Philippines-based International Container Terminal Services Incorporated (ICTSI), the preferred bidder for the Durban pier 2 terminal (DCT2), has roped in the services of respected economist Brian Kantor as an expert witness in a titanic battle to have the tender temporarily halted by the courts.
Kantor is a former chief investment strategist of Investec Wealth & Investment SA and erstwhile dean of the faculty of commerce and head of the school of economics at the University of Cape Town. His expert opinion will be that Transnet was not amiss in allowing ICTSI to use its market capitalisation to calculate its solvency as part of the bidding process.
According to court documents filed with the high court in Durban, seen by Business Day, Kantor is of the view that market capitalisation is a credible measure of solvency.
“Protection provided to lenders to a company must be its market value relative to its debts. It is the market value of the assets of a firm — that could be realised if necessary — to meet its obligations that it secures,” Kantor’s report reads, before adding that a company’s share price indicates the value of the company.
Sticking point
The usage of ICTSI’s market capitalisation will be a sticking point when the group faces off with rival APM Terminal — the port operating company of Danish logistics major AP Moller-Maersk — in court next month.
Durban high court judge Robin Mossop in October issued an interdict that highlights serious flaws in the procurement process, casting a shadow over the state-owned freight and rail operator’s decision-making that led to the selection of ICTSI.
At the heart of the legal challenge is that Transnet erred in allowing ICTSI to calculate its solvency ratio using its market capitalisation to secure the 25-year contract to develop and manage the Durban container port.
This decision, which inflated ICTSI’s solvency from 0.24 to the required 0.4, was made despite internal and expert advice warning against it.
ICTSI, listed on the Philippines Stock Exchange, was the only bidder to use its market capitalisation to prove it met Transnet solvency requirements to qualify for the tender, allowing it comfortably to pass the solvency requirement.
Kantor supports the views of another expert on ICTSI’s team, Wits accounting expert professor Warren Maroun, who has said there is no single authoritative basis for computing solvency ratios, arguing that market capitalisation may indicate an organisation’s ability to attract additional funding or refinance its existing debt.
To bolster its case APM has roped in Harvey Wainer, a visiting professor at Wits School of Accounting, and member of the JSE securities exchange issuer regulation advisory committee.
Wainer has argued that there is no recognised solvency ratio in financial analysis for any normal purpose that relies on market capitalisation as being the total equity amount.
The DCT2 project is the cornerstone of SA’s infrastructure, pivotal for economic stability and growth. It is Transnet’s biggest container terminal and handles 72% of the Port of Durban’s throughput and 46% of SA’s port traffic.
Congestion
The infrastructure and design of DCT2 has remained the same since 1963. Over the past 20 years, congestion at the terminal due to shipping traffic and limited operational capacity have led to backlogs at the Port of Durban.
One of the main arguments to be advanced by ICTSI is that APM’s bid to set aside the contract is self-serving as APM missed the opportunity to challenge its inclusion in the shortlist process, which was concluded in August 2022 — when it was already aware at the time that it used market capitalisation to calculate its solvency.
APM was ranked as the second preferred bidder — with ICTSI’s bid R2bn higher than that of APM. ICTSI in its papers highlights the harm suffered by the company due to the delay of starting the project.
“Following the announcement of the preferred bidder in July 2023, ICTSI immediately started preparations for making a $618m purchase price payment. Reserving this capital for imminent investment has significant opportunity costs for ICTSI which is unable to pursue other opportunities or investments while it holds these funds available,” the papers said.
“To give a sense of the quantum, if the interdict is in place for six months it would result in a direct cost of ICTSI of R360m on top of the significant opportunity costs which it incurs while these funds are held available for Transnet and be able to be applied to other projects and opportunities,” they said.
“The unavoidable effect of the unwarranted delay is to paralyse a major infrastructure project for which there is dire and urgent need ... the project is required to remedy underperformance at the port, and to expand and modernise the port.
“It is indispensable to economic growth in SA.”
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