Dec 27, 2017
In recent years, a global reorientation of global trade towards the East, aided by developments under China’s Belt and Road Initiative, has reshaped the port infrastructure landscape. Even as port operators look to adjust to changing economic trends, geopolitical imperatives, demographic shifts and technological innovation, opportunities are ripe for companies who can position themselves to take advantage of the challenges.
Discourse on Belt and Road, sometimes referred to as OBOR in the West, has evolved dramatically over the last year. A proliferation of articles, debates and presentations has been clearly noticeable – all asking questions on what Belt and Road is, what it means, and why it matters.
Belt and Road has had a high profile in Asia since the Chinese Government committed to the scheme in 2013. But Western companies and experts are scrambling to catch up, in part due to the realisation that the initiative looks set to transform East-West trade flows and terminal operations.
Decoding Belt and Road
The Belt and Road initiative has two prongs: the ‘Silk Road Economic Belt’ (the Belt) and the ‘21st Century Maritime Silk Road’ (with the ‘Road’, somewhat confusingly, referring to the shipping lanes).
Arguably forming the biggest infrastructure project in history, this initiative is investing huge sums in the development of new infrastructure to strengthen energy security, improve connectivity and trade routes, linking China with countries and emerging markets in Asia and Africa – and then on to hubs in Europe.
All of this is being achieved at tremendous cost – current estimates vary, but the value of the sum invested has been measured by experts at around $150bn a year. This figure covers investment in overland links – like roads, railways and pipelines – and new terminal and port infrastructure in key nations along the route. With the goal of bridging Asia’s infrastructure gap, the Belt and Road Initiative encompasses around 60 countries as diverse as Pakistan, Sri Lanka, Vietnam, Greece and the Netherlands.
In the maritime world, the ‘Road’ is having a dramatic impact on port infrastructure and seaborne trade. According to the Financial Times, China has invested $20bn in ports and terminals in the past 12 months. These investments are clustered along what China has identified as three distinct ‘blue economic passages’ and include the acquisition of the Port of Piraeus, multiple investments by Chinese companies in Malaysia and Pakistan as well as recent acquisitions of terminal interests in Sri Lanka, Spain, Belgium and Brazil. Between them, COSCO Shipping Ports, Shanghai International Port Group and China Merchants Port Holdings have now invested in nearly 40 overseas port locations.
Shifts in trade flows
It is clear that the Belt and Road Initiative promises to be a game-changer for the industry and is leading to shifts in the flow of global trade. With these developments comes another important trend – that of consolidation in ownership. Recent figures published by Drewry Maritime Research show that, following the merger between COSCO and China Shipping in 2015, the combined entity is set to become the biggest global container terminal operator by capacity by 2020, climbing from fourth and eighth respectively, with the current leader, Hutchison Ports, itself slipping to fourth place.
In this sense, the gauntlet has been thrown down to other port operators to respond to Chinese investment that is dominating the headlines.
Opportunities at the cutting edge
China has invested heavily in emerging and frontier markets, such as its projects in Djibouti, the East Coast Rail Line (ECRL) in Malaysia and Gwadar in Pakistan, but it is far from being the only party to recognise these opportunities. For their part, DP World has announced plans to build an integrated port, logistics and economic zone in Dakar, Senegal, and ICTSI plans to invest in Port of Motukea and Port Lae in Papua New Guinea.
Given the sheer scale of the planned projects, it is tempting to ask who the likely winners and losers will be. Although some ‘white elephants’ are inevitable, it is too soon to make predictions. Every indication is that the market will continue to grow in absolute terms, displaying that Belt and Road is triggering a range of opportunities that transcend the fate of individual ports that will rise and fall in global ranks.
Understandably, operators are questioning how they can take advantage of this upward momentum, and particularly those in geographies that face greater competition in the coming years. These questions are being exacerbated by the suggestion that the routes and individual port calls of some vessels may be, in part, guided by policy decisions mandated by the Chinese government – and not through commerce.
Challenges for transhipment and gateways
The challenges also differ between transhipment and gateway ports. The more successful ventures may well be those that focus on serving as gateway terminals, such as Bolloré’s terminal at Tibar Bay in Timor-Leste since these terminals can capitalise on relatively captive markets for their services.
To compete, large transhipment hubs need to upgrade their facilities or risk losing business if liners have a choice of where they tranship their cargo. Frankly, to some, it makes little difference if this transhipment takes place in Singapore, Indonesia or Sri Lanka.
A new reality for port operators
All of this is happening at a time when the Belt and Road Initiative is not the only issue confronting port operators. New technologies, for example, are increasing efficiencies and driving down costs, but are also accompanied by commensurate cyber-security threats. In a tough commercial and compliance landscape, finding financing for the developments and modernisation required to leverage Belt and Road remains a challenge.
Meanwhile, new international regulations – sometimes in ports that themselves have undergone new domestic regulatory regimes – are increasing the complexity of port operations. The cross-jurisdictional nature of shipping further adds fuel to this area as one of key concern for operators.
Ince & Co is heavily involved in the global ports and terminals sector, working with operators, contractors, shipping lines, investors and banks. Whether advising on concession agreements, joint ventures, acquisitions, financing and commercial contracts, or assisting with dispute resolution and compliance issues, we pride ourselves on helping to negotiate the varied challenges that can arise at any stage of a project..
The onus is on port operators and financiers to seize the chances being created by what is a time of change for the industry. The Belt and Road Initiative will liberalise access to new markets and drive global commerce, and, for operators that can navigate current market pressures, there is every indication that a new reality awaits them.
By Ton van den Bosch, head of the global ports & maritime infrastructure practice of Ince & Co and based in Singapore (http://www.incelaw.com/en)