Private Investment

D. Private Investment

Public ports have traditionally relied on three sources of finance for capital investment: retained earnings, debt, and government capital subsidies. Larger ports have benefited from their size and monopoly position to acquire considerable capital reserves from which a large Public ports have traditionally relied on three sources of finance for capital investment: retained earnings, debt, and government capital subsidies. Larger ports have benefited from their size and monopoly position to acquire considerable capital reserves from which a large

Modern financing techniques were first introduced into port development by the private sector. The multinational terminal operating companies and the shipping lines relied on a variety of sources of funds to develop terminals in public ports. Although commercial debt was a primary source, stock offerings, debentures and project finance have become increasingly important. Now the larger public ports have begun to avail themselves of these funds. Pusan’s innovative use of debentures to fund the first phase of Kwanyang Bay and Singapore Port Corporation’s issue of US$250 million in variable rate bonds represent what is expected to be

a growing use of the international bond markets. Port Kelang’s use of a stock initial public offering as part of its first container terminal joint venture has not been replicated but is likely to receive more attention when the Asian stock markets return to good health. Mezzanine financing by privatized pension funds, insurance companies and other institutions looking for reasonable returns with low risk has been important in Latin America and is expected to play an increasingly important role in Asia. Domestic bond markets have not reached a stage of maturity in most developing countries but their success in the US is likely to be replicated in the future.

Many public ports have sought to participate in private investment in ports through mechanisms such as joint ventures or concession agreements where the port assumes control of the assets, e.g., build-lease-transfer and build-transfer-operate. While these provide a useful transition for governments which are reluctant to allow complete private operation, they may also be a mechanism for retaining public control over operations. Arguments are made that these arrangements provide a transfer of technology and management skills from international companies to the port, but this implies continued public sector involvement in operations. Management buy-outs and employee stock ownership plans are other mechanisms for easing the transition to full privatization of ports, but they create the risk of a private monopoly by the same parties that operated the public monopoly. They have also provided a mechanism for the existing management to capture most of the value added from the conversion from a public port to a private port. Corporatization of the port, followed by a public share offering, is another mechanism that allows public sector management to continue. If these arrangements are to

be successful, the public port must act as a passive investor providing representation of the public interest in corporate policy. 56

54 Perhaps the most extreme examples are Singapore and Mumbai, both of which have acquired more than US$1 billion in cash reserves. However, there the similarity ends. Singapore has used its retained earnings to finance all past capital investment

often exceeding US$100 million per year. Mumbai has lent out its surplus to other port trusts while making minimal 55 investments in its own facilities. During the boom years in Southeast Asia there was increasing use of lending from domestic banks, often with the

56 encouragement of the government. As the Malaysians were able to do so effectively with their golden shares.

There are no best practices for private finance of port in vestment. This remains an area in rapid evolution, not only in the port sector but for all public infrastructure. The increased use of private investment is a necessary complement to privatization.