Source: adapted from Rodrigue, J-P, T. Notteboom and A. Pallis (2010) "The Financialization of the Terminal and Port Industry: Rediscovering Risk", International Association of Maritime Economists.
Value Propositions behind the Interest of Equity Firms in Transport Terminals
The rationale for the growing involvement of the financial sector in port terminals is mainly because terminals are increasingly capital intensive, since the asset has an intrinsic and operational value. The substantial levels of productivity brought by containerization have resulted in a much more capital intensive industry depending on financing not just for asset acquisition, but also for their operations. Since terminals occupy strategic waterfront locations, their value as real estate assets is expected to increase. In turn, there is the expectation that terminals are relatively liquid assets, implying that they can be sold and a buyer readily found. Such an expectation can however change rapidly in periods of recession where terminal assets can become rather illiquid. The amortization of investments tends to take place over longer periods of time implying a more direct involvement and oversight of financial firms. Terminals in landlord ports became particularly attractive investments as land lease arrangements in these ports allow investors to acquire exclusive user rights on prime port sites for the entire duration of the lease term, which typically ranges between 25 and 40 years for larger terminals.
With the growth of international trade, the volume handled by terminals grew accordingly and with it their revenue. This attracted the attention of financial firms, such as banks, insurance companies and even pension funds, seeing transportation assets, such as port terminals, as an investment class part of a diversified global portfolio permitting risk mitigation. A reason why pension funds became interested in terminal assets was that the time horizon of the investment, such as a concession agreement, corresponded to their time horizon, which is long term. This helped to provide large quantities of capital to develop intermodal assets and an increase of their value. Scale factors also played. Global financial firms were looking at opportunities large enough to accommodate the vast quantities of capital at their disposal and terminals represented an asset class that suited well the scale of this allocation. Therefore, both the capital time and scale prospects of the maritime industry were in synchronism with the prospects of the financial industry. With the growth of international trade, transactions between commercial actors became increasingly complex and reliant on financing.