Imperial College London PORTeC

RESTRUCTURING OF PORTS FOR IMPROVED INVESTMENT

Dr Sheila Farrell

What are ports really for?

What are ports for?

• Unloading ships

• Logistics services

• Free Trade Zones

• Industrial nodes

• Urban regeneration

• Guardians of waterfront land

• Corridor development

• Exporters of capital and services

• Leaders of maritime clusters

Ports are national strategic assets, still mainly public-sector owned. Most countries want to

use them as economic development tools, but are they suitable in their present form?

Unloading ships

Reasons

• Access to capital

- reduction in public sector budgetary requirements - capital inflow - higher credit ratings cheaper, longer term & more sophisticated funding - economies of scale in procurement • Increased efficiency - greater flexibility in manning - access to leading edge technology - proven IT systems - commercial discipline • Marketing strength - global contacts with shipping lines - ability to discriminate between customers - commercial confidentiality - partnerships with shipping line • Competition - increased supply/wider choice - downward pressure on prices • Greater security in emergencies - ability to bring in equipment and management from elsewhere

Over the last 20 years there has been a big switch from service ports to landlord ports,

mainly to allow in private investment

Unloading ships

How successful has the drive to attract private investment actually been?

• Most private investment has been in container terminals

– high financial returns

– strong market growth

– standardised contracts

– ease of implementation

• Dry bulk terminals are a mixed bag _ vertical integration with mining & manufacturing activities

_ large third party terminal operators

_ small local stevedoring companies

• Liquid bulk terminals : large capacities mean few operators _ main choice is oil company versus port authority

• Port modernisation programmes & multi purpose berths are less attractive

– small scale & low profitability

– technical complexity

– overmanning issues

• New ports at greenfield sites are attracting private interest :

– expensive, especially for breakwaters & dredging

– complex structures

– high commercial risks

Unloading ships

Container terminals worldwide (705)

Containers

• Over two thirds of terminals worldwide now privately operated

• Private sector terminals - originally monopolies but increasingly exposed to competition - dominated by large international players (HPH, DPW, PSA, APMT) - progression from brownfield to greenfield concessions

• Public sector terminals - vertical integration of infrastructure and services has preserved monopolies - on average half the size of private terminals - difficulty of ensuring fair competition in “mixed” public-private situations - two “giants” – Dubai & Singapore – proving public sector can be efficient • JV’s - found mainly in China, Indonesia, North Africa - public sector mainly a portfolio investor - provides an alternative to regulation

Private operators

65% JVs 5%

Public monopoly

24%

Public-private

competition 6%

Top 10 international container terminal operators

0

5

10

15

20

25

30

35

40

45

50 m TEU

Terminal operators’ throughput in 2011 (equity adjusted)

• Control 36% of global port container traffic • Five of the Top 10 are now linked to shipping lines • Typical portfolio size is 50-60 terminals • Turnover is similar to GDP for smaller African countries • Typical CAPEX is 0.5-1.0bn p.a. • Highly profitable, with EBITDA margins normally 35-45% • All of them have equity adjusted throughputs larger than Durban

Unloading ships

Where does South Africa stand?

Private sector

TNPA TPT

Marine services 100%

Containers 97% 3%

Bulk 37% 63%

Break-bulk 78% 22%

Automotive 100%

Public sector

Public v private market shares in South African ports

• Enabling legislation in place (National Ports Act 2005) • Strong entrepreneurial culture • BUT public sector remains dominant

Why is there not more private investment? • Transnet is focused on financial rather than economic objectives • Close historic relationship between TNPA and TPT • Upside-down regulatory regime - Ports Regulator should be regulating TPT as well as TNPA - TNPA regulation should include access rights to public infrastructure as well as price - TNPA should not be required to cross-subsidise the railways • Trade union concerns about private investment • Overselling by some foreign investors • Market size and structure

Logistics

Ports are key nodes in supply chains –

will they become more involved in logistics in future?

• Shipping lines have 3PL subsidiaries – why not ports? - need for global outreach - conflicts of interest with freight forwarder customers - highly competitive business lower and less secure margins than in core business - government policies which favour rail transport - lack of precedents

• “Back of port” logistics parks are now very common - vary in size 85 ha for Maasvlakte 1 in Rotterdam, 23ha for Keppel in Singapore

- public or private sector responsibility for development Rotterdam private, Singapore public

- key features exemption from Customs duties until goods leave the port

dedicated transport links to terminals good location in national transport networks integration with port IT systems

Alexandra Distripark Singapore

Maasvlakte Distripark Rotterdam

• Public sector investment requirements - low investment, low return, low risk - opportunities for JVs with property developers - need for protection of land reserves

Free Trade Zones

Ports are often used as focal points for Free Trade Zone developments

- how useful are FTZs as economic development tools, and

- are ports the right organisations to develop them

• There are now over 1,000 FTZs worldwide – they are losing their uniqueness • Tax advantages have fallen following global trade liberalisation

• Public sector development costs have been moderate - outsourcing of investment to the private sector - self-financing business model (phased development with capital roll-over)

• Employment creation effects have been mixed

• The nature of the FTZ’s is changing

South Africa is well-positioned to act as a distribution

centre for Sub-Saharan Africa

Trade oriented Distribution/

logistics

High tech/ service

oriented

Manufacturing

Pre -1960s 1960/70s 1980/90s 2000+

Tax

incentives

Strategic location Enabling business

environment

Low cost labour

Employment densities (jobs per ha)

Free Trade Zones

Ports in the Middle East have been closely involved in Free Zone development

FTZ Start Area (km2)

Control

Jebel Ali (UAE) 1998 48 Varied history

AZESA (Jordan) 2000 375 FTZ controls port

Ras al Khaimah (UAE) 2000 4.5 Port & FTZ are independent

Sohar (Oman) 2002 22 Port controls FTZ

Salalah (Oman) 2008 19 Varied history

Al Khalifa (UAE) 2012 417 Port controls FTZ

• Large size (not essential)

• Varied responsibility for development - reflects strengths of different institutions - failure of private FTZ development (Salalah) • Critical success factors - gateway to “difficult” regional markets - joint marketing with ports - targeting of customers with comparative advantages - modern Customs procedures - ease of doing business

Ports should also provide facilities for industry serving the domestic market

• Emphasis on container terminals has taken attention away from bulk processing industries in ports • Scarcity of waterfront land can be overcome at new ports by providing dedicated transport links or easements to off-dock industrial estates • Pricing policies should encourage non-essential waterfront users to move inland

Logistics & Free Trade Zones

Where does South Africa stand?

• Existing integration of ports and rail provides opportunities (but not incentives) for development of world class logistics • Is there a demand for “high rise” warehousing & logistics in Durban and Cape Town? • Is enough space reserved for Distripark development at Ngqura? • Who will develop Free Trade Zones at Saldanha and Richards Bay • How should non-transport agencies (SARS, Department of Home Affairs, provincial and city governments) be involved?

Urban Regeneration

Ports often own valuable city centre land – how do we unlock that value

and facilitate the move to greenfield sites outside congested city centres

• Land values are under-recorded in port asset registers (if they appear at all) • Land redevelopment is not a core business for most ports • Land redevelopment is politically controversial and takes a long time to agree. Support from the City is essential • Land redevelopment is expensive US$ 400m for first stage of Port Rashid in Dubai and there is a long time lag between moving the port and receiving the first returns • Association with private developers increases risks and reduces rewards • Inertia or opposition from port customers - a whole port community has to be moved as well

Urban Regeneration

Where does South Africa stand?

Large-scale strategic change • Are there any existing activities that can be moved now?

Cape Town Saldanha Bay Durban Richards Bay

• Should a centralised port planning system direct future investment on the basis of long-term economic

benefits or short-term financial costs?

• Are new policies required for port estate management?

Short-term, small scale changes • Is there any scope for land use rationalisation in South African ports?

- including associated facilities such as rail sidings

• How to balance flexibility versus security for tenants in port leases?

• How to price port land which has a higher alternative use value

Exporters of capital and services

Two public sector ports – Dubai and Singapore – have become world leaders in the export

of port investment and services. Why not Transnet?

Positives • Large market on the doorstep

- around 30 port projects suitable for private

finance at any one time - high perception of risks by some non-African investors

• Experience of corridor developments • Proven ability to raise finance • Staff development experience (BBBEE spin-off)

Negatives • Political acceptability of SOE involvement in

other countries • Mixed reputation for performance - Saldanha & Richards Bay are world class bulk ports

- labour issues at Durban attract negative publicity

• Limited experience of working in commercial, competitive environments • Higher priorities for investment at home

If not Transnet, is there a market for private South African investors

• One or two companies like Grindrod are investing in nearby countries (Namibia, Mozambique) • South Africa is the main centre for engineering, legal and banking services in Sub-Saharan Africa • Rotterdam Maritime Group model = private sector-led with port authority support

Conclusions

Restructuring has been a major feature of the ports industry worldwide over the last 20 years

Physical restructuring • Faster and larger scale development

• Greater specialisation - string of terminals sharing some common infrastructure and services

• More greenfield port projects • Movement away from city centres • Stricter environmental controls - more restricted choice of sites - reduced impact on residential areas

Institutional restructuring • Greater financial autonomy

• Increased involvement of other stakeholders in decision-making • More private investment • Clearer financial objectives - often over-riding economic objectives

• More competition within and between ports - with regulation as the fall back

• Transparency & accountability ?????

What has been the impact on investment • Incremental growth rather than the grand vision*

• More efficient use of funds ??? • Fewer failed projects

* Except in the Middle East and certain other countries

THANK YOU

Imperial College London PORTeC