Before 1980, service ports and tool ports were mainly financed by the government. The general infrastructure of landlord ports typically was financed jointly by the government and the port authority, and the terminal superstructure and equipment by private operators. Fully privatized ports were the exception. In the event a government had no funds for expensive port infrastructure, either port development was halted or money was acquired at preferential rates from an IFI such as the World Bank.
Ports require expensive infrastructure to be able to compete successfully. Until recently, port authorities mainly relied on contributions and subsidies from national governments for building or improving basic port infrastructure. Such contributions usually were excluded from port financial accounts and therefore helped ports to exhibit positive financial positions.
Whether national governments finance basic port infrastructure depends on the government’s political and economic policies. For example, if ports are considered part of the general transport infrastructure of the country, then investments in them may be considered to promote the national interest. Research shows that in 63 percent of the top container ports, the public sector (either the national government or the public port authority) was responsible for creating and maintaining (public) basic port infrastructure.
In some countries, financing basic infrastructure is considered a public task (for example, in France, Italy, and Croatia) because this part of infrastructure belongs to the public domain, which is protected by law. To carry out construction activities or port operations in this domain, a public license is required. This requirement could reduce intraport competition if the licenses are granted only on a limited and discriminatory basis.
An often occurring problem with public (thus political) investment decisions is that the decision to invest does not necessarily originate at the same level of government as that of the financing sources and responsibilities. Because of this disconnect, the interest of public officials to increase efficiency and profitability of port assets is usually limited because they are not held accountable for the success or failure of their investment decisions.
As mentioned earlier, the increasing role of private enterprise in the port sector exerts a direct influence both on port management and operations, as well as on the way capital projects are financed. The private sector has become interested in financing the construction of entire terminals, including quay walls, land reclamation, dredging, superstructure, and equipment. This has given rise to a large variety of financing and management schemes such as BOT (buildoperate- transfer), BOOT (build-own-operatetransfer), and BOO (built-own-operate). Each is designed to mobilize private capital while balancing public and private interests.
Government’s views on ports are evolving. Increasingly, ports are considered separate economic entities, although still subject to national regional and local planning goals. As such, they should operate on a commercial basis. By the same token, subsidies for operational port infrastructure construction, such as port land, quay walls, common areas, and inner channels, should be avoided.
Box 13 summarizes the EU’s views on subsidies, particularly those for infrastructure.
There still is, however, a category of port infrastructure for which it will be hard to find private investors: investments for expensive and long-lived infrastructure (for example, breakwaters and locks, entrance channels and fairways, and coastal protection works). The main stumbling block for private financing of such projects is their life span, which often exceeds 100 years, and the sunk investment aspect of these projects. Cost recovery of such works often cannot be achieved in 20 to 30 years (see Module 4), which is a normal repayment period for long-term loans for infrastructure works by IFIs. Nevertheless, the second- and third-order benefits from such infrastructure investments for national and regional economies may be substantial. Hence, many governments are still willing to finance part or all of long-term port investments as these contribute to the achievement of public policy objectives. Caution is warranted, however, whenever governments contemplate underwriting such investments.
To further clarify financing approaches, it is important to distinguish among investments in basic port infrastructure, operational port infrastructure, port superstructure, and port equipment. Understanding these distinctions will help in deciding which investments should be paid for by the port and which should be paid for by the local or regional community, the central government, and private investors. Box 14 lists various types of port assets under these four categories.
In addition to financing the construction, rehabilitation, acquisition, and maintenance of physical assets, ports may also need to finance organizational restructuring and associated labor compensation as well as working capital to support operations. Each of these categories and their potential sources of financing are discussed below.
In many countries, the government is responsible for financing basic infrastructure, either directly or through a contribution to offset its cost when the project is conducted, for example, by a highway authority or a port authority. In the Netherlands, construction of maritime access and protection works used to be carried out by and for the account of the government with the port authorities obliged to pay onethird of the relevant costs. In France, this issue is regulated in the Port Authority Law of 1965 (Law No. 65 – 491 of June 29, 1965), which allocates a minimum of 80 percent of the costs of basic port infrastructure of the Autonomous Ports to the national government.
For the government, there are two key issues associated with making large direct investments in port facilities: how to find the necessary funds and how to recover the investment.
The ways in which the government (or any other public body) funds investments are diverse:
Direct investments, paid for by the investment budget or a special fund, are based on the assumption that they will have a substantial positive effect on the economy, as shown by the positive results of a cost-benefit analysis (always heavily dependent on traffic forecasts). For investments broadly benefiting the entire nation, it is not unusual that a government would not seek direct financial repayment.
However, there are also situations where the government may receive direct reimbursement for the funds it invested via a variety of rates and charges assessed against the beneficiaries of the investments. These may take the form of:
Often, basic infrastructure elements are financed by an IFI under a government guarantee. However, even when IFI financing is made available, ports and governments must still face the challenge of providing matching shares for a period of 30 to 50 years and making interest payments over a period of some 20 years.
When considering financing of operational infrastructure, port authorities have a number of options from which to choose. For service ports or tool ports, governments will usually finance the operational infrastructure, with or without the assistance of an IFI. For landlord ports made up of self-contained terminals, investment in the terminal should be financed by the terminal concessionaire or the lessee, while the port provides the land (often in a condition ready for construction). The port may also provide the quay wall with the land, but, increasingly, private concessionaires have been willing to invest in this infrastructure.
Other financial arrangements are also common. For example, in U.S. public ports, the port authority may have access to “cheaper” money than a private sector operator. In this case, the authority has the option to issue tax-free port revenue and general obligation bonds. Both give ports access to capital markets; the former relies on the revenues generated by operation of the new facility to repay debt, the latter assures purchasers of the debt that the government will make good on any repayments should revenues from operation of the new facility prove inadequate.
The most attractive situation, both from the point of view of the landlord port authority as well as of the operator, is the conclusion of a long-term lease contract with the operator (running for a period of 20 to 30 years) for the use of part of the port area. This type of long-term lease has the legal character of a property right and has four advantages:
For the financing of common areas (all areas within the port area not being part of a terminal or other port enterprise), the port authority may make use of retained earnings, issue its own bonds (where permitted to do so by its statutes and legal system) or make use of bonds, or simply take a bank loan. Except in the first case, the associated risk is with the borrower. The problem confronting public ports is what to use as collateral or guarantees for the lender, particularly since there may be restrictions with respect to the use of the port’s assets.
In the event of a major reorganization program for the port authority, substantial amounts of money may be required for compensation payments to personnel. (See Module 7 for a detailed discussion of labor issues affecting port reform.) Such payments often have a short payback period. Nevertheless, traditional sources of finance may be unwilling to lend money specifically for this purpose. There is, however, a possibility for “triangular” financing, that is, lending the money for some other transaction on condition that the funds thus liberated are used to compensate displaced workers. Moreover, a national government might be willing to provide funds for labor redundancy schemes with or without the involvement of an IFI.
Port operators and providers of services who take over existing installations and equipment from a port authority may have a greater need for working capital than investment capital, especially in their start-up periods. With respect to debt financing, operators face the problem of providing security because installations and equipment often may be leased under conditions that prevent them from being mortgaged. Since port operators are essentially private companies, an attractive alternative to debt financing is through the flotation of equity shares, the success of which will depend largely on the degree of confidence prospective shareholders have in the newly founded company and in its management.
Supplier credit, provided that it includes the financing of necessary spare parts over a period of at least three years, offers another potential source of funding for the procurement of equipment, with the usual limitations of this type of financing.
Finally, a joint venture between the port authority and the operator offers what may be an attractive source of finance for the operator. For a specialized terminal, where the likelihood of a competing terminal being constructed is remote, a joint venture may be reasonable. In most circumstances, however, the likely effect of a joint venture between a port authority and an operator is to obscure the transparency of the relationship between the different port functions and, more pragmatically, to discourage the entry of new operators to the port. Box 15 describes the challenges mounted by such relationships in the case of the Sri Lanka Port Authority.
Port authorities or port operators seeking to finance new facilities or equipment typically have to offer some sort of security to a prospective lender. Generally, they have assets and other support from political and business circles for the project they want to undertake. In many ports, however, land is government-owned and cannot be used to secure financing. And, when a port needs money to dredge a channel entrance to remain attractive and competitive, the channel itself does not constitute credible security for the lender. There are however, various options for ports to provide lenders “comfort.”
Prospective lenders will examine closely the position of the borrower, which might be a port authority or a port enterprise. In the vast majority of cases, the latter are structured as limited liability companies. In the case of loans to a public port authority, the state or municipality usually provides a guarantee. A port authority might also be corporatized with the state or the port city as main shareholders. In both cases, the lender will assess the financial strength of the port authority and the public bodies owning it. This is often sufficient to ensure financing of the venture without too much regard to the assets supporting it. In Anglo-Saxon jurisdictions, a borrower may create a “floating charge” (similar to a mortgage) over all assets. This avoids the need to consider specific elements of the port assets as collateral.
A port’s most valuable asset is its land; however, land’s value as a security for financing varies significantly. Generally the land is owned by a public body or by the port authority itself. In landlord ports, the land is concessioned or leased to private operators, with the exception of common areas, which usually have a low commercial value. In the majority of cases, port land cannot be mortgaged under a concession agreement. Sometimes it is legally possible to mortgage superstructure on the terminal. Using the land itself as collateral is therefore complicated. The land must have inherent worth and a user should be able to exploit it. If a right to use the port area concerned does not accompany the mortgage on port land, its value is considerably diminished. Another problem might be that the national legislation grants only limited rights to a mortgage. Lastly, in the event of a public port authority, the lender might be confronted with political processes complicating its ability to exercise rights under a mortgage. This makes the security less valuable to a lender.
In most ports, the concession or lease to private operators is the principal security for lenders, provided that the conditions of the concession or lease allow transfer of the contractual rights to another party. In the case of a full-fledged concession (including a BOT scheme), the financier often desires to have the ability to arrange for the operation of the terminal itself if the operator defaults. In the case of a concession or land lease, a port authority is usually obliged to transfer the concession or lease to a third party, such as transfer to another port-related firm, when certain conditions are met. This might be a cargo handling firm or terminal operating company, or a port-based industry such as a refinery or a chemical plant. Conditions attaching to the transfer typically require the new firm to use the facilities in accordance with their initial assignment and to generate sufficient seagoing traffic.
A port complex comprises a large variety of other assets that might be mortgaged or used as collateral, such as warehouses, quay cranes, offices and other buildings, tugs, dredged channels, and others. Some of these assets might provide security to a lender, especially when the assets can be used in other ports (for example, cranes and tugs). Others, because they are immobile or have few alternative uses, constitute little or no security (for example, dredged channels). An important aspect of securing financing is the legal right of a port operator to own buildings on land leased from the port authority. Lenders are usually prepared to finance buildings and certain types of equipment in view of their intrinsic value.
Port firms, and sometimes privatized or corporatized port authorities, typically take the legal structure of a joint stock or limited liability company. The equity of such enterprises does not constitute security in itself, but may help to attract investment funds. Rights of equity holders to repayment usually rank immediately behind the rights of a lender. When balance sheet financing is undertaken, a high level of equity (in relation to debt) means that more funds are available to absorb losses before lenders come under threat.
One of the most important elements of financial security is the cash flow generated by the port or terminal. A lender almost always wants the earnings of the project to provide security for the loan. Estimation of such earnings is highly complex because it involves assessing elements such as future traffic levels, port revenues and expenses, the expected general economic development of the country, potential exchange rate risks, the future political climate, and other factors. The more accurate and reliable the traffic and financial forecasts are perceived to be by prospective investors, the higher the probability that a port authority or port operator will be able to attract risk capital and obtain loans.
Governments may also guarantee commercial loans against political risk and possibly use the guarantee programs offered by the IFIs. In the port sector, lenders often take security via assignment of port charges. However, much will depend on the terms of the concession or lease agreement, terms of earlier financing, and the rights of third parties. Finally, financing can be affected by the provision of additional government support. A government may invest equity in a firm it deems essential for the general development of the port. It may also provide subordinated loans. Direct financial involvement of governments and public port authorities is increasingly common, despite potential conflicts of interest. Sometimes a government may assign certain rights or grant concessions such as a duty-free status (as was the case at Jebel Ali) to enhance the success of the venture. Properly focused government support can be very important to provide additional comfort to lenders.
As private sector involvement in financing port and other infrastructure works has increased, the tools for financing these facilities have become increasingly sophisticated and the legal conditions to be satisfied by the project more strict. The private sector evaluates its participation in port infrastructure and superstructure projects based on the following elements:
Funding large infrastructure investments in greenfield port projects is more risky because of certain complicating factors, including:
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