Investment Review

D. Investment Review

Another form of advice required for port privatization involves structuring public offerings of debt and equity. For commercial bankers’ loans, the lender acts as the financial advisor. Prior to arranging the loans, the lender will perform a due diligence appraisal of the proposed investment including market surveys, engineering review, and financial analysis applying a generally accepted accounting principles analysis. The format of this appraisal is similar to that applied by the MDB’s for sovereign loans, but focuses on the balance sheet and the project’s cash flow. Typically, the lender stipulates which professional organizations will perform the components of the appraisal and the port will pay for their services.

Ports wishing to issue debentures in long-term capital markets will retain investment bankers to appraise the investment, advise the port on where to place the debt (in domestic or international markets) and the expected cost and terms of repayment for the debt, and prepare

63 This should be accomplished by reducing the costs to the private sector rather than increasing the costs to the port users. While this role has traditionally been undertaken by accounting firms as part of the effort to produce “cost-based” accounting systems, the results are a regulatory pricing system rather than a commercial pricing system. The commercial

pricing should be developed by those familiar with the markets served and the relationship between value and price in a competitive system.

the prospectus and complementary documents for the debt issue. They will assist in negotiations regarding the financial covenants that the port must agree to and the insurance and other forms of risk mitigation required by the lenders. They will also determine if the debt is to be sold through private placement or through public sale. Finally, they will arrange for registration of the debt, determine the timing of the issue and arrange for underwriting of the issue if it is a public placement. For these services, the banks will collect a fee that will vary with the size of the issue and the market in which it is placed but will typically range from three percent to five percent exclusive of the cost of the initial investment appraisal.

Investment bankers play a similar role in the issue of shares for sale to the public in the final stage of port corporatization. It is a more complex procedure because of more stringent requirements for the issue of common stock. It is more costly because of the greater risk assumed by the bankers who underwrite the issue of the stock and because of the uncertainty regarding the market’s demand for the stock.

The advice of investment bankers may also be sought when developing concession agreements. Where the private sector is expecting to invest, they will have their bankers perform

a pre-appraisal of the tender and seek a commitment prior to bidding. The port may also seek advice regarding the terms and conditions that should be included in the agreement to make it “Bankable”, that is, make it attractive to the commercial lenders who will provide the funds needed by the private sector.