Financial Times

A wise call on Colombo South Port

Point of View
By Capt. Namal Tissera

Much has been said and written, unfortunately without substance, on the sole China Merchant Holdings/Aitken Spence (CMH/AS) bid to develop the Colombo South Container Terminal.
A Cabinet appointed tender board approved the technical bid to design, build and operate the long-awaited new container terminal, while the financial aspect of the bid is being evaluated.
During the first half of 2009 the Port of Colombo witnessed a throughput decline of 11%. Further, for the first time in the history of the Port of Colombo, the Sri Lanka Ports Authority in July lost its container handling market share leadership to South Asia Gateway Terminals (SAGT).

It has been reported that CMH/AS consortium has quoted a royalty which is less than what the existing private operator SAGT has offered. The fact remains that SAGT has offered a royalty per TEU of US$ 1 escalating up to approximately US$3.35, whereas understandably the CMH/AS has reportedly offered a royalty per TEU ranging between US$2.50–9.75.

On a concession of this nature the Government of Sri Lanka derives its revenue not only from royalty but also on lease rental and premiums. Over a period of 30 years Sri Lanka Ports Authority (SLPA) would receive US$240 million of revenue from SAGT whilst CMH/Aitken Spence has offered US$ 630 million. Besides, from a net present value perspective SAGT has offered US$ 81.5 million whilst CMH/Aitken Spence has offered US$ 199 million which is 144% higher.

The reasons for the other major port operators to eventually show interest in the development of Colombo’s new terminal are clearly emanating from the global recession. In light of this global reality and the urgency in which we require the new terminal to Colombo to fend off competition in the region, the attempts to derail Sri Lanka Port Authority’s attempts to negotiate sustainable financial terms with the sole bidder seems ill-intended towards our national interest.

Although, the CMH/Aitken Spence consortium is yet to agree with SLPA on the financial terms, its undertaking of this critical investment should not be underestimated, especially when all other major port operators have been unable to show interest in investing due to the prevailing global economic environment.

Globally acclaimed Drewry’s latest Annual Review on Global Container Terminal Operators has predicted a contraction in excess of 10% in global container port throughput in 2009 and in the year 2010 it expects little or no growth.

Moreover, with the general economic slowdown some port operators are contemplating to divest its interests and this may create opportunities to those global terminal operators and financial investors with ready access to funds, rather than investing in new projects such as Colombo’s new container terminal.

The Dragados of Spain, Asciano of Australia, NCC of Russia, Dubai Ports World (DP World) and Hague-based APM Terminals are all reportedly negotiating the sale of some of their terminal assets, whilst the investment on the Colombo South Terminal will take a minimum of 3–4 years, to secure returns. With port terminal assets now being valued at between EV/EBITDA (Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization) 7–9, it is obviously prudent for potential investors to procure terminal assets instead of developing a green field such as the Colombo South Terminal.
It was recently reported that DP World which has witnessed a EBITDA decrease of 20% during the first half of 2009 is negotiating a sale of a minority stake to a regional private equity firm. In addition to its financial outlook, considering DP World’s heavy commitment in JNPT, Chennai and Vallarpadam as India’s largest terminal operator, it is pretty clear that DP World will not be interested in the Colombo South Terminal.

AP Moller-Maresk another large port operator has also sustained a net profit decline of 76.5% during the first half of 2009 and is expected to lose a whopping US$ 2 billion for the year 2009. Hence its interest in new terminal project seems very unlikely at best. Singapore’s PSA International reportedly considered a “persona non grata” due to its possible conflict of interest with the Port of Colombo has recorded a decline of 46% in net profit during the first half of 2009. Besides, given the fact that PSA is operating Chennai International Terminal at a designed capacity of 1.5 million TEUs at a draft of minus 15.5 M where the Main Line vessels can directly call PSA, it would not have a pressing need for the development of the Colombo South Terminal.

Hutchison Ports which announced its first half 2009 results has witnessed a contraction of 35% of their earnings before interest and tax (EBIT). With Hutchison’s current net debt to equity ratio being higher than 60%, one would expect them to be cautious when making new investments.

Some have mooted re-bidding as an option. It will be time-consuming and will need approval from the lender, the ADB who has already granted one extension. Sri Lanka can ill-afford another delay in developing the Colombo South Container Terminal. As SLPA’s Managing Director recently stated to the media, there had been enough delays already.

Development of ports in India is posing a huge threat to the Port of Colombo. Mumbai’s JNPT Terminal 4, Chennai Mega Terminal, Port of Vallarpadam will be operational between 2010 and 2014. Sri Lanka has already incurred a sunk cost of US$ 300 million for the construction of the breakwater. With public debt financing cost being around 90% to revenue and the IMF asking to bring down the fiscal deficit to 5% of GDP by the year 2011, getting the Government to construct the Colombo South Terminal is certainly not an option.

In this backdrop, it seems wiser to focus our attention on securing a sustainable financial model for the project which would give optimum returns to the government and the investors who have clearly shown confidence in the Sri Lankan economy, than castigating CMH/Aitken Spence for the only reason of being the sole bidder.

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