidding will be the main process through which Greek Ports are turned into cash by the Greek Government. Something of a surprise when the success of bid processes in Australia are considered.

First, that “shortlist”: APM Terminals BV, Cosco (Hong Kong) Group Ltd, Cartesian Capital Group LLC, International Container Terminal Services Inc, Ports America Group Holdings, and Utilico Emerging Markets Ltd. The interesting thing about these is Cosco Pacific already operates two-thirds of the Piraeus container terminal through a 35-year concession agreement it signed in 2008; what for the interest of ICTSI, Ports America and APMT one therefore asks (I have and therefore have doubts they will really bid!). This, COSCO being eliminated on conflict of interest or competition concerns, leaves only two viable bidders: a private equity firm and an infrastructure fund. HRADF therefore seem left without much of a position to engender competition. That is surprising given the potential quality of the asset; making a market in the port sector may be harder than it looks..

The less heralded decisions relate to the smaller ports in Greece where though there are good niche opportunities available and little appetite for open competitive process seems to exist. Shame as we see that Crete and Volos in particular offer great potential, done right.The Greek Government can ring me anytime!

Container Terminal 1, New Priok Port: A Case Study

By the grace of God in this year of 2014 a miracle has been achieved in that a world class Public Private Partnership has been completed in the port sector in Indonesia. On April 19th 2014, Mitsui and Indonesia Port Corporation (IPC) signed a Shareholders Agreement to invest in the development and operation of Container Terminal 1 in New Priok Port (the first of three terminals in the first phase of the port expansion). The agreement signed was the keystone of the development of the US$ 2.5 billion New Priok and secured the future of Tanjung Priok in Container Handling for the next twenty years. Hopefully this is enough time to allow Chilamaya, the 100 year port for Jakarta, to be designed and developed. The process for New Priok Port to succeed has involved application of the basic principles of PPP. First, it ensured that there was a clear, legally certain regulatory position for the development. Though initially awarded by Presidential Decree to IPC, after award a clear world class Concession Agreement was negotiated between IPC(a state-owned enterprise operating on a commercial basis) and the Tanjung Priok Port Authority(an agency of the Ministry of Transportation). This provided definitive terms for the development in respect of concession fees, termination events, termination payments etc... Thus a firm foundation on which to base the construction, operational and financial aspects of the development was created. With the foundation in place IPC then established a legal structure through which construction risk, financial risk, market risk and operating risk could be clearly allocated to those parties best able to manage those risks. In doing so they created a situation where the return on investment made in infrastructure could be realized by IPC whilst transferring the market risk to the operator. This was then done through a transparent operator bid process. At the same time IPC ensured that the operators knew they had a fair chance of securing the contract to operate based on clear pre-defined qualification and assessment criteria. The scrutiny of the bid process by a fiercely independent oversight panel gave IPC and Consultants alike a high incentive to ensure the process was clean and transparent; they had nowhere to hide and so could hide nothing. Container Terminal 1 is not the end of the story but hopefully a new beginning. If other State Owned Enterprises and Regulators in Indonesia study the development maybe they can emulate the success. IPC will continue the process and secure the development of Container Terminals 2 and 3 in New Priok as well as other specialist terminal within the new development. There is also the intention to use the expertise gained to accelerate port development across Indonesia. David Wignall Associates has been instrumental in the development of New Priok Port and is looking to use the experienced gained on other projects in Indonesia. We also hope to provide a detailed case study at a conference near you soon!