Download pdf - HFW Ports and Terminals Major Investments Report [A4] May 2013

7/27/2019 HFW Ports and Terminals Major Investments Report [A4] May 2013

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Ports &Terminals


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Increasing role for private investment

Until airly recently, the ownership o ports and terminals wasin state hands or strategic as well as commercial reasons.But the emergence o more ree trade agreements,unprecedented expansion in trading volumes over the lastdecade and widespread deregulation o many economies

has led to the private sector playing an increasinglyimportant and protable role in marine terminal management.

The trend has proved particularly acute over the last tenyears, says Alistair Mackie, Head o Ports and Terminal Groupat Holman Fenwick Willan. He sees private participation ininrastructure (PPI) as a vital part o port development intodays liberalised trading environment. PPI projects help toprovide the nancial support and expertise that many portsmight need or their commercial and social objectives, hesays. And or the investor they can provide the opportunityto prot rom rapid growth in international trade.

In practical terms this can simply mean improvingperormance. Many ports and industry players have realisedthat they need to reduce congestion and minimise delays ithey are to earn a prot rom rising imports and exports. Inthis sense private capital has proved crucial. In act, theresearch revealed that privatisation is oten considered asthe best and most ecient way to simply increase porteciency and throughput (see chart 1).

In addition, the research reveals that many governmentsseek to benet rom private unding into large work projectsor economic recovery and job creation. This is seen with theLondon Gateway terminal development, where privateinvestor DP World highlights the employment opportunitiesas the largest job creation project in the UK. The six-berthport, which is currently under construction will create 12,000

new jobs and employ a urther 20,000 people indirectly.

Similarly in Sepitiba Bay, Brazil, on receiving the permit tobuild an iron ore port acility in September 2010, a privatemining company stressed the employment opportunities itsport project would lead to or the Minas Gerias area.

Recent research rom the Organisation or EconomicCo-operation and Development has predicted that portsworldwide need to nd some US$830 billion capitalexpenditure by 2030 or total inrastructure (including airport,port, road, rail, energy and water investment).

Global phenomenon

This need to und and expand ports came at an opportunetime when many private investors sought to diversiy theirportolios to include exposure to the booming maritime andcommodity sector. Long-term terminal lease deals thereoreenabled attractive returns on investment.

02Global investment in ports and terminals

1. Factors driving demand for infrastructure investments

Costs due to delays Missed berthing slots Higher uel costs to

make-up schedules Readjusted schedules

Increased demandor investmentin ports andinrastructure

supporting ports

Piling ocontainers atterminals due totransportationbottlenecks

Congestion ataccess roadsand intermodalconnections

Insucientaccess roadsand intermodalconnections


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The research reveals there were 195 separate privateparticipation in inrastructure (PPI) projects over the lastdecade. This was or container, dry bulk, liquid bulk and multi-purpose terminals with a total investment o US$38 billion.

In investment terms, greeneld or new-site projectsrepresented the major type o project in the seaport sector.The research highlights that US$20 billion was spent on 78greeneld projects in Asia, the Pacic, Latin America and theCaribbean through the last decade (see chart 2). Concessiondeals saw a total investment o US$15.5 billion or 97projects. Management and lease projects, meanwhile,received a total o US$305 million or 11 ventures.

A result o the infow o capital or many terminals has beenseparation o port authority rom port operator, with theormer ocusing on policy and regulation and leavingprotable commercial services surrounding port operationsto the private sector. This does not come without hetycapital infows, large scale personnel management as well asheavy machinery and inrastructure investments.

Concessions are generally awarded on a leasehold basis orbetween 20 and 50 years. This is with the notable exceptiono the UK, where reehold deals are possible. Investments

tend to range rom stakes o 20 or 30% to total nancingdepending on the host country and port authority.


East Asia and Pacic

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Arica

South Asia

Sub-Saharan Arica

34

48

26

8

17

18

8

14

34

15

3

2

2

231

32

2. Projects by type and region*

Concession Divestiture Greeneldproject

Management

and leasecontract

97

78

119

* 2000-2009. Source: PPI-World Bank; Pipal Research analysis


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The distribution o PPI deals worldwide is airly evenaccording to the research. O the total projects initiatedbetween 2000 and 2009, 29% were in East Asia and thePacic ollowed by Latin America and the Caribbean at 22%and Sub-Saharan Arica with a share o 20%. While theshare o investments into the dierent regions are similar, thenancing sums do dier. East Asia and the Pacic sawinvestments worth US$13.2 billion, Latin America andthe Caribbean were US$9 billion, but Sub-Saharan Arica justUS$4 billion (see chart 3 below).

In terms o individual countries, China, India and Brazilrecorded the highest number o PPI investments in ports andterminals business in the latter part o the last decade.Between 2006 and 2009, China saw almost US$4 billion inPPI projects, Brazil US$1.5 billion and India US$2.5 billion.This is a refection o the rapid trade-related growth in theseeconomies over the last ew years.

3. Investment in projects by region (US$ millions)*

Global investment in ports and terminals 05

2000 $486 $97 $520 $564 $0 $178 $1,844

2001 $231 $0 $825 $0 $220 $0 $1,275

2002 $1,400 $0 $179 $0 $240 $0 $1,819

2003 $1,270 $121 $282 $0 $44 $156 $1,873

2004 $822 $54 $163 $430 $238 $71 $1,777

2005 $3,054 $202 $229 $103 $500 $2,380 $6,468

2006 $2,112 $301 $851 $742 $1,497 $86 $5,589

2007 $2,650 $907 $1,252 $1,126 $1,331 $71 $7,336

2008 $758 $429 $2,466 $1,060 $658 $873 $6,243

2009 $420 $135 $2,151 $153 $790 $159 $3,808

Total $13,203 $2,246 $8,918 $4,178 $5,518 $3,974 $38,032

Financial East Asia Europe and Latin America and Middle East and South Asia Sub-Saharan Totalyear and Pacifc Central Asia the Caribbean North Arica Arica

* 2000-2009. Source: PPI-World Bank; Pipal Research analysis


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Key investors

Investors into new port developments are dominated by thelarge and experienced players in port management. Thisincludes PSA International, APM Terminals, DP World andHutchison Port Holdings (see chart 4).

PSA leads the way in terms o the value o its investmentswith participation in 28 port projects through 16 countries,handling a global capacity o over 100 million TEU per year.In general, the majors in the business appear to have animpressive and varied portolio although in some cases there

is regional bias or expertise. DP World, or example, alongwith CMA-CGM and APM Terminals have been the majorprivate investors in port and terminal projects in the MiddleEast and North Arica or the 2006 to 2009 period.

There are also a wide variety o newcomers that have hit theheadlines including the 2009 deal o Chinas COSCO Pacicsigning a 35-year lease contract worth US$4.2 billion to takeover the management o the port o Piraeus in Greece.

The ICTSI bid or Portek in June 2011 is urther evidence oincreasing competition in the sector. The acquisition would

put ICTSI at the ront o an emerging second tier ooperators, also including Yildirim and Noatum Group. While

4. Top 6 global investors (US$)*


PSA International $2,922m

APM Terminals $2,461m

DP World $1,908m

Hutchison Port Holdings $1,209m

International ContainerTerminal Services Inc

$384m

CMA-CGM $375m

* 2006-2009. Source: PPI-World Bank; Port Investor; Pipal Research analysis

much smaller in terms o volumes or capital, thesecompanies are building up portolios comprising eeder andsecond-string niche ports: sure signs that the smallerterminal market is set to become a lot more competitive.


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Investment types

The type o ports and terminals receiving investment haverevealed some interesting industry patterns, explains Mackie.We see there has been a huge port sector split between thedierent types o terminals, he says. There are also sometrends in the type o port nanced with private unds, hesays. Historically in Asia, dry bulk projects have oten beennanced domestically in conjunction with the entity involvedin exporting or importing the relevant commodity, whereascontainer terminals have attracted international privateoperator investments.

Bulk sectorMackie doesnt see much room or change in this trend. Asbulk operators tend to be export terminals or one company,my gut instinct is that it will continue, he says. He points outthat mines exporting minerals or coal or example, tend tocontrol their own supply chain so would not necessarilyattract nor want private investors. As there is essentially onecustomer, this might not be attractive or investors whowouldnt want to put all their eggs in one basket.

In total volume terms, the bulk shipping o commodities still

dominates global trade and it is the role o China thatsingularly stands out. As its economy expanded rapidly over

the last decade, this led to an unprecedented demand orvast amounts o raw materials to eed the countrys industrialgrowth. Even in 2009 when the rest o the world saw a rapiddownturn in trade volumes, huge nancial stimulus packagesrom Beijing kept Chinas appetite or energy, iron ore andother steel inputs extremely rm. And this in turn supported

the commodity trades rom Southern Arica, Brazil andAustralia in particular.

Nonetheless, investments have been relatively limited. Bulkshipping tends to be or projects where a terminal is locatednext to an exporter or miner. This usually attracts less privateinvestment than say a container terminal where most privateinvestment projects tend to be ocused.

Container sectorMatthew Gore, Associate at Holman Fenwick Willan alsonotes the growth in container terminal concessions. Funds

on the container side o the business are prominent, hesays. And I expect this will continue.

The container sector dominates seaborne trade in terms othe value o the goods shipped. There has been tremendousgrowth over the past decade with the shit away rom themanually-intensive break-bulk cargoes, towards heavilyautomated box-trades or manuactured and semi-manuactured goods. There has also been expansion in thevolume o some higher value commodities such as coee,cement and steel being shipped in containers. This trend isset to continue as the number o load and discharge pointsexpands and as containers are requently a cost-worthy

competitor to break bulk trades.

The construction o larger ships to handle more tradevolumes has moved alongside this trend. There is moreinterest in hubs and catering to the mega-ships, saysMackie. Earlier this year Maersk Line signed a contract or 10giant Triple E container ships with an option to buy another20 rom a South Korean shipyard. These ships will have thecapacity to carry 18,000 TEU, compared with the currentlargest such vessel with a capacity o 15,500 TEU. Suchmoves have required signicant upgrades to existing portinrastructure and the result has largely been an improvement

in port perormance and superior economies o scale orcontainer ship operators.



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The research highlights this drive, noting that the volume ototal port handling rose by 32% rom 399 million TEU in2005 to an estimated 525.3 million TEU in 2008. Theollowing year, however, saw a slump in trade due to theimpact o the nancial crisis and pull-back in consumerspending and meant a number o ports were aced with anover-capacity issue. This put severe pressure on many bulk

shipping companies and container lines leading some toail. It also contributed to some delays in port investmentprojects, including the decision in June 2009 by DP Worldto delay the expansion to its US$1.5 billion third terminal atJebel Ali. The nancial crisis caused global operators toscale back internally and look to protect their existingbusiness rather than expand, says Gore. And that meantthey werent looking to grow at that time.

Data or 2010 suggests this could all change. Preliminaryassessments suggest volumes surpassed 2008 levels, withmost o the trade growth coming rom emerging markets

notably intra-Asian trades. In 2010 itsel, China and theAssociation o South East Asian Nations (ASEAN)established the worlds third largest ree-trade area aterthe EU and NAFTA, which is expected to result in anestimated trade value o US$1.2 trillion.

While Asian markets are making the headlines with theirsheer size, some o the astest expansion in containervolumes, at over 20% in 2010 year-on-year, was actuallyseen in Eastern Europe.

Looking ahead, the research estimates that globalcontainer growth or the 2010 to 2015 period will be in the

region o 7.3% year-on-year, to reach a value o 750 millionTEU by 2015.

Where is the growth coming from?

Expanded private port interest has been global. In Brazil, orexample, one o the highest-prole recent deals includes thato a US$990 million investment by APM Terminals. This wasor 50% o the shares in Brasil Terminal Portuario, a newcontainer terminal with a capacity o 2.2 million TEU, beingbuilt in Santos. The terminal is expected to become ully

operational by mid-2013 and will serve the state o SoPaulo and its hinterland.

Some o the larger projects include those in India. In 2008, acontainer terminal concession in Mumbai was agreed,nanced by an Indian-Spanish partnership at a cost oUS$238 million. There was another, much bigger terminalconcession, started in 2006, at Gopalpur Port nancedthrough a group o domestic and oreign investors at a costo US$425 million. Other types o port development in Indiainclude a large multi-purpose terminal greeneld deallaunched in 2007. This project was nanced by a joint-

venture between an Indian and overseas company at a costo US$600 million.


6.3m Long Beach5.3m New York/New Jersey

7.8m Los Angeles


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East Asia is the growth marketWhile containerised terminal growth is scattered throughoutthe world however, most o the expansion has been withinthe emerging East Asian markets. Today, out o the worlds20 largest container ports more than hal are in the regionwith Shanghai, Singapore and Hong Kong taking the topthree slots and the region accounts or over 50% o totalcontainer handling (see chart 5 above).

New trade corridors rom Asia to the rest o the world requirehuge amounts o new inrastructure (see chart 6 overlea).

The emerging economies o the area have seen considerablegrowth in consumer spending power and intra-regionalcontainer trades have become some o the astest growingover recent years. As such, PPI developments in East Asiaand the Pacic have dominated the seaport investmentscene over the last 10 years. According to the research, theyaccounted or almost 29% o the total PPI projects in thebusiness over the last decade.

This was particularly so in China - leading to 34 new projects,including 15 with a total investment value o US$3.9 billion

*2010 container trafc (TEUs). Source: Containerisation International; Pipal Research analysis

5. Worlds top 20 container terminals*


29.1m Shanghai

13.1m Ningbo

14.2m Busan

7.9m Hamburg

8.5mAntwerp

11.6m Dubai12.6m Guangzhou

8.9m Port Klang

12m Qingdao

9.2m Kaohsiung

10.1m Tianjin

11.1m Rotterdam

5.8m Xiamen

22.5m Shenzhen

23.5m Hong Kong

6.5m Tanjung Pelepas

28.4m Singapore


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between 2006 and 2009. In China, port development isconducted in a very co-ordinated ashion, says Mackie,noting that it makes or a swit investment timetable. This is

not necessarily the case elsewhere.

The largest Chinese PPI investment highlighted by theresearch was a buy-operate-transer (BOT) project inQingdao, North China. This deal commanded a totalinvestment o US$1 billion and was initiated in 2007.

Connie Chen, Special Counsel with Holman Fenwick Willanexplains that aside rom its size, this deal was unusual, as itinvolved a number o dierent parties. She says that the largeproject had ve partners including a local port operator andadditional local rm and other oreign interests and addedthat they all had experience in the port operation business.

With experience comes operational eciency, she says.However, this could be a sign o things to come. Chenexplains that a orthcoming container port joint venture in thesame region includes eight dierent global operators.

For Chinese business today, nding the right opportunitymay not be as easy as perhaps it once was. There aredenitely unds there looking to invest in China, says Chen.

However, the barriers to entry are somewhat higher, sheadds, noting that concession agreements are in less supplythan they once were.

Greeneld sites and seaport projects are harder to come byand about 80% o container terminals along the coastlinealready have private inclusion. This tends to be a oreigninvestment with one or more Chinese partners. As a result,investors in Chinese ports are increasingly looking atalternative opportunities and taking over rom otherinvestors. This includes looking at inland river terminals andtranshipment sites.

As well as actual project availability, there are key actorsabout the Chinese market that investors still have to heed.The rst o these is relationships, Chen says. Thiscontinues to be o particular importance in China includingthe need to build a relationship with local government.

6. Development of new trade corridors


2000 2008

Thickness o arrows represent the value o exports to manuacturers

*Source: PwC; news articles; Pipal Research analysis


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What operators can offer

In more general terms, in order to secure a new lease,operators have to consider what they can oer in return. Inpart, this is the contribution o capital, but also whether thecompany has the relationship with the shipping companiesrequired to bring the lines to the terminals. This candetermine the awarding o a terminal to a particular investor.The recent investment by the Yildirim Group in CMA-CGMwill be an interesting one to watch.

Competitiveness between terminals encompasses a numbero issues including the speed o turnaround or loading anddischarge as well as throughput capacity. Operators have toremain very ecient and this could involve high degrees oautomation and electronic monitoring or tagging, saysChen. New technology is vital in improving eciency andadding value and leading companies are always looking atinnovative ways to improve overall productivity.

In addition, links between ports and the source o cargo ormarket or goods can also be an integral part o the private

terminal deal. This is particularly the case in emergingeconomies such as Brazil or China, where distances can belengthy and existing or suitable transport, limited. Themultimodal aspect o a port and its acilities can be a majorselling point to the shipping lines and win over localauthorities keen to develop road and rail inrastructure ingeneral.

Rates are another actor. In many Chinese terminal deals,and or those urther aeld, the local government setsstandard taris, then the port operator has to base theircharges on these guidelines set by authorities. This can be abalancing act between keeping handling costs attractive to

the shipping lines yet proving protable or the port operatorand local interests.

For the operators themselves, exclusivity is key. An initialbid could have been based on an exclusive deal, says Gore.The last thing you want is a replica project up the coast.This is particularly so as competition within key tradingregions mounts or import, export and transhipment cargoes.Attracting the lines is vital or the large-scale container tradesand terminals can oer a wide choice o intermodalconnections and marine services such as bunker suppliesand repair yards to secure business.



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Key challenges

Challenges remain and the research highlights the legalcomplexity in many o the terminal ventures embarked upon.This includes stringent rules pertaining to oreign investment,not least because some ports are considered asinrastructure or logistics integral to the countrys transportpolicy. This thereore requires a sensitive approach to thecountrys appropriate local and national laws.

In addition, due to the strategic nature o ports and terminals,there are oten regulations as to the extent o oreign

involvement. This can be in the orm o the privateconcession being limited to certain sections within a port orthe prerequisite that a oreign investor has a partnership witha majority domestic shareholder. In India, or example, whilethere has been a concerted drive towards bringing in privateunds or many terminals and other port services, thecomplete privatisation o major ports is not allowed ascentral government retains many o the residual powersdened under the Indian Ports Act 1908 and Major PortTrusts Act 1963.

As well as nancial and legal requirements, project

investments are increasingly subject to environmental policy a point that has led to many projects acing delay or even

cancellation due to their perceived impact on theenvironment. Investors today generally have to take on aproactive approach to ensure compliance to internationalconventions, codes o practice and regulations as well aslocal ecological issues. This can include policies or wasteand ballast water, dangerous cargo handling, carbonemissions, noise and other orms o pollution.

To meet these requirements authorities and operatorsgenerally have to oer sucient waste-water and oil residueacilities, and while essential to win a concession and worthyor the environment, these investments oer limited pure

commercial return. Thereore the question o how to pay orthe acilities is requently a major issue conronting portauthorities and operators.

In addition to the legal and environmental hurdles in PPIprojects there are also a ew wild-card actors or the privatesector to consider. This includes the growing problem opiracy and the eect that this has had on the trading o allvessel types in the Western Indian Ocean and into the Gul oAden. The widening reach o the pirates in this area to wellbeyond the Somalian coast has led to the use o escortvessels and armed guards. For DP World, the erocity and

requency o the attacks have contributed to a delay in thecompanys expansion plans or the port o Aden.



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Whats next?

In terms o whats next or PPI projects, merger andacquisition deals now appear to be on the increase ollowingthe turbulent economic situation in 2009. There also appearsto be growing popularity in deals involving the LNG and oilsectors, while regionally there could be some shit to newmarkets. We are looking at the Middle East, India and SouthAmerica in particular, says Gore. He is certain o urthergrowth this decade in ports and terminals investment.Private equity is returning to the market ollowing the creditcrunch, he says. But, I see long-term investment unds,

such as pensions, gaining urther ground.

Non-traditional deals are also being sought. One example isthe wind turbine acility at the Port o Hull in North EastEngland. The agreement between engineering companySiemens and Associated British Ports is to develop amanuacturing plant adjacent to a specialised loading dockto ship the turbines to wind arms in the North Sea.

Despite the legal diculties and other challenges acingpotential port investors today, the potential o healthyoperational returns sustains private interest. In addition, the

advantages o having asset-based projects on the books ata time o infationary uncertainty and currency volatility also

means PPI projects have maintained a high business prole.Mackie is highly condent that the drive will continue throughthis decade particularly as ports and their host countriesseek to benet rom trade-led development strategies.

The success o complex port investment transactions restsin part with the clear denition o the project and itsobjectives, says Gore. Key to this is open and competitivedialogue between all parties, he adds. Discussing andresolving issues between public and private participantsahead o closing the deal is essential.

Gore also points out that investment opportunity has to bebalanced against potential political uncertainty, as hasrecently been seen, as well as unstable trac growth and thehigher cost challenges o raising nance. He also notes thata number o jurisdictions have complicated legal systems,bureaucracy, ambiguous court procedures and laws whichare open to interpretation and can add to the dicultiesaced by potential investors.

Many have ound that these actors oten balance out overthe long run, says Gore. And, as has always been the case,investors with an appetite or risk are likely to be rewarded

with greater returns rom ocusing on emerging markets.


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About Holman Fenwick Willan

Holman Fenwick Willan is a global law rm advisingbusinesses engaged in all aspects o internationalcommerce. With oces in Europe, the Middle East and AsiaPacic, we have built a reputation worldwide or excellence

and innovation and have ocused the development o ourcapabilities and the growth o our expertise in a limitednumber o sectors, including ports and terminals.

We now have one o the largest teams specialising in legalmatters relating to the development and operation o nationaland international ports and terminals. Our Ports & TerminalsGroup includes English and oreign qualied lawyers basedin oces across our international network.

Our experience, gained rom having worked on over 40major port projects around the globe, includes: M&A and Projects. Commercial Contracts. Development. Finance. Commercial Disputes. Insurance and Insured Claims. Antitrust, Competition and Regulatory. Construction and Property. International Tax. IP and IT. Emergency Response.