10 September 13

Keeping the taps open

10 September 2013

Financing for expansion will only come if the Triple Bottom Line is there, says Martin Rushmere

It’s no longer a matter of choice; developers and operators are now faced with the Triple Bottom Line when deciding on expansion projects – the social, financial and environmental effects.

Where once the radical approach of an option to consider the environment was forward thinking, now it’s a routine part of all development projects. But, rather like the early international campaigns to stop cigarette smoking, the industry shies away from, or just plain declines to discuss, assessing the financial and marginal cost of promoting (or, in many cases, being ordered to enforce) stricter environmental measures.

Likewise, a pattern sometimes emerges of anti-pollution programmes being drawn up without fully matching the cost-benefit impact. In some cases the expense would be much lower if the two sides of the equation were thoroughly analysed, to make sure that a port gets greener at the most cost-effective rate.

As numerous consultants point out, the community/taxpayers as a whole will benefit from sustainability but the cost of implementation will ultimately fall on them as well.

An example of greater awareness of costs is shown in the PIANC (the World Association of Waterborne Transport Infrastructure) analysis of Green Port strategies. The report acknowledges ”competition among ports, and commercial short term views are often difficult barriers to be overcome”. It adds that lease agreements should include “sustainability criteria” so that “excessive corrective costs in solving environmental problems can be prevented”. A number of other suggestions are made about cost considerations and avoidance for specific environmental measures.


Cash commitment

For the most part however, expense is seen as secondary. All three types of institution involved in arranging financing, the banker, the consultant and the international non-government advisory institution, take the approach that green objectives are paramount and trump expense. Not only should a project be ditched if environmental objectives are not met, economic gains alone are unacceptable and unjustified.

Delivering strict compliance with sustainable standards in the form of being one of the 78 signatories to the Equator Principles – one of the leading principles for port construction loans – is DNB, one of the world’s biggest shipping and maritime financiers. “This year we have made five or six new loans, bringing our total loan book for ports to about $2bn,” says Berend Paasman, of DNB Bank London.

He agrees that throughout the financial sector there is strong interest in lending for port projects, provided sustainable guidelines are followed. In emerging markets, the bank prefers to combine with international agencies such as the IFC and regional development banks.

Mr Paasman advises developers to take a broader look at sources of finance, as the market is changing and volatile. “It’s not just banks any more. Insurance companies and pension funds are getting involved as lenders. Many terminal operators are issuing their own bonds or opting for private financing.

“At the same time, regulations on capital ratios and requirements (as a consequence of ‘Basel III’) are getting tighter, which could lead to restrictions in bank financing. However, the consequences of “Solvency II” [capital regulations specifically aimed at insurance groups] are not fully known yet. This could reduce the insurance companies’ appetite for long term lending in port projects going forward.”

Ports and developers must also realise that most deals are with multiple lenders “and are usually approached on a club or syndicated basis. The typical minimum size of a port project finance is $100m-$150m, with each bank putting up $30m-$70m.”


Emission admission

One of the most important clauses of the Equator Principles says that a member institution “will require the client to report publicly on an annual basis on greenhouse gas emission levels (combined Scope 1 and Scope 2 Emissions) during the operational phase for projects emitting over 100,000 tonnes of CO2 equivalent annually. Clients will be encouraged to report publicly on projects emitting over 25,000 tonnes.”

As an aside, some European and Asian financiers have complained about US lenders wriggling around sustainable practices. In fact, three of the biggest US banks and the quasi-government Ex-Im Bank have signed up to the Equator Principles.

And the general momentum to improve on sustainability is unstoppable. The European Seaports Organisation notes that the percentage of member ports that have an environmental policy has increased from 45 in 1996 to 91 today.

Says Dr Patrick Uyttendaele, a director of MTBS consultants: “All ports are trying to implement (sustainable) Green projects. It’s not an isolated consideration but is an essential part of development. In Europe the port authorities are imposing rules for sustainable practices on the private sector.”

For Europe, the main thrust is to divert cargo from roadways to short sea modes (particularly barges). Maasvlakte II is a particular case in point, with bids for developing the container terminals being assessed 20% on sustainability – with barge and rail transport counting for a large part of the project. Rotterdam port authority stipulates that road transport must be less than 35% of goods movement to the hinterland. Dr Uyttendaele says that sustainability now counts for just as much, and in some cases even more, than other aspects in port development.

“But at the end of the day it’s all about risk and the question of bankability and profitability, although we work within the regulations, guidelines and wishes of the port authorities and clients. While sustainability is still important, the client’s requirements can still vary – some might want to emphasise employment, while others might see something else as more important. And let us not forget that port infrastructure is also about security, in the post-September 2001 world.”


Three’s no crowd

For the World Bank, ports are subject to its standard project performance measure of a Triple Bottom Line – the economic, social and environmental sustainability impacts – when assessing proposed developments. The bank has become more sophisticated in project requirements and compliance rules, and sets out precise targets to justify support and investment, in line with its Inclusive Green Growth principles policy report released in 2012.

Marc Juhel, sector manager for transport at the World Bank, says the institution is keen to foster more port development as part of its infrastructure programme to reduce poverty and to improve living conditions.

“However, we prefer to develop existing facilities rather than develop new facilities. We are not going to participate in a Greenfield project if an existing facility is not being used to its best extent.”

Developers’ eagerness to develop a new site makes the finance suppliers and advisers wary. They push back when the potential of existing sites is ignored (sometimes deliberately) or overlooked and governments and developers clamour to develop a new facility.

But ports should not feel especially victimised by the insistence on strict sustainability rules. As a US analyst notes: “Ports are merely part of the world trend to clean up the environment. The difference is that they have long been seen as a main source of pollution and so are getting more attention than other sectors of the world economy.”

Which goes back to the simple truth that if ports don’t acknowledge the importance of sustainability or try to evade environmental capture, they don’t get the money.

Source: PortStrategy