Post-crisis: The missing link in strategic decision-making

With only very few exceptions the global infra and port investors have been flip-flopping over the last 5-10 years when it comes to investment and asset management and strategic decision-making in that regard.

At the mercy of market volatility they spend massive resources to secure one investment only to spend the same amount of resources to get rid of it a few years later.

It would be fair to say that a good deal of this behavior is inherent from the volatility of global trade and with that the local markets we invest in. But it would also be fair to say that a significant component is self-induced.

The focus, still seems to be primarily on using prediction as a means to deal with strategic decision-making rather than attacking the models we employ to work better with the volatility that is inherent in the markets.

There is a missing link – which is what we explore in this article with a view to set out a better framework for investment and asset management and related strategic decision-making.

For the full presentation: Strategy Re-work.

The missing link

Again. All gathered together in the meeting room. Various reports and paper scattered on the table and most likely some power point going on in the background with various market assessments and return calculations. It is time again to make another strategic decision about potential investment “x” or asset “y”.

Very meaningful if it was not for the fact that decision-bases keep changing from session to session. One investment a star one year, the next a dog.

How can anyone make meaningful strategic decisions in an environment like that?  Frustrating at best – root cause of immense shareholder value destruction at worst.

But it’s not for lack of good people on the case or hard work for that matter. No, the solution lies elsewhere.

And the good news is that with that solution also comes the potential to substantially improve your return exposure.

The problem

The foundation for strategic decision-making is broken. As illustrated in below diagram most decision-makers are using a set of forecasted value drivers as base for their decision-making process. This turns the strategy on its head every time the markets shift.

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The central problem is reliance on precision forecasting. For whatever reason it seems to stick, despite ample proof that we can can’t predict much even for the next year, let alone a 50 year concession…

And come to that, neither can the World Bank or the IMF. And they employ an army of PhD’s to work day and night on forecasting. So who are we to believe we can do any better?

The solution

No, we do not believe the solution lies in getting better at forecasting. We are convinced it lies in becoming less reliant on forecasting – or at least in not deceiving ourselves with forecasting.

With that guiding principle we have created this framework to deal with the missing links we observe in the behavior of many global investors.

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The goal 

The purpose of this framework is of course ultimately to work towards shareholder value creation. And in that regard we see much untapped value that be tapped into by working with the previous blind-spots.

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What comes next?

We have laid out the key components we think are necessary for establishing this new framework in the presentation enclosed. Below diagram gives a brief overview of what we cover in that presentation.

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Is your strategy just a gamble or robust in delivering returns?

How does your investment rank?

9test3

In previous posts we have explored how strategy and the associated investment, operational and ownership models impact your return exposure.

In this post we take a closer look at how to measure that impact with an assessment tool developed with key stakeholders in the sector. For the full piece in presentation format: The 9 Point Test.

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Breaking the code: Think like the top infra and port investors

In our previous two articles we have been discussing how some of the best investors are applying new models and some of the consequences.

We have subsequently been challenged to come up with a formula to break the code. In other words how you can systematically approach your own strategic and investment related decision-making to mirror these players.

In this post we have sought to outline as best we could how you can re-work your strategic framework to reap the same benefits and broken it down into five steps.

  1. Goal reset
  2. Domain division
  3. Model and options identification
  4. Testing
  5. Strategy reset

We have also included a brief case for illustration purposes at the end.

For download in presentation format: Breaking the code

If you have followed our previous articles you will come across some repetition, but can consider this a more elaborate synthesis of previous writings.

Step 1. Goal reset

This is where it all starts.

The most notable difference in what some of the most renowned investors do versus others starts with the way they look at investment or shareholder returns – the goal metrics itself.

Specifically they have experienced volatility during the crisis that is making them skeptical about the goal metrics that used to guide their decisions for investing and portfolio management.

The one line projection has failed.

Instead they now look at the full spectrum, or at least a conceivable spectrum and work to improve the whole return exposure.

And with that the goal post has changed.

illu1

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Post-crisis investing: How port executives will be measured

In our last post we discussed how the leaders in the industry are changing the way they invest and manage their investments:

www.port-investor.com/post-crisis-investing

In this post we explore how the metrics to measure success is changing and how it is going to impact the way port executives are appraised and maybe one day how they are remunerated.

For full download in presentation format: Post-crisis Performance

How your goal is changing

The crisis brought with it clear evidence of substantially more volatility than was previously conceived possible. With that we are seeing how some of the best in the market are changing the goal metrics.

The main focus point has previously been, and for many still is, one figure or a base case around which decisions were made and expectations to management performance were formed. But with the, in many cases, negative and, in some cases, positive surprises investors have had we expect, and already see, a change.

Specifically we start seeing much more focus on potential downside and upside.

That changes the game. It is increasingly becoming about altering the entire return profile by limiting downside and increasing upside (and very much the relation between the two).

As example an investment yielding a total expected NPV of $125mn may be entrusted to you or a management team of which you are part to deliver on for a given number of years (see below diagram).

If the investment changes from Scenario 0 to Scenario 1 during your tenure you have failed. This is often seen in incremental investments where a set of assumptions make decision-makers blind to the disproportion between incremental downside and upside (as example when automating a yard operation).

But if you have changed payoff exposure from Scenario 0 to Scenario 2, then, despite not having added additional upside, you have performed much better.

post2-1

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Post-crisis investing: How Hutchison and others employ new models

It used to be all about the markets, well, mostly at least. Which markets are hot and which are not (and “picking the winners”).

Whereas this is still something the global port investors clearly obsess about, a clear difference is possible to spot for those who have been around some years in the sector.

In short, they are starting to focus much more on the models they use to invest and extract value from their portfolios. And as part of that they employ models that assume much more volatility in the markets than previously.

In this short piece we will be illustrating this trend with a few samples and uncover some of the key things the best in the market are doing differently.

For download in presentation format: Post-crisis investing.

What Hutchison and others are doing

One of the most notable cases was the Hutchison Port Trust IPO in Singapore.

In one single move Hutchison Port Holdings (HPH) transformed their return exposure completely for all their Pearl River Delta (PRD) assets when they IPO’ed them on the Singapore Stock Exchange. Not only did they secure a substantial part of the potential future cash flows they also placed themselves in a role that gives them many times the upside compared to the stake they have left in the game.

In 2010/11 when HPH was faced with decisions concerning their PRD portfolio, including their very profitable Hong Kong and Shenzhen activities, they probably looked at something resembling the below spread of potential returns.

The diagram displays a spectrum from the least optimal to the most optimal market conditions and a corresponding value of the HPH PRD assets (in NPV) when matched against a potential sale (or in this case proceeds from an IPO) at $5bn.

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Port market volatility, prediction and aliens

All port markets globally have inherent volatility. Most are predominantly driven by global trade and some by domestic trade, which both have shown substantial variation over the years. Despite this it seems to be the norm to use single point forecasting to aid our decision-making in the port markets.

In this brief article we explore some market realities and use a thought experiment to substantiate the market uncertainty that is reality for all engaged in port infrastructure – whether as operators, owners or investors.

This article is part of our “Real Payoff” initiative launched with the purpose of facing up to the uncertainty around us and finding ways of working with it in a meaningful way rather than using narratives to shy away from it.

For more please go to www.port-investor.com/real-payoff.

The obvious volatility around us

market volatility

Source: www.aapa-ports.org and own calculations.

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Real payoff for port and terminal investors and operators


To download in pdf: Real Payoff – Inititaive by InduStreams.

Market volatility is all around us and we experience it frequently in the port and infrastructure markets. Precision forecasting has long ago been debunked as a meaningful method of handling this volatility.

Despite this it seems to be the norm to revert to single point predictions to manage terminals and port assets. One number to guide the decision-making on million and billion dollar investment decisions (maybe with a bit of sensitivity analysis).

If the impact had not been so important we could maybe say: “…so be it, the assumptions will not hold, but it is the best we can do…”. But essentially this is about return – return to shareholders (and citizens through government deployed capital). It is a critical component of that one half that makes up the whole of the world economy – how we allocate and deploy capital.

Essentially this is about the core of port and terminal infrastructure investing and management. It directly impacts strategy setting and permeates all walks of decision-making on a strategic as well as operational level. If we base our strategies and decision-making on fragile narratives we fail our shareholders and citizens.

In some other sectors this is now recognized as a tremendous challenge and frameworks and tools are being worked out for use in their own domains. Our view is that we need to do the same for the port and infrastructure domain in the form of embracing this volatility and working with it in a meaningful way and hopefully even gaining from it. That is the purpose of this initiative.

We will be posting relevant pieces as we go along on www.port-investor.com and are otherwise working with constituents on actual application in their own specific contexts.

Should this have interest to you we invite you to reach out and explore the potential with us.

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Nordics Port Market Review 2013

For core markets in which we provide insight and services to owners, investors, users and others, we regularly do reviews.

As one of these markets we have just completed a review of the Nordics and would be glad to share insights, trends and opportunities we have come across with investors and others with significant interest in the market.

For more please see enclosed introduction: Nordics Market Review Introduction

Or contact us directly on: contact@industreams.com

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China Port Market Review 2013

For core markets in which we provide insight and services to owners, investors, users and others, we regularly do reviews.

As one of these markets we have just completed a review of China and would be glad to share insights, trends and opportunities we have come across with investors and others with significant interest in the market.

For more please see enclosed introduction: China Market Review Introduction

Or contact us directly on: contact@industreams.com

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China 2013 | Port Growth Expectations

Through our network we have had much feedback from various constituents including shipping lines, terminal operators, port groups, infrastructure investors and others in the Chinese port markets, on their expectations for the 2013 container port market.

With this brief piece we wish to share some of the main feedback as well as an overview of how the biggest port markets are likely to end up by the end of 2012. For questions or comments please write us on contact@industreams.com. For easy download of the presentation in pdf format: China 2013.

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The Pearl River Delta | A 60+ million container market (TEU)

Representing more than one third of the total Chinese container port market and greater in size than the entire North American port market the Pearl River Delta is by some considered the biggest metropolitan area in the world (with population of 120mn) and could be considered the biggest container port market in the world.

Whereas the PRD consists of a number of larger and smaller ports (here among Shenzhen, Guangzhou and Hong Kong), the relations between these and their markets of origin and destination are substantial with a significant overlap in amongst others the hinterland markets. The PRD is also home to some of the worlds biggest port operators and investors. Among these are Hutchison Port Holdings (and in particular their new Singapore listed trust only owning assets in the PRD – the HPH Trust), China Merchants Holdings International, Modern Terminals (Wharf Holdings) and other companies which market value are highly dependent on the PRD market.

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266.5bn RMB in assets and set for 50% market coverage (listed ports in China)

Compared to most other countries (if not all) China has the highest share of listed port groups. Measured in share of total throughput per port an estimated 39% are already listed today and with 3 major upcoming IPO’s this is will increase to about half of the Chinese port market. These companies are unlike other port groups around the world in that they own a substantial part of not only general port infrastructure but also the terminal operations in their respective ports. In total for 2011 the listed port groups reported an asset base in excess of one quarter trillion RMB.

We are providing an overview, benchmarks and 17 profiles of China’s listed port group companies. For easy download in pdf format: Listed Port Groups in China.

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Yantian Port Company (SZE:000088)

This is a simple one page overview of Shenzhen Yantian Port Holdings Co. For easy download in pdf format: Yantian Port Co

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Wuhu Port Company (SSE:600575)

This is a simple one page overview of Wuhu Port Storage & Transportation Co. Ltd. For easy download in pdf format: Wuhu Port Co

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Zhuhai Port Company (SZE:000507)

This is a simple one page overview of Zhuhai Port Co. Ltd. For easy download in pdf format: Zhuhai Port Co

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Nanjing Port Company (SZE:002040)

This is a simple one page overview of Nanjing Port Company (NPC) and their port activities. For easy download in pdf format: Nanjing Port Co

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Xiamen Port Company (HKG:3378)

This is a simple one page overview of Xiamen Internaltional Port Company and their port activities. For easy download in pdf format: Xiamen Port Co

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Chiwan Wharf Holdings (SZE:000022)

This is a simple one page overview of Shenzhen Chiwan Wharf Holdings and their port activities. For easy download in pdf format: Chiwan Wharf Holdings

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Lianyungang Port Company (SHA:601008)

This is a simple one page overview of Jiangsu Lianyungang Port Company and their port activities. For easy download in pdf format: Lianyungang Port Co

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Ningbo Port Company (SHA:601018)

This is a simple one page overview of Ningbo Port Co. and their port activities. For easy download in pdf format: Ningbo Port Co

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