Abstract
Logistics structures playing significant roles in the economic development of countries are irreversible investments. The exact valuation of them could be difficult due to various uncertainties and problems. This chapter illustrates a methodological way to be able to make an investment decision about the creation of a logistics hub in Of-Iyidere region. Under given assumptions, the study findings indicate that (1) the investment has a positive net present value under three different cost of capital rates, which are 7.5%, 10%, and 15%; (2) the internal rate of return is 18.5%; (3) the payback period is 7 years 8 months; and (4) the discounted payback periods are calculated as 10 years 1 month, 11 years 3 months, and 14 years 11 months according to the aforementioned cost of capital rates. Moreover, the chapter discusses basic project valuation challenges and presents solutions to improve the practice of logistics hub appraisal. So, the paper exhibits an essential guidance and policy support tool to highlight the potential of logistics hub infrastructures in Turkey.
TopIntroduction And Background
According to the data of Clarksons Research, which is the world’s leading provider of integrated shipping services, on average 80 percent of the world trade is realized by maritime transport (Clarksons Research, 2019). There are several participants in the sector and the flow of funds constitutes an essential share for the world trade. In the sector where the risks are high, making the right investments at the right time is the most important key to success in the market. From this perspective, among the developing countries, Turkey connects the centers of production and consumption since it takes place in the most geographically and economically convenient location where it is close to many countries and borders. To be able to benefit from this important advantage, there is a need for logistics hub center where many integrated logistics activities such as transportation, distribution, storage, handling, export, import, and transit trade could be carried out easily. Similar to the world trade transport data, approximately 85 percent of Turkey’s foreign trade is transported by sea (Turkish Chamber of Shipping, 2018). The great proportion of maritime transport in trade has constituted a source of motivation for this study. The high share of maritime transport within the trade volume as well as the specific risks of the sector show that the logistics hubs and ports where sea transportation is carried out should be subject to special consideration and valuation.
Palšaitis and Bazaras (2004) and Europlatforms (2004) define the logistics centers as the hub of a specific region where all logistics activities related to transport and distribution both for national and international transit are carried out on a commercial basis by various operators. These activities may include many integrated services such as storage, handling, consolidation, decomposition, customs clearance, export, import and transit operations, infrastructure services, insurance and banking, consultancy, and production. Starting from the local scale, the logistics center can be a regional, international and global center of attraction as far as its technical and legal infrastructures and geographical locations permit this. Turkey could be considered as a regional transportation project area in this context. However, global developments and inter-country economic cooperation have made countries face serious competition in world markets. In this fierce competition environment, both the countries and the enterprises need to make new capital investments in order to be successful and to survive. Therefore, especially in developing countries such as Turkey, capital investments will be a natural extension of these developments in the future.
The most important step in the development of trade relations between the European Union (EU) Countries and Central Asia and the Caucasus is the transportation corridor. In 1993, EU Commission - via the Brussels Declaration- has started to implement the Transport Corridor Europe-Caucasus-Asia (TRACECA) project, an international transport program involving the European Union and 14 member States of the Eastern European, Caucasian and Central Asian region, in order to strengthen the trade and transportation of Azerbaijan, Armenia, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan to integrate them with the international economy. On 8 September 1998, the project started with the approval by the State Parliament of total 12 countries including Turkey, Ukraine, Moldova, Romania, and Bulgaria. The accomplishment of this project aiming at the development of trade and transportation systems in order to improve the cooperation between countries depends primarily on the realization of international issues such as international road, air transportation, railway and sea transportation systems, traffic prominence, environmental sensitivity, transportation security, and competitiveness in the transfer of goods.
Key Terms in this Chapter
Project Valuation: Project valuation refers to the analysis of the investment projects in order to determine the benefits and costs of the investments. With regard to this, the analysis aims to decide which projects to choose and to determine whether an investment project will be implemented or not. That is to say, the project valuation is a detailed study that includes investigating and evaluating whether any investment is practically applicable. The study mainly covers research and evaluations on market, technical and financial issues. Moreover, in general terms project valuation is a comprehensive process that detects the price of anything. This process could contain the worth determination of various assets from stocks, options, and mutual funds to patents, trademarks, and properties. Before launching any investment the entrepreneurs assess and analyze different factors such as project environment, cash flows, profitability, risks, technical solutions, regional and social effects, and other necessary information according to the scope of the project in order to be able to determine the worth of it.
Credit Default Swap Spread: The credit default swap (CDS) is a type of credit derivative product. Credit derivatives provide transferring credit risk, which is the possibility that one of the contract parties will not able to fulfill his obligations, from one contractor to another one. Accordingly, credit derivatives are the tools that help banks, financial institutions and investors manage this risk. For example, if a debtor cannot pay the debts, losses will occur on the investments and these losses can be compensated by credit derivatives. Banks and investors prefer credit derivatives over insurance contracts because of their low transaction costs, quick payments and more liquidity. Within this context, CDS could be considered as an insurance transaction that is made to guarantee the receivable of the creditor. The cost of this insurance is the spread determined by the CDS rates. In other words, the price of a credit default swap is referred to as its spread. The spread is expressed by the basis points. For instance, a company CDS has a spread of 300 basis point indicates 3% which means that to insure $100 of this company’s debt, an investor has to pay $3 per year. The higher the risk of debt, the higher the CDS point is. The increase in CDS rates indicates that the risk of the debt or the economy has increased. Thus, beyond the insurance function against the default risk, CDS provides insight into the countries’ risks. Especially foreign investors primarily analyze the CDS of the country while they are making an investment in that country.
TEU: It is a type of measurement standing for Twenty-Foot Equivalent Unit which is used to measure a ship’s cargo-carrying capacity. The dimensions of one TEU are equal to that of a standard 20' (20-foot) shipping container and it has a volume of approximately 34 cubic meters. In other words, the term TEU expresses the capacity of a container ship in a uniform manner, the number of containers that the ship can load is converted into a number of containers of the smallest size, i.e. those that are twenty feet in length.
Southeastern Anatolia Project: The Southeastern Anatolia Project (GAP) is an integrated program covering the development and services of urban and rural infrastructure, transportation, industry, education, health, and other sectors, as well as dams, hydroelectric power plants, and irrigation facilities in the Euphrates- Tigris Basin and upper Mesopotamia plains. In this respect, the program is one of the biggest projects in the history of the Turkish Republic. The project area covers 9 cities which are Adiyaman, Batman, Diyarbakir, Gaziantep, Kilis, Mardin, Siirt, Sanliurfa, and Sirnak. These provinces make up approximately 11% of Turkey in both geographical and population terms. The project aims to increase the income level and strengthen the living standards of the local population by using the region's resources, increasing productivity, providing employment opportunities, and what is more, the project intends to decrease the economic disparities between the region and other parts of the country. Thus, it contributes to national economic development and social stability.
TRACECA: It is the abbreviation of Transport Corridor Europe-Caucasus-Asia. This transport corridor project is an inter-state program that aims at improving international transport and political-economic progress in the European Union, the Black Sea, Caucasus, and Central Asia. Moreover, specifically, the program intends to strengthen the trade and transportation of Azerbaijan, Armenia, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan to integrate them with the international economy.
Cost of Capital: All kinds of resources used by the businesses have a cost. The cost of capital or the cost of funding is the weighted average cost of any kind of financial resources used or intended to be used. The importance of the calculation of the cost of capital could be listed as follows: (a) The cost of capital is used as the discount rate in the valuation of investment projects, (b) The capital structure and the cost of capital affect the success and the profitability of the businesses, (c) It is necessary to know the cost of capital for decisions such as leasing, long-term financing, and working capital policy. Moreover, the components of the cost of capital are the equity, preferred shares, undistributed profits and debts including long term liabilities and short term loans such as bank loans, financial bills, and vendor credits. While estimating the cost of capital, the cost of each resource constituting the capital structure of the business is calculated separately, then the average cost of capital is calculated by considering the weight of these resources in the capital structure. Furthermore, it is assumed that operating risk, profit distribution policy and capital structure will not change when calculating the cost of capital.
Logistics Center: The logistics center is a hub of a specific region where all logistics activities related to transport and distribution both for national and international transit are carried out on a commercial basis by various operators. These activities include many integrated services such as storage, handling, consolidation, decomposition, customs clearance, export, import and transit operations, infrastructure services, insurance and banking, consultancy, and production. In order to be able to carry out these mentioned operations, a logistics center should be equipped with all facilities. The terms logistics center, logistics hub, and logistics freight are generally used interchangeably.