Selling ports off to equity a risk: expert

Date: 14.10.2011

Sour deals and failed infrastructure projects the direct result of private equity ownership of ports in the UK, maritime professor tells seminar

By Anna Game-Lopata |
October 14, 2011

A professor of Maritime Business spoke out against selling port assets to private equity at a Seminar at Victoria University’s Institute of Supply Chain and Logistics in Melbourne.

Based at the Transport Research Institute at Edinburgh’s Napier University, Professor Alfred Baird says the sale of ports to private equity is fraught with difficulty.

"Transactions in Europe where private equity companies have bought shipping and other infrastructure interests raise a number of questions," Baird tells SCR.

"The deals are leveraged transactions where the private equity funds are basically borrowing from other groups, such as investors and banks.

"These debts have to be repaid in capital and interest.
In addition, the private equity funds usually involve significant management fees, which as we all know, can turn into many millions."

Baird, whose research involves developing shipping and port services to improve transnational maritime competitiveness, points to a recent study on acquisitions by private equity funds in the European ferry market.

"Our study shows the majority of 11 transactions worth about $7 billion euros are failing because the recession has left private equity funds unable to re-pay the capital as well as the interest for the leveraged deals they entered into."

"So in quite a few cases the banks/lenders are now taking ownership of these assets," he says.

In the UK, ports were initially privatised 1980s and 1990s, through sales to port officials.

"The port officials quickly sold the ports on to other parties, including investment banks, so the entire UK ports industry, with one or two exceptions, is now owned by private equity funds," Baird explains.

Baird says the other problem experienced in the UK, is equity funds buy existing mature assets and won’t necessarily invest in new infrastructure.

With port trade doubling every 10 to 15 years, this is a concern for future capacity and ultimately a growing economy.

"Quite often there is no requirement or compulsion on the private equity fund to invest in new infrastructure as part of the transaction, particularly to take account of trade increases or economic growth," Baird says.

"So what this means in the long term is you have no plans, strategy or investment vehicle for these new owners to invest in new port infrastructure. Potentially you’re then looking at a constraint on trade."

In Australia, Port Botany will be privatised under a 99-year lease to bankroll key infrastructure upgrades including freight routes, the Pacific and Princes highways.

NSW Treasurer Michael Baird plans on handing over Botany’s assets by mid-2013 to scrape together the cash to meet a federal commitment on the Pacific Highway.

The Port of Newcastle and Port Kembla will not be part of the deal.

Canberra has promised an extra $750 million to 2014-15 to continue upgrades as long as NSW matched it dollar for dollar. Baird says the government is determined to reach the figure.

He refers to the sale of the Port of Brisbane to private equity in November 2010 that netted $2.1 billion for taxpayers, saying it proves the benefits that can be realised.

Botany’s assets include three container terminals with six container berths, which will rise to 11 when upgrades are completed next year.

"The introduction of a private operator at Port Botany will increase contestability and help drive further efficiency on the waterfront, which will in turn help to further develop the NSW economy," he says.

But Professor Alfred Baird says a number of plans for new port projects in the UK have been unable to proceed as a direct result of private equity ownership.

"Private equity funds are not keen on investing in new port capacity. Yet new port capacity will be essential for trade to increase and for the economy to grow."

"At the height of the cargo boom in 2007 we actually found there was insufficient capacity within the UK to take account of the trade, so there was a loss of trade as ports were congested.

"The trade deficit worsened and has become very serious in the UK now.

"Absence of adequate or competitive ports has led to a continual shift of firms' productive capacity out of the UK.
With the vast proportion of UK trade now comprising imports this means the UK economy is less competitive, with consequences for equipment imbalances.

"If you have insufficient port capacity or high cost port capacity, it will eventually and perhaps very quickly feed through into a reduction in trade."

Baird warns of a long term price to pay for these transactions.

"It’s all very well to for the government to fill a black hole in a state budget deficit in the short term, but when you’re selling off a port infrastructure, in the very long term there is a price you pay," he says.

"The price will ultimately flow through into increased costs for users, in other words for importers and exporters, for trade and consumers."

Friday's seminar covered shipping and maritime reform, port strategy and privatisation.

Along with Professor Baird Seminar speakers included representatives from the Federal Department of Infrastructure and Transport, the Australian Shipowners Association, the Maritime Union of Australia, Carnival and Asciano.