1. International Association of Maritime Economists (IAME) 2010 Conference, Lisbon, Portugal The Financialization of the Terminal and Port Industry: Rediscovering Risk Paper no. 2.09.02 Jean-Paul Rodrigue Department of Global Studies & Geography, Hofstra University, New York, USA Theo Notteboom ITMMA - University of Antwerp and Antwerp Maritime Academy, Belgium Athanasios Pallis Department of Shipping, Trade & Transport University of the Aegean, Chios, Greece

2. The Financialization of the Terminal and Port Industry: Rediscovering Risk 1) Embeddedness, Spatial disconnection and Financialization 2) Finance and Leverage Upside-Down 3) Rediscovering Risk 4) Re-embedding Finance and the Port Terminal Industry 5) Conclusions: Rebalancing Trade and the Balance Sheet

3. Finance and the Maritime Industry: An Embedded History ■An old relationship: Joint stock companies (17 th century; VOC). Insurance industry (e.g. Lloyd 1871). Finance used to leverage the opportunities of international transportation. Providing capital and mitigating risk when needed. ■Local embeddedness: Financial district in view of the wharves. ■Industrial revolution and globalization Better growth opportunities outside trade. Separated the financial from the industry and the geography => cf. literature on port-city relations, global city networks, etc..

4. The Age of Discovery … of Risk: Dutch East India Company, Trade Network, 17th Century

5. Historic Proximity of the Port / Financial District

6. Port and Maritime Industry Finance: Who is Leveraging Whom? Brokers Financial Markets Investors Commercial Banks Mortgage Banks Merchant Banks Finance Houses Leasing Companies Money Markets Capital Markets Equity Markets Private Placement Corporations Private Investors Investments Managers Insurance Companies Pension Funds Banks Trust Funds Finance Houses Shipping Companies Port Operators Earnings

7. Value Propositions behind the Interest of Equity Firms in Transport Terminals Diversification (Risk mitigation value) Diversification (Risk mitigation value) Source of income (Operational value) Source of income (Operational value) Asset (Intrinsic value) Terminals occupy premium locations (waterfront). Globalization made terminal assets more valuable. Traffic growth linked with valuation. Same amount of land generates a higher income. Terminals as fairly liquid assets. Income (rent) linked with the traffic volume. Constant revenue stream with limited, or predictable, seasonality. Traffic growth expectations result in income growth expectations. Sectorial and geographical asset diversification. Mitigate risks linked with a specific regional or national market.

8. Container Terminal Surface of the World's Major Port Holdings, 2009 N = 405

9. Container Terminals of the World's Four Major Port Holdings, 2009

10. The Financial Playground (1997-2008) At least 246 terminals acquired via M&A (some examples) New Comers (financial institutions) Goldman SachsWall Street Bank Deutsche BankPrudential AIGBorealis (Canadian pension fund) Ontario Teachers Pension FundBabcock & Brown Infrastructure Macquarie InfrastructureMantauban SA Sovereign FundsGIC (Singapore government co)Dubai Ports World Players from within the sector (Stevedores & Shipping Companies) CMA-CGMEurogate Holding EurokaiHesse Natie Hutchison Port HoldingsPSA Corp. Maersk LineNeptune Orient Lines Nippon Yusen KaishaP&O

11. Reviewing Assumptions: The Impacts of “Financialization” Disconnection From market knowledge From long-term business cycles From local/ regional dynamics From outcome of actions Loss of embeddedness Lower contestability Rent-seeking strategies Lack of accountability Lack of regional embeddedness Focus on short- term results Asset inflation High amortization Asset inflation High amortization Assets perceived simply from their expected level of return. Expectations of quick capital amortization. Expectations about future growth and the corresponding volumes. Perceived liquidity. Capacity to quickly enter and exit the market. Physical assets seen as financial assets.

12. Consolidation and Scale Increases: Major Port Terminal Acquisitions since 2005 DateTransactionPrice compared to EBITDA 2005 DP World takes over CSX World Terminals 14 times Early 2006 PSA acquires a 20% stake in HPH17 times Mid 2006 DP World acquires P&O Ports19 times Mid 2006 Goldman Sachs Consortium acquires ABP 14.5 times End 2006 AIG acquires P&O Ports North America24 times Early 2007 Ontario Teachers’ Pension Fund acquires OOIL Terminals 23.5 times Mid 2007 RREEF acquires Maher Terminals25 times EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

13. Additional Factors of “Recklessness” in pre-crisis “bubble” (2002-2008) ■Supply lagging behind demand Capacity shortages in terminals and ships increasing their “market value”. Sense of “urgency” in terminal and shipping investments. ■Emerging terminal management model Concessions agreements to maximize returns. Over-bidding related to availability of finance; OPM. “Right price’ replaced by “any price”. ■Existing actors being “financialized” Equity related offerings on financial markets.

14. Shipping Equity and Equity-linked Offerings in Public Markets (2000-2007)

15. The Financial Playground: Private Equity Funds and Ferries (1995-2004) OperatorPEF BuyerYearPrice Paid (€ million) Equity share (estimated) WightlinkCinven1995160Min Holding Condor Ferries3i19955033% Moby LinesEfibanca/MPS200054,3% WightlinkRoyal Bank of Scotland200127035% Red Funnel FerriesJP Morgan2001105Min Holding Condor FerriesABN-AMRO2002225Maj Holding Isle of Man Steam PacketMontagu Private Equity2003210100% Wightlink Maquarie Bank2004350Min Holding Condor Ferries Royal Bank of Scotland2004360Maj Holding Red Funnel Ferries HBOS200414549% Moby Lines Equinox20042014% Grandi Navi VelocePermira200452280% Sources: Baird (2009); Cruise & Ferry Info: ShipPax, Halmstad, Sweden.

16. The Financial Playground: Private Equity Funds and Ferries (2004-8) OperatorPEF BuyerYearPrice Paid (€ million) Equity share (estimated) Moby LinesClessidra20055030% Isle of Man Steam Packet Maquarie Bank2005315100% Grandi Navi VeloceInvestitori Associati200670087% SNCMButler Capital Ptnrs20063538% Red Funnel FerriesPrudential2007300Maj Holding Scandlines3i / Allianz20071,560- Superfast FerriesMarfin Investment200750090% Blue Star FerriesMarfin Investment200750085% UN RoRoKohlberg Kravis Roberts 2007910100% Condor FerriesMaquarie Bank2008390Maj Holding Total7,682 Sources: Baird (2009); Cruise & Ferry Info: ShipPax, Halmstad, Sweden.

17. The Double Squeeze on Ports and Maritime Shipping in the “Post-Bubble” Period Overcapacity New terminals coming online New ships coming online (+ cancellations) Overcapacity New terminals coming online New ships coming online (+ cancellations) Lower profitability Less pressures on terminal resources Less financial appeal Lower profitability Less pressures on terminal resources Less financial appeal Contestability for gateways Contestability for hubs Rebalancing Contestability for gateways Contestability for hubs Rebalancing

18. Re-Discovering Risk: Relations between Risk and Embeddedness Embeddedness Level Risk Level High Low High Caution Recklessness Information Trust FINANCE SHIPPING

19. Risk Typology in Ports, Terminals and Shipping Risk CategoryTypeDetails Technical InternalConstruction and technology Market ExternalGross domestic product, growth, inflation, market structures, changes in supply chain management practices. InternalBusiness models (e.g. concentration/specialization risk), traffic demand, elasticity, pricing and capacity strategies of rivals and on alternative routes, energy cost risks Financial ExternalInterest rate, taxation currency, exchange rates, debt rating of the country, payment risk (customer base). InternalCapital risk (including loans availability and interest rates, revenues, payback period, grant financing) Political ExternalLegal, Regulatory, Security, moral hazard Environmental ExternalChanges of environmental laws, unforeseen societal sensitivities

20. Re-embedding Finance and the Port Terminal Industry 1) Risk AllocationDesire to allocate greater risks onto private sector in PPPs: Requires clear policy goals and stable regulation. Moral hazard risks will continue to be tested. More demanding capital markets and less access to (cheap) credit: Focus on performance to meet financial metrics. New projects more critically assessed. Greater consideration of cost recovery of port infrastructure investment: From the deal / financial structure to quality of the asset. 2) Reviewing False Asymmetries The assumption that larger players have more information than smaller players : The larger players appear to have lost the most.

21. Re-embedding Finance and the Port Terminal Industry 3) Growth Story: Time for realism Abandoning the compound annual growth paradigm Port traffic assumptions likely to be less backward looking. Stronger cyclical effects than perhaps first assumed. Greater attention on market fundamentals: Globalization or regionalization? 4) Barriers to Entry: Competition matters Paying attention to competition drivers: Growth may no longer mitigate competitiveness as it did previously. Transshipment a particularly vulnerable segment. 5) Amortization: Modest times Volume & pricing assumptions more modest: Longer amortization periods. PPP rent sharing more probable.

22. The New Normal ■Trend 1: Rebalancing short-term and long-term benefits Short-term investor gains against long-term performance improvements. ■Trend 2: Redefining public involvement New forms of Public-Private Partnerships (PPP). Towards a revision of conventional concession models of a landlord port authority (i.e. awarding system, performance, concession fee system, etc..) ? Private sector has a lower tolerance to risk. ■Trend 3: Refocus on resource management Operations, and resources and asset optimization.

23. The New Normal ■Trend 4: Reassessing portfolios, vertical disintegration and consolidation Low valuations could offer potential for mergers or acquisitions. Shipowners’ interest in investing in terminals? ■Trend 5: Restrictions in getting finance Ports should be considered as long-term investments. ■Trend 6: Dealing with mature markets Low to moderate long-term growth perspectives. Shift towards quality of service instead of growth.

24. Conclusions: Rebalancing Trade and the Balance Sheet ■Paradigm shift Risk that was traditionally highly embedded within the industry has been obfuscated. Port terminals as abstracted bundles of financial assets and liabilities: “Financialization”. Better understanding: Global trade dynamics Financial and monetary cycles. Capital misallocations. Recreation of embeddedness: Through intermodalism and supply chain integration. Cluster formation and governance.