Trust ports stuck in a dry dock: John Murray explains why the Government is stalling over its plans for privatisation

SIX months after they were supposed to have come up with their own ideas for privatisation, managers of Britain's trust ports will spend Christmas Day blissfully unaware of the Government's plans for them.

When the companies failed to come up with their own plans in June, the industry had expected to hear news of an early wave of sales. Instead, there has been a studied silence from government, although six ports expected to be lined up for an early sale. The biggest and most valuable is Dover. Other candidates could include Ipswich, Poole, Tyne, Aberdeen and Dundee.

The issue has become a political hot potato since the sale of Medway ports netted a bonanza for the management and workers who bought out the Kent ports in the first round of privatisations in 1992.

The Ports Act 1991 granted the Secretary of State for Transport powers to privatise trust ports two years from its enactment, if the ports did not come up with proposals. When the deadline passed on 25 June, none of the remaining ports had produced proposals.

The furore over the sale of Medway to Mersey Docks was the culmination of complaints over the ports privatisation programme. Opponents argue that the Government has been selling the assets too cheaply. In the case of Medway, the issue was complicated by an imbroglio over a share buy-back that cost redundant workers dearly. Medway was sold in a management/employee buyout for pounds 37m. Less than 18 months later, Mersey Docks bought the company from the management for pounds 104m.

Many employees made big capital gains, having bought shares at pounds 1 that ended up worth pounds 37.25 apiece. Controversy was ignited when 269 dockers had their shares compulsorily bought back at pounds 2.50 each after leaving the company. The share price was valued at pounds 2.50 by KPMG Peat Marwick, the accountants. Two former Medway directors, who also sold shares after the KPMG assessment, were to decide this week whether to sue KPMG for negligence. They were expected to be joined in any action by about 100 dockers.

Medway was one of five trust ports that privatised voluntarily in the first wave of sell-offs last year. Tees and Hartlepool, Clyde, Forth and Tilbury were the others. They account for more than half the turnover of the 15 ports liable for privatisation under the Ports Act.

Gross proceeds from the sales came to pounds 380m. The Treasury netted pounds 169m after costs of pounds 12.8m, of which the port authorities spent pounds 9.6m while pounds 2.2m went to management and employee buyout teams. The remaining pounds 1m was paid to government advisers.

They were not the first, however. Associated British Ports, the UK's biggest operator, was privatised in 1983. The long hiatus before last year's sell-offs can be explained by the reluctance of the Government to risk a national dock strike, despite its union-baiting rhetoric.

The decision to move was partly sparked by the restlessness of some port managements, which wanted to expand but were restricted by trust status. That prevented them from using their assets to develop surrounding property.

The prerequisite for any privatisation programme, however, was a resolution of the problems caused by the Dock Labour Scheme. The Governmnent finally abolished the jobs-for-life scheme in 1989, and the resulting savings in productivity have dramatically improved the profitability of many ports.

Between December 1991 and the end of 1992, five more ports were sold. First off the block was Tees and Hartlepool, which was sold for pounds 180m to a consortium including Powell Duffryn, Humberside Holdings and 3i. This was followed in March 1992 by the management buyouts of Tilbury for pounds 32m, Clyde for pounds 26m and Medway for pounds 29.7m. Forth opted for a public flotation, which raised pounds 29.7m.

Industry observers say the Department of Transport is likely to come under increasing pressure from the Treasury to proceed with the compulsory privatisation of the remaining ports, as further sales could raise up to pounds 200m.

An alternative explanation for the Government's delay is that John MacGregor, the Transport Secretary, is waiting to get the privatisation of British Rail out the way first. There are also circumstances that could complicate some of the proposed sell-offs. Dover is understood to be in favour of privatisation in principle, though not yet. Dover makes pre-tax profits of around pounds 15m a year, but its chairman, John Malby, says privatisation must wait until after 1995, so that the effect of the Channel tunnel on the port's business can be assessed.

Among those believed to be interested in Dover is Peninsular & Oriental, the shipping to construction conglomerate, which would like to have more control of its main passenger terminal.

The next most profitable port is Aberdeen, whose board, dominated by port users, opposes privatisation.

Industry observers say that despite the DoT's powers, it will take a long time to effect a sell-off against the wishes of a port's board. This problem could also delay privatisation of Poole.

Tyne, which makes annual profits in the range of pounds 3m to pounds 5m, is another candidate that may plead special circumstances to avoid privatisation. Its business has previously leaned strongly on British Coal - trade that has all but disappeared. But it recently won the contract to handle the throughput from Nissan's Sunderland plant.

The remaining candidates - Ipswich and Dundee - are small fry, with profits of less than pounds 1m each.

Most of the sales are likely to be trade sales. Only Dover and Aberdeen would have the critical mass to float. It is also likely the second tranche of ports will fetch fancier prices than the first as the DoT will be keen to avoid criticism about selling assets cheaply.

Apart from the huge capital gains at Medway Ports, critics point to the huge rise in Forth's share price. The company was floated at 110p; its shares closed yesterday at 450p.

The problem of valuing the assets is compounded by the significant property that often accompanies the ports, although the Ports Act did incorporate a clawback arrangement for property transactions in the 10 years following privatisation.

But buyers still believe there are costs to be squeezed out of the remaining ports. Observers say a public sector mentality has prevented some ports from becoming as efficient as they might be. But some buyers - notably ABP - may face barriers in the shape of the Office of Fair Trading, which will have to examine the monopoly considerations closely.

(Photograph omitted)