The Hindu Business Line : DPW boxes-in South Asia

The battle raged fierce and fast. Two major players in the international port operations arena had fixed their sights on a prize both considered crucial to their future. But when two eager suitors line up for the hand of the same maiden only one can win.

In the full glare of wide media coverage both Port Singapore Authority (PSA) and Dubai Ports World (DPW) fought a fierce battle to take over P&O Ports. But in the end PSA decided that it could not better DPW's offer of $6.8 billion and P&O's shareholders voted overwhelmingly in favour of accepting the DPW offer.

At stake was not merely a hugely profitable company with some superb concessions in ports across the world. Had PSA succeeded in taking over P&O, it would have become the No 1 port operator in the world. As it is, in 2005 PSA regained its position as the world's busiest port from Hong Kong by moving 23.2 million TEUs. In terms of shipping tonnage handled, Singapore is the world's busiest port as well as one of the largest bunkering centres. All this led to an increase of more than 20 per cent in net profit and boosted the bottomline of the group. By 2018 PSA hopes to double its current output and reach the staggering figure of 50 million TEUs per annum.

CASH AND SHARE OPTION

Given this impressive record, the argument that PSA could not compete with DPA because the latter had the might of the UAE Treasury at its back is not entirely valid. PSA could have considered a cash and share option that would have created a new, enlarged firm which would combine the assets of both PSA and P&O.

In this reverse takeover, shareholders in P&O would have received a certain amount of money for their shares and also shares in an enlarged company formed by injecting PSA's assets into those of P&O thus creating the largest port company in the world. In this scenario the real attraction would have been the opportunity to hold stock in such a company.The company itself would have been listed on the London Stock Exchange giving P&O a listing in London though it is they are yet to be listed in Singapore itself. It is not clear whether PSA considered the cash and share option seriously.

The twin benefits of not having to fork out as large a sum as that offered by DPA plus the fact that the company would get a listing on the London Stock Exchange should have been major attractions. PSA is in any case rumoured to be mulling a listing in Singapore. Outright purchase of P&O would have put too great a strain on PSA's balance-sheet and could even have led to a possible credit rating downgrade. This would have made raising of loans that much more expensive and difficult. The cash and share option would have taken pressure off the balance-sheet, but Temasek Holdings, PSA's owner, passed up the opportunity to get its first company listed in London.

MONOPOLY IN SOUTH ASIA

For India, however, there is more to the sale of P&O's port business to DPW. P&O controls container terminals in India from JNPT and Mundada on the west coast to Chennai and Kulpi on the East. It also has concessions in container terminals in Karachi and Colombo. All these will be added to DPW's own interests in flourishing container terminals in Vizag and Kochi.

The result: A virtual monopoly to DPW not only in India but in South Asia. Now, its only competitor is the AP Moller Group, which is developing a new container terminal in JNPT. In the entire region, PSA operates a container terminal only at the relatively small port of Tuticorin.

In this background, our first priority should have been to attract more players into this sector so that a monopoly situation is not created. Greater competition ensures more attractive pricing and a better deal for shippers using Indian ports. Unfortunately, our obsession with security considerations has kept the world's largest port operator, Hutchinson, out of Indian ports.

DPW's acquisition of P&O has not been completely smooth. The UAE government-owned entity ran into unexpected opposition in the US where, cutting across party lines, senators, congressmen and the media alike opposed the takeover by DPW of the six American container terminals operated by P&O. The reason: Unacceptable security risks. Strong support to the deal from no less than the US President, Mr George Bush, could not wear down the determined fight put up by political and public interests in the US. Finally, DPW backed down and agreed to hand over the American concessions to a local port operator.

The security argument used to block the take over of P&O's American concessions is flawed. If the six American terminals run by a private firm headquartered in Australia did not lead to a breach of security, there is really no reason to suppose that security is threatened merely because the new operator is headquartered in the UAE. Security is in any case the task of the port authority and not the terminal operator.

But if for emotive reasons that do not stand up to cold economic logic the Americans could stall the entire deal, should not more relevant considerations such as the establishment of a monopoly cause Indian policy-makers and the public alike to sit up and take notice?

(The author is a former Secretary, Ministry of Shipping.)

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