Alternative Port Management Structures and Ownership Models

WORLD BANK PORT REFORM TOOL KIT

MODULE 3 ALTERNATIVE PORT MANAGEMENT STRUCTURES AND OWNERSHIP MODELS

The Port Reform Toolkit could be elaborated thanks to the financing contributions of the following organizations:

The Public-Private Infrastructure Advisory Facility (PPIAF) PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of theirinfrastructure through private sector involvement.For more information on the facility see the web site:www.ppiaf.org.

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

The Port Reform Toolkit Modules have been prepared with the contributions of the following organizations,under the management of the World Bank Transport Division:

International Maritime Associates (USA)

Mainport Holding Rotterdam Consultancy (formerly known as TEMPO),Rotterdam Municipal Port Management

(The Netherlands)

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

AXELCIUM – Ingenierie et Regulation Financiere (France)

Nathan Associates (USA)

United Nations Economic Commission for Latin America and the Caribbean (Chile)

PA Consulting (USA)

Comments are welcome. Please send them to the World Bank Transport Help Desk. Fax:1 202 522 32 23.Internet:[email protected] MODULE 3 STRUCTURES & OWNERSHIP MODELS

OBJECTIVES AND OVERVIEW tions. Examples have been included illus- trating approaches that have been suc- This Module, the third of seven compris- cessful as well as those that have been ing the World Bank’s Port Reform Toolkit, less than fully successful. This Module lays out an array of alternative port man- also notes how ports have adjusted agement and control structures, and organizational and administrative explains for each structure the respective arrangements as a result of the strategic roles most likely to be filled by the public shifts and competitive pressures affecting and private sectors. It provides a frame- the maritime sector. These developments work for all of the Modules by defining are described in Module 2 in detail. the characteristics of specific management Module 3 is organized into seven sec- structures and the tasks and responsibili- tions, including this overview. ties to be performed by private and public sector entities. In particular, it identifies The section titled “Evolution of Port the problems facing port managers when Institutional Frameworks” provides basic adapting their organizations to the chal- terms of reference and a conceptual lenges of today’s global market place. framework for defining the respective The solutions and "tools" suggested in roles of the public and private sectors in this Module are adapted as much as pos- port management. The section also sible to the port manager’s specific situa- describes a number of public interest

1 issues affecting port planning, port oper- describes the strengths and weaknesses ations and infrastructure development. of each. There are many ways to change the institutional structure of a port. The section titled “Port Functions, Traditional methods of operating and Services and Adurinis-fration Models” management structures have been aban- defines a number of typical manage- doned, with ports increasingly operating ment structures that ports use around as commercial entities in the global mar- the globe. This section spells out the ket place. The process of structural kinds of tasks that public ports under- change can be a painful one, with the take and defines for each of the alterna- potential for costly mistakes to be made. tive management structures ways in However, increasingly the international which discrete elements of these tasks port community agrees on the structural are assigned to various parties. role and function of port authorities. The global market has had a unifying The next section focuses on the impor- influence on emerging institutional tant subject of port finance, a topic that structures. The increasing influence of is dealt with at greater length in Module International Finance Institutions on 5. Here, the private sector plays an port development also facilitates the increasingly important role in providing introduction of efficient models and funds for infrastructure development, in structures all over the world. Although addition to paying for superstructure, there still is a large diversity of port equipment and systems. This has not management and organizational struc- only a profound impact on management tures, the trend towards several success- structures, but also on long-term public ful port management models is strong. participation in port development. The analysis assesses various aspects of pub- The next section analyses the reform lic versus private investments in infra- tools that port managers can use. The structure including: which components role of governments in financing port of infrastructure are paid for by the development is eroding and the private Government or by the Port Authority; sector has assumed more responsibility which investments should be made by not only in port finance but also in port the terminal operator; and how operations. This causes a gradual shift in Governments with limited funds can the balance of power between govern- harness private funding for port-related ments and the private sector. It is not investments. This section also analyzes clear how far this shift will go, but it is the role global terminal operators -- both evident that the balance is likely to be shipping lines and stevedoring compa- different from port to port and from nies -- play in today’s maritime sector country to country. and assesses their impact on port management and finance. The final section analyzes traditional marine services in the context of port The section titled “Port Reform reform. Such services include activities Modalities” presents an overview of that are carried out by both the public various port reform options and and private sector. Marine services

2 ensure the safe and expeditious flow of transformed and renegotiated to adjust vessel traffic in port approaches and to modern bulk handling methods, unit- harbors and a safe stay at berth or at ized handling and containerization. All anchor. In every port the Harbormaster of these developments resulted in a (or Port Captain) is responsible for nau- rapid modernization of port handling tical safety and often also for the protec- equipment. At the start of this process, tion of the environment. Other services labor unions often refused to accept such as vessel traffic management, reductions in the labor force, and pilotage, and dangerous goods control ignored the need to upgrade skills. are described as well. Finally, the sec- Later, however, unions realized that port tion describes several possible reform reform was a necessity. Enlightened approaches that can be applied to labor leaders accepted moderate marine services. reforms. As Module 7 describes in greater detail, it is no longer realistic for Upon completing this Module, the read- dockworkers and their trade unions to er should have attained a better under- oppose institutional reform and the standing of the various types of port technological advances that frequently management and ownership alterna- precede and accompany it. tives, their respective strengths and weaknesses, and which alternatives The second reason why many ports might best fit a port’s particular circum- failed to respond adequately to the stances. increased demands imposed on them was centralized government control in EVOLUTION OF PORT INSTITUTIONAL the port sector. Particularly between FRAMEWORKS 1960 and 1980, central planning (in the port sector as well as in other sectors) Private sector investment and involve- prevailed not only as a norm in socialist ment in ports emerged as a significant economies, but also as in many western issue in the 1980s. By this time, many and developing countries where nation- ports had become bottlenecks to efficient al port authorities were often promoted distribution chains of which they are an by international development banks. essential component. Three main prob- Slow paced and rigidly hierarchical lems contributed to the gradual deterio- planning, control and command struc- ration of service quality (illustrated by tures often accompanied central plan- port congestion and consequent chronic ning. Only in the 1980s did the disman- service failures) during this period. tling of communist systems and the increasing introduction of market-ori- The first was restrictive labor practices. ented policies on a worldwide basis Increasingly after World War II, anti- open the way for decentralized port quated work practices and methods for management and for reduced govern- matching available labor with occasional ment intervention in port affairs. work -- practices that developed during a previous era characterized by break- The third main reason for a lack of port bulk cargo handling -- needed to be service quality was the inability or

3 unwillingness of many governments to Box 1 invest in expensive port infrastructure or the "mis-investment" in infrastructure "White Elephants" in Port (i.e., to provide facilities that were badly Development matched with the needs of foreign trade During its early years, the container terminal of the and shipping). During this period a Port of Damietta in the Arab Republic of Egypt was number of beautifully constructed port often cited as a "white elephant" in port development. The terminal was constructed and fully complexes became "white elephants" equipped in the 1970s to handle anticipated con- when expected demand failed to materi- tainer transshipment requirements in the Eastern alize. See Box 1. As a result of systemic Mediterranean. Yet, for various reasons, the terminal failures in managing port development, was without any business for years. Only when the shipping company Scan-Dutch decided to change its governments have learned to rely Eastern Mediterranean port of call from Cyprus to increasingly on private investors to Damietta did throughput start to increase sharply. reduce ports’ reliance on state budgets Today, more than twenty years later, Damietta is one of the leading container ports in the region compet- and to spread investment risks through ing with terminals in Italy, and on Malta and Cyprus. joint undertakings. During the 1960s, major West-European ports such as Rotterdam, Antwerp and Marseilles developed During this period, fundamental ques- large industrial sites near their port facilities. These sites became centers for refineries and petro-chemi- tions arose about the appropriate divi- cal industries. In view of the apparent success of sion of responsibilities between the pub- ports becoming industrial centers, the Dutch lic and private sectors. So-called Government created three regional ports to support the ailing economies of their respective regions. Two "boundary line" issues came into sharp of these ports – Flushing and Terneuzen – developed focus during the 1980s. Policy makers fairly well. They are located along the River Scheldt became increasingly aware of the need in the vicinity of their large neighbors: Antwerp and Rotterdam. The third port was built along the River for co-ordination among various branch- Eems near Germany in the Northern Province of es of government and for consultation Groningen. Despite modern port facilities and large with diverse port interests. They real- government subsidies, the Port of Eemshaven never became a success. It was too isolated and lacked an ized clearly that port development had industrial hinterland. It struggled on for years to collateral consequences and effects on gradually develop a few niche markets. The case of public interests in land use, environ- Eemshaven shows that the creation of a new port, as such, does not guarantee success when there is no mental impact, job creation and econom- natural hinterland generating significant cargo flows ic stimulation for economically blighted and when the port does not attract large-scale hub areas. Moreover, among some leaders, traffic. first in the United Kingdom and then gradually in other parts of the world, it tor has no adequate incentive to provide became increasingly clear that large- and, consequently, are under-supplied scale government involvement in port without some form of government inter- operations was self-defeating and vention). destructive of private initiative. They In many countries today, still another came to realize that the role of govern- trend has emerged: the private provision ment in a market economy should focus of public services. Increasingly, govern- on the provision of "public goods" (i.e., ments have transferred public tasks to goods and services that the private sec-

4 private contractors. "Outsourcing" of increasingly transcends the interests of key functions and roles has had a major local users, and benefits businesses and impact on redrawing traditional bound- communities located beyond regional ary lines in the port sector. Hence, in and national borders. This global diffu- many ports today, the public sector sion of benefits poses some interesting mainly acts as planner, facilitator and challenges with respect to the need for regulator, whereas the private sector acts large-scale investments in the sector. At as service provider, operator and devel- Box 2 oper.

Experimentation in shifting the bound- Institutional Formats of ary line that divides the public and pri- "Green Field" Ports vate sectors has resulted in a healthy pragmatism. Today, best practice is Salalah, Oman more concerned with results than with In 1997 Salalah Port Services (SPS) was awarded a ideology, and is intended to result in: 30-year concession to equip and operate the Port of Salalah in Oman. SPS is a joint venture with 30% foreign investment and 70% Omani Government and • Increased service levels for infra- public/private investment. The concession contract structure users; covers the container terminal, the conventional port, and the Free Trade Zone. • Increased efficiency in operations; and Investment in the port comprised the following pro- portions: • Improved allocation of limited public • Omani Government: 20% • Government pension funds: 11% funds. • Sea-Land Services: 15% • Omani private investors: 19% At the same time, various types of port • Public offering: 20% terminals have become highly special- • Maersk / A.P. Moller: 15%. ized in the cargo handling services they The initial capitalization was US $260 million. The provide and manifest fewer of the char- Government built the infrastructure. acteristics of a public good. New "green Container Terminal at Vadhavan, India field" container terminals have been built with private capital and other con- Vadhavan, India tainer terminals have been re-developed In February 1997 P&O Ports Ltd. was selected by the and re-capitalized through some form of Government of the State of Maharashtra to head a privatization. Box 2 presents two of the consortium to develop a US$ 950 million "green field" deep water oil and container port at Vadhavan institutional formats used in recent (North of Mumbai). The participants were: years to develop "green field" terminals. • Maharashtra Government: 11% • ICICI: 11% Increasingly, ports are being integrated • Jakari Terminals: 4% into global logistics chains, and the pub- • Meherji Cassinath: 2% lic benefits they provide are taking on • P&O Ports and other private investors: 72%. regional and global attributes. At the The future of this project is uncertain, however, since dawn of the 21st century the value of the Environmental Protection Authority ruled that services provided by regional ports the project was illegal.

5 the same time, as discussed in Module 2, charge for them. Thus, some form of private port service providers them- public intervention is appropriate in selves have become increasingly global their production to make certain that an in scope and scale. Even more recently, adequate level of public goods is pro- a number of strategic alliances have duced. formed both within the global shipping industry and the port services industry. Ports represent a mix of public and pri- These alliances have profound implica- vate goods. They generate direct eco- tions for the ways ports are financed, nomic benefits (private goods) through regulated and operated. Confronted their operations as well as additional with these global shipping and port indirect benefits (public goods) in the service powers, port authorities will form of trade enhancement, second have challenges in defending "public" order increases in production volumes and local interests. The full implications and collateral increases in trade-related of these developments on port manage- services. These "economic multiplier effects" have been used by many ports ment and structure are not yet clear and to justify direct public sector investment. will emerge only with time. It is in this dual production of both pub- PORT FUNCTIONS, SERVICES AND lic and private goods that complexities ADMINISTRATION MODELS arise, which makes defining roles for and boundaries between the public and Overview private sectors challenging in the ports industry. Box 3 lists a number of areas Ports produce a combination of public where ports generate economic multipli- and private goods. Public goods er effects. include those that are inherently non- Box 3 divisible and non-consumable, such as coastal protection works necessary to create port basins. Private goods are Examples of Port Economic both consumable and divisible and their Multiplier Effects use entails a minimum of economic externalities. • Petro-chemical industry • Value Added Services Most of the value of private goods can be captured in market transactions • Repair and maintenance between private parties. A substantial • Packing and repacking portion of the value of public goods, on • Labeling the other hand, cannot be captured in • Testing arms length transactions. Consequently, • Telecommunications private firms have little incentive to produce them. Public goods create positive • Banking externalities when they are used; the • Customs social benefits they generate are greater • Inland transport than the price that private parties can

6 Both through targeted development example of cluster development is the policies and the unplanned growth of Port of Colombo. A fashion goods and interrelated industries, many ports have apparel industry cluster has developed become the location for industrial clus- around Colombo, which focuses on reli- ters. Industrial clusters are geographic able, short transit container services to concentrations of private companies that complete just-in-time (JIT) purchase may compete with one another or com- orders. This development was business- plement each other as customers and driven and not the direct result of suppliers in specialized areas of produc- explicit public policy. The lesson tion and distribution. Industrial clusters demonstrated in Colombo is that quasi- represent a kind of value chain, a web of public goods in the form of efficient interrelated activities that are mutually industrial networks can be created and supportive and continuously growing. developed through private initiatives. Clustering of related activities improves As a matter of strategic development the competitive advantage of cluster policy, many ports encourage the co- participants by increasing their produc- development of various value added tivity, by reducing transaction costs services through franchising, licensing, among them, by driving technological and incentive leasing. Today, ports aim innovation, and by stimulating the for- at attracting enterprises that extend their mation of new business spin-offs. logistics chains or provide them with Large ports offer particularly attractive specialized capabilities to add value to locations for "seed" industries and distri- cargos that are stored and handled in bution-intensive enterprises. Several the port. General services that many ports attempt to develop include chand- notable port-centered industrial clusters lering, ship repair, container mainte- have developed over the last 50 years nance, marine appraisals, insurance including those in Rotterdam, claims inspections and banking. Box 4 Yokohama, Antwerp, Hamburg, describes the efforts of one port to Marseilles and Houston, to name but a expand and develop its ensemble of few. In the 1970s, the larger European value added services. ports targeted refineries and chemical industries for co-location and co-devel- Many governments are directly or indi- opment, with considerable success. rectly involved in port development. Thus, for example, a large cluster of five They often use a "Growth Pole" argu- refineries and many chemical-processing ment to justify the direct financing of companies located in the Port of basic port infrastructure. This "Growth Rotterdam as a direct result of public Pole" rationale derives from the belief policies developed in 1950s. A cluster of that investments in port assets have world class, specialized marine services strong direct and indirect multiplier likewise established themselves in the effects on the entire national economy Port of Rotterdam as a result of the good and, further, that the commitment of hinterland connections and the gas and public resources is necessary to encour- oil finds in the North Sea. A second age co-investment by the commercial

7 and industrial sectors. These sectors are On the other hand, port operations are thus stimulated to make investments businesses in their own right and should that they would not make in the absence be managed to achieve optimal utiliza- of public "seed investment" in port infra- tion of capital. Investments in port structure. However, determining causal assets are affected by risk, by competi- links between public investment and tion for land, for capital or other factors specific commercial activities and invest- in the competitive business environ- ments is difficult and at times specula- ment. Subsidies and government-pro- tive. Still, it is important that govern- vided incentives distort the allocation of ments envision and articulate future resources for port development and may development scenarios, maintain fre- result in over or under investment. quent consultation with the private sec- It is the delicate alignment of public and tor, and implement public policies that private interests that determines the are applied consistently and that enable structure of port management and port the private sector to invest with confi- development policy. A full spectrum of dence in projects that support the stated institutional frameworks is available, public policy objectives. Box 4

Value Added Development Efforts in the Port of Rotterdam

Distriparks

Distriparks are the Port of Rotterdam’s response to the growing demands on shippers and transport firms for just- in-time delivery at lower costs. Distriparks are advanced logistics parks with comprehensive facilities for distribution operations at a single location close to the cargo terminals and multimodal transport facilities for transit shipment. They employ the latest information and communications technology.

Distriparks provide space for warehousing and forwarding facilities including the storage and handling of cargo and the stuffing and stripping of containers. They also offer a comprehensive range of value added services.

In Distriparks, companies can, either on their own or in partnership with local specialist firms, process their goods according to specific customer and country-of-destination requirements. These value-added services include packing and re-packing, labeling and assembly, sorting and invoicing. The Distripark’s on-site customs service promptly handles import and export documentation.

To date, three Distripaks have been established within the area of the Port of Rotterdam.

Trade, Distribution and Marketing Centers (TDMCs)

TDMCs in Rotterdam are specialized centers where traders and manufacturers from non-European countries meet and trade with their European counterparts and with each other. The TDMCs are concentrated in Rotterdam’s Euro Trade Park.

The TMDCs enable participating manufacturers to tune into local markets and requirements. Each TMDC represents a concentration of know-how, products, markets, professionals, financial resources, technologies, government agencies and other institutions. Each Center is specialized in different areas of industry, geographic areas and particular expertise.

8 differing primarily in where the bound- effects. For example, competition "for ary line is drawn between the public the market" can replace competition "in and private sectors. At one end of this the market," and competition "for the spectrum, full public control over plan- market" can be engineered into con- ning, regulation and operations results testable offers of rights in ways that in what this report will refer to as a assure pro-competitive outcomes. Service Port. At the other end, the almost total absence of public owner- It follows that one of the objectives of ship, control or regulatory oversight public policy should be to create con- results in a Fully Privatized Port. testable market structures for port services and to manage competitive behav- The alignment of public and private ior. This might be done through licens- interests in recent years has resulted in a ing, leasing, concessioning, and other diminishing role for governments in the methods designed to bring about an effi- port industry. This trend is clear. The cient allocation of resources. This mar- total absence of public involvement in ket surrogate view of the role for gov- the port sector, however, still remains an ernment in the port sector is followed in exception, limited primarily to situations most countries with market oriented in which surplus port capacity may exist economic policies. in a national market and where competition for port services is already intense. The need for some form of government intervention in markets for port services When governments undertake to is related to the unique economic char- increase national economic welfare acteristics of seaports, some of which through port development, they may tend to make them natural monopolies: choose to apply one of two distinct nor- mative frameworks: the market surro- • The provision of port services entails gate framework or the public interest large fixed costs and low marginal costs. The marginal benefits associ- framework. In seeking to increase eco- ated with using port services exceed nomic welfare, governments may the marginal costs of providing these attempt to remedy market imperfections services. and capture non-market externalities within appropriately engineered and • A relatively large minimum initial contested transactions. Alternatively, capacity of basic infrastructure is they may pursue explicit goals devel- required for technical reasons. oped through public consultative processes designed to determine • The infrastructure is frequently indi- demand for public goods. visible and, as a result, increases in infrastructure capacity can only be With respect to the market surrogate realized in "quantum chunks." framework, the primary task of government is to identify and eliminate market • Both initial construction and port imperfections and anti-competitive expansion require large amounts of behavior or to regulate its undesired capital. As a result, the need to

9 develop basic port infrastructure mean, however, that the port will be (e.g., sea locks, breakwaters, quay extended at the place where it was origi- walls, and main roads) all at one nally founded. Antwerp and Rotterdam time creates large capital operating are examples of ports that developed losses and foregone investment relatively close to the cities’ central opportunities as a result of underuti- cores. Over time, however, they shifted lized capacity during the earlier operations away from city centers. The phases of a project’s lifecycle. underlying reason was the increase in ship sizes (requiring deeper drafts and • The life span of port infrastructure longer berths). Another reason con- projects often exceeds the time hori- tributing to the weakening of links zon acceptable for private investors between port and city centers is the and commercial banks. rapid mechanization and specialization of port work and the accompanying • Basic port infrastructure is immobile increase the operational scale and scope. and has few alternative uses. This leads to increased storage space requirements and makes ports very This set of characteristics is the main space-intensive. reason for financial involvement of governments in port construction and Another factor is the rapid industrializa- expansion projects. tion of most developed country cities. Interaction with Port Cities The new industries emerging after World War II required large tracts of land, preferably close to deep water, Ports and the cities of which they are a which often could not be found within part interact across many dimensions: the original port borders. Therefore, economic, social, environmental and cul- Maritime Industrial Development Areas tural. Any port reform process should (MIDAs) were located at some distance take into account the linkages between from old city centers. port city objectives and port objectives. Transport integration – the smooth Technological changes and consequen- transfer of cargo and equipment from tial port re-location have left substantial land to water-borne systems – is an areas available for redevelopment for essential port function; but it doesn’t other purposes. Such areas are often take place in isolation. A seaport node located near city centers, since that is within a multi-modal transport system where the port (and city) began. is frequently associated with the devel- Therefore, land values are potentially opment of an urban center and gener- high, although probably depressed prior ates substantial employment, industrial to redevelopment because of the pres- activity and national and regional devel- ence of decaying port facilities. opment. Three approaches commonly have been Many big cities trace their roots to the used for the development of surplus establishment of a port. This does not port land:

10 • Retaining it within the Port of old city docks for mixed commer- Authority for redevelopment as in cial, residential and recreational use. the case of the Port of Barcelona. Probably the biggest and best-known This implies a widening of the port’s special purpose corporation is the function from that of a port into a London Docklands Development property developer. Such change Corporation (LDDC) created to rede- may require modifications to the velop the old docks of the port of statutes of the public port authority, London. The LDDC was created by or of the trust port. The experience the government and endowed with of Associated British Ports (ABP) extensive planning powers as a shows that, when the port is in pri- result of the inability of six riparian vate hands, it is capable of effective municipalities to agree on a coherent development of surplus lands. The and feasible plan for the dock’s rede- Port Authority of New York and velopment. New Jersey is an example of a public Finally, the interests of ports extend port authority with wide redevelop- beyond local traffic and transport. ment powers. Hinterland connections, nationally and • Transferring it to the local authori- internationally, rely on road, rail and ty/municipality for redevelopment. waterway links. Both the Port Authority In practice this is not always effec- and the port city should use their influ- tive, as the municipality might lack ence to establish needed intermodal the resources to realize the full value infrastructure and agreements. In addi- of the land in question. On the other tion, the Port Authority and the port city hand, there are examples (e.g., should collaborate to efficiently accom- Baltimore and Rotterdam) of the suc- modate traffic flows and limit transport cessful regeneration by the munici- costs (including external costs). pality of port lands near the city cen- Role of a Port Authority ter. Ports usually have a governing body • Creating a special development cor- referred to as the Port Authority, Port poration for the specific purpose of Management or Port Administration. redeveloping an old dock area. This "Port Authority" is used widely to indi- is most appropriate when the area is cate any of these three terms. very extensive, involves various municipalities and involves high The term "Port Authority" has been redevelopment costs. An example of defined in various ways. In 1977 a a separate corporation established Commission of the European Union for this purpose is the Puerto defined a Port Authority as a "State, Madera Corporation in Argentina, Municipal, public or private body, which is a joint venture by the City which is largely responsible for the tasks of Buenos Aires and the national of construction, administration and government for the redevelopment sometimes the operation of port facili-

11 ties and, in certain circumstances, for • Information and research: Power to security." This definition is sufficiently collect, collate, analyze and dissemi- broad to accommodate the various port nate statistical information on port management models existing within the activity for general use, and to spon- European Union and elsewhere. sor research into port matters as required; and The UNCTAD Handbook for Port Planners in Developing Countries lists • Legal: Power to act as legal advisor the statutory powers of a National Port to local port authorities. Authority as follows (on the assumption that operational decisions will be taken Increasingly, central governments imple- locally): ment seaport policies through the allocation of resources rather than through the • Investment: Power to approve pro- exercise of wide-ranging regulatory posals for port investments in powers. amounts above a certain figure. The While central governments should pur- criterion for approval would be that sue macro-economic objectives through the proposal was broadly in accor- an active seaport policy, Port Authority dance with a national plan, which objectives should be more narrowly the authority would maintain; focused on port finances and operations. • Financial policy: Power to set com- It is a widely accepted opinion among mon financial objectives for ports port specialists that a Port Authority (for example, required return on should have as a principal objective the investment defined on a common full recovery of all port-related costs basis), with a common policy on including capital costs plus an adequate what infrastructure will be funded return on capital. The full recovery of centrally versus locally; advising the costs will help a Port Authority to: Government on loan applications; • Maintain internal cost discipline; • Tariff policy: Power to regulate rates and charges as required to protect • Attract outside investment and the public interest; establish secure long-term cash flows; • Labor policy: Power to set common recruitment standards, a common • Stimulate innovation in the various wage structure and common qualifi- functional areas to guarantee a long- cation for promotion; power to term balance between costs and rev- approve common labor union proce- enues, especially when faced with dures; innovations by terminal operators, port users, rival ports and hinterland • Licensing: When appropriate, power operators; to establish principles for licensing of port employees, agents, etc.; • Generate internal cash flows needed

12 to replace and expand port infra- such objectives can the benefits of a structure and superstructure; market-oriented system be achieved.

• Compete according to the rules of Roles of a Transport Ministry the market system, without excessive distortions of competition; In a market-oriented economic system the Ministry of Transport typically per- • Put limits on cross-subsidization, forms a variety of functions at a national which may be rational from a mar- level. With respect to coastline and port keting point of view (market pene- issues, the main tasks and responsibili- tration, traffic attraction) but which ties of the Ministry can be summarized can undermine financial perform- as follows: ance; and Policy making. The Ministry develops • Avoid dissipation of the Port transport and port policies related to: Authority's asset base to satisfy objectives of third parties (e.g., port • Planning and development of a basic users demanding the use of land in maritime infrastructure including the port area without regard to the coastline defenses (shore protection), land’s most economic use; port and port entrances, lighthouses and aids city administrations using Port to navigation, navigable sea routes Authority assets to pursue general and canals; city goals). • Planning and development of ports Full cost recovery should be viewed as a (location, function, type of manage- minimum Port Authority objective; once ment). this objective has been achieved, howev- • Planning and development of port er, the Port Authority would be better hinterland connections (roads, rail- able to pursue other-than-financial ways, waterways, pipelines). objectives considered desirable by the government or by itself. Legislation. The Ministry drafts and implements transport and port laws, Role of Port Operators national regulations and decrees. It is responsible for incorporating relevant Just as central governments and Port elements of International Conventions Authorities play key roles in the port (e.g., SOLAS, Law of the Sea, MARPOL) communities, so too do private port into national legislation. operators (such as stevedoring firms, cargo-handling companies, and terminal International Relations. Specialized operators). Port operators typically pur- departments of the Ministry represent sue conventional micro-economic objec- the country in bilateral and multilateral tives, such as profit maximization, port and shipping forums. The Ministry growth, and additional market share. may also negotiate agreements with Only if port operators are free to pursue neighboring countries relating to water-

13 borne or intermodal transit privileges. • Hydro-technical construction (construction of protective works, sea- Financial and Economic Affairs. A locks, port entrances, etc.); Ministerial department is usually responsible for planning and financing • Vessel Traffic Systems and Aids to national projects. It should be able to Navigation (construction and main- carry out financial and economic analy- tenance); and ses and assess the socio-economic and • Search and Rescue. financial feasibility of projects in the context of national policies and priori- Port Functions ties. Within the port system, one or more Auditing. Auditing functions should be organizations fill the following roles: performed independently from the affected line organization and are usual- • Landlord for private entities offering ly included in a staff office. The audi- a variety of services; tors should report directly to the Minister. • Regulator of economic activity and operations; In many countries Transport Directorates are established as inde- • Planning for future operations and capital investments; pendent bodies within a Ministry and perform an executive function. They are • Operator of nautical services and usually responsible for one of the modes facilities; of transport; e.g., the Maritime and Ports Directorate (Maritime Administration). • Marketer and promoter of port services and economic development; The principal elements of a typical Maritime and Ports Directorate are: • Cargo-handler and storer; and

• Ship Inspections and Register of • Provider of ancillary activities. Shipping (oversight of ship safety In view of the strategic significance of and manning conditions); port land, port land is rarely sold out- • Traffic Safety and Environment (safe right to private parties because of its movement of shipping and protec- intrinsic value and scarcity. Therefore, a tion of the marine environment); key role for many Port Authorities, is that of landlord with the responsibility • Maritime Education and Training to manage the real estate within the port (maritime academies, merchant offi- area. This management includes the cers exams, licensing of seafarers); economic exploitation, the long-term development of the land and the upkeep • Ports (execution of national ports of basic port infrastructure such as fair- policy); ways, berths, access roads and tunnels.

14 Port Authorities often have broad regu- initiated at these levels. Investment latory powers relating to both shipping plans of industrial and commercial port and port operations. It is responsible for operators or projects for specific cargo applying conventions, laws, rules and handling, storage and distribution regulations. Generally, as a public organ should be integrated at the level of the it is responsible for observance of con- Port Authority to arrive at a strategic ventions and laws regarding public safe- master plan for the port. The individual ty and security, environment, navigation master plans may then be integrated and health care. Port Authorities also into a national seaport policy, taking issue port by-laws, comprising a multi- into account macro-economic considera- tude of rules and regulations with tions. Integration of individual master respect to the behavior of vessels in plans may call for changes in some port, use of port areas, etc. Often, exten- ports’ plans to: sive police powers are also part of Port Authorities’ powers. • Avoid duplication of expensive, tech- nologically advanced facilities when The planning function of the Port different ports in a national system Authority in co-ordination with the strive to attract the same customers; Municipality is a complicated affair, and especially for large ports located within or near a city. The port planner has to • Select the appropriate location for consider: specific seaport facilities that will interconnect maritime and land • The consistency of his/her plans transport systems. with the general terms of land use that have been set by the competent To conclude, central governments authority; should establish a national port policy that supports national economic objec- • The impact of port development pro- tives and creates a reasonable frame- posals on the immediate surround- work for port development. The devel- ings (environment, traffic, facilities, opment of plans for specific port proj- roads, etc.); ects, however, should remain in the hands of port operators. • The appropriateness of port development proposals in the context of Oversight of nautical operations should international, national and regional be within a Port Authority’s mandate port competition. and is often referred to as the Harbormaster’s function. It generally Actual port services and balancing of comprises all legal and operational tasks supply and demand occur at the levels related to the safety and efficiency of of the Port Authority and individual vessel management within the bound- port firms. Hence, the development of aries of the port area. The realistic investment projects for infra- Harbormaster’s office allocates berths structure and superstructure should be and co-ordinates all services necessary

15 to berth and un-berth a vessel. These its business. This type of broad port services include pilotage, towage, moor- marketing is distinct from customer-ori- ing and un-mooring, and vessel traffic ented marketing that is aimed at attract- services (VTS). In view of its general ing specific clients and cargos for specif- safety aspects, the Harbormaster’s func- ic terminals or services. tion has a public character. Often, the Harbormaster is also charged with a A variety of ancillary functions such as leading role in management of shipping towage and ship-chandlering, fire pro- and port-related crises (e.g., collisions, tection services, linesmen services, port explosions, natural disasters, discharge information services, and liner and ship- of pollutants). ping agencies exist within the port community. Large Port Authorities usually The cargo-handling and storage function do not provide these services, with the comprises all activities related to load- exception of towage. In a number of ing and discharging seagoing and smaller ports, however, these are part of inland vessels, including warehousing the Port Authority operations because of and intra-port transport. A distinction the limited traffic base. typically is made between cargo-han- Port Administration Models dling on board of the vessel (stevedoring) and cargo-handling on shore (land- A number of factors influence the way side or quay handling). Terminal opera- ports are organized, structured, and tors can fulfill both roles. managed including:

There are two types of cargo handling • The socio-economic structure of a and terminal operating firms: country (e.g., market economy, open borders); • Firms that own and maintain all superstructures at a terminal (e.g., • Historical developments (e.g., former offices, sheds warehouses, cranes, colonial structure); forklifts, conveyor belts); and • Location of the port (e.g., within an • Firms that use superstructure and urban area, in isolated regions); and rolling stock owned by the Port Authority; such firms only employ • Types of cargos handled (e.g., liquid stevedores and have virtually no and dry bulk, containers). physical assets. Four man categories of ports have The port marketing and promotion func- emerged over time. They can be classi- tion is a logical extension of the port fied into four main models: planning function. Port marketing is • Service Port; aimed at promoting the advantages of the entire port complex both for the Port • Tool Port; Authority to attract new clients and for the ports industry to generally promote • Landlord Port; and

16 • Fully Privatized Port or Private part of) the Ministry of Transport Service Port. (and/or Communications) and the Chairman (or Director General) is a civil These models are distinguished by how servant appointed by, and/or directly they differ with respect for such charac- reporting to, the Minister concerned. teristics as: Among the main functions of a service • Public, private or mixed provision of port are cargo-handling activities. In service; some developing country ports the cargo-handling activities are executed • Local, regional or global orientation; by a separate public entity, often • Ownership of infrastructure (includ- referred to as the "Cargo Handling ing port land); Company." Such public companies usually report to the same Ministry as the • Ownership of superstructure and Port Authority. To have public entities equipment (in particular ship-to- with different and sometimes conflicting shore handling equipment and ware- interests reporting to the same Ministry, houses); and and forced to co-operate in the same operational environment, constitutes a • Status of dock labor and manage- serious management challenge. For this ment. reason the Port Authorities and Cargo Handling Companies of Mombassa, Service and tool ports mainly focus on Kenya, and Tema, and Takoradi, Ghana, the realization of public interests. were merged into one single entity. Landlord ports have a mixed character and aim to strike a balance between In the tool port model, the Port public (Port Authority) and private (port Authority owns, develops and main- industry) interests. Fully privatized tains the port infrastructure as well as ports focus on private (shareholder) the superstructure, including cargo-han- interests. dling equipment such as quay cranes, forklift trucks, etc. Port Authority staff Service ports have a predominantly usually operates all Port Authority- public character. Many ports in devel- owned equipment. Other cargo-han- oping countries are still managed dling on board vessels as well as on the according to this model (e.g., India, Sri apron and on the quay is usually carried Lanka). Under it, the Port Authority out by private cargo-handling firms con- offers the complete range of services tracted by the shipping agents or other required for the functioning of the sea- principals licensed by the Port port system. The port owns, maintains Authority. "Ports Autonomes" in France and operates every available asset (fixed is an example of a container terminal and mobile) and cargo-handling activi- managed and operated as a tool port, ties are executed by labor employed although for more recent terminals the directly by the Port Authority. Service private terminal operator has made the ports are usually controlled by (or even investment in gantry cranes. This

17 arrangement has generated conflicts strong companies that could function between Port Authority staff and termi- efficiently in the port and be able to nal operators, which has impeded oper- compete internationally. ational efficiency. As noted, the landlord port is character- The above-mentioned division of tasks ized by its mixed public-private orienta- within the tool port system clearly iden- tion. Under this model the Port tifies the essential problem with this Authority acts as regulatory body and type of port management model: split as landlord, while port operations (espe- operational responsibilities. Whereas cially cargo-handling) are carried out by the Port Authority owns and operates private companies. Examples of land- the cargo handling equipment, the pri- lord ports are Rotterdam, Antwerp, New vate cargo-handling firm usually signs York and, since 1997, Singapore. Today the cargo-handling contract with the the landlord port is the dominant port ship owner or cargo owner. The cargo- model in larger and medium sized handling firm however, is not able to ports. fully control the cargo handling operations itself. To prevent conflicts between In the landlord port model, infrastruc- cargo-handling firms, some Port ture is leased to private operating com- Authorities allow operators to use their panies and/or to industries such as own equipment (at which point it is no refineries, tank terminals and chemical longer a true tool port). The tool port plants. The lease to be paid to the Port has a number of similarities to the serv- Authority is usually a fixed sum per ice port, both in terms of its public ori- square meter per year, typically indexed entation and the way the port is to some measure of inflation. The level financed. of the lease amount is related to the initial preparation and construction costs Under a tool port model, the Port (e.g., land reclamation and quay wall Authority makes land and superstruc- construction). The private port opera- tures available to cargo-handling com- tors provide and maintain their own panies. In the past, these companies superstructure including buildings (e.g., tended to be small, with few capital offices, sheds, warehouses, Container assets. Their costs were almost entirely Freight Stations, workshops). They also variable. The cost of under-utilization purchase and install their own equip- of port facilities was usually absorbed ment on the terminal grounds (e.g., by the Port Authority, which minimized quay cranes, transtainers, conveyor risk for the cargo-handling companies. belts) as required by their business. In Often, the provision of cargo-handling landlord ports dock labor is employed services was atomized: cargo-handling by private terminal operators, although companies were small with activity frag- in some ports part of the labor may be mented over many participants. The provided through a port-wide labor lack of capitalization of the cargo-han- pool system. dling companies constituted a significant obstacle to the development of Fully privatized ports (which often take

18 the form of a private service port) are by a greater degree of labor partici- few in number, and can be found mainly pation in the new port enterprises. in the United Kingdom and New Zealand. Full privatization is consid- Box 5 summarizes the strong and weak ered by many as an extreme form of points of the principal port management port reform. It suggests that the State models. no longer has any meaningful involve- Box 6 summarizes the sectors (public or ment or public policy interest in the port private) with which various responsibili- sector. In fully privatized ports, port ties typically lie under the four basic land is privately owned, contrary to the port management models. situation in other port management models. This requires the transfer of Globalization of Terminal Operations ownership of such land from the public to the private sector. Additionally, along Port Authorities are increasingly con- with the sale of port land to private fronted with the globalization of termi- interests, some governments may simul- nal operations. During the 1990s, a taneously transfer the regulatory func- number of terminal operators and major tions to private successor companies. In shipping lines emerged to invest in and the absence of a port regulator in the take control of a large number of termi- UK, for example, privatized ports are nals all over the world. This trend has essentially self-regulating. The risk in far reaching consequences for the strate- this type of arrangement is that port gic position of port management vis- à- land can be sold or re-sold for non-port vis some of their major clients. activities, thereby making it impossible to reclaim for its original maritime use. This trend toward globalization has affected mainly containerized opera- The decision to move to full privatiza- tions. Today, a handful of major carrier tion in the UK was made for three main alliances and independent terminal reasons: operators increasingly dominate the major global container trades. The glob- • To modernize institutions and instal- al carriers have sought to secure their lations, both of which often dated competitive positions by concluding back to the early years of the indus- long-term contracts for dedicated con- trial revolution, making them more tainer terminals in major, strategically responsive to the needs and wishes located ports. Their reasoning is that of the users; they believe they need to control all • To achieve financial stability and stages of the transport chain to remain financial targets, with an increasing competitive. These efforts to establish proportion of the financing coming integrated transport chains pose a chal- from private sources; and lenge for port authorities in their relations with the largest carriers. For • To achieve labor stability and a example, how should a port respond if a degree of rationalization, followed large container operator demands to

19 Box 5

Strong and Weak Points of Port Management Models

Public Service port:

Strength: Superstructure development and cargo handling operations are the responsibility of the same organization (unity of command).

Weakness: There is no or only a limited role for the private sector in cargo handling operations There is less problem-solving capability and flexibility in case of labor problems, since the port administration also is the major employer of port labor There is lack of internal competition, leading to inefficiency Wasteful use of resources and under-investment as a result of government interference and dependence on government budget. Operations are not user-oriented or market-oriented Lack of innovation.

Tool Port: Strength: Investments in port infrastructure and equipment (in particular ship/shore equipment) are decided and provided by the public sector, thus avoiding duplication of facilities.

Weakness: The Port Administration and private enterprise jointly share the cargo handling services (split operation), leading to conflicting situations. Because the private operators do not own major equipment, they tend to function as labor pools and do not develop into firms with strong balance sheets. This causes instability and lim its future expansion of their companies. Risk of under-investment. Lack of innovation.

Landlord Port: Strength: A single entity (the private sector) executes cargo-handling operations and owns and operates cargo-handling equipment. The terminal operators are more loyal to the port and more likely to make needed investments as a consequence of their long-term contracts. Private terminal handling companies generally are better able to cope with market require ments.

Weakness: Risk of over-capacity as a result of pressure from various private operators. Risk of misjudging the proper timing of capacity additions.

Fully Privatized Port:

Strength: Maximum flexibility with respect to investments and port operations. No direct government interference. Ownership of port land enables market oriented port development and tariff policies. In case of redevelopment, private operator probably realizes a high price for the sale of port land. The often strategic location of port land may enable the private operator to broaden its scope of activities.

Weakness: Government may need to create a Port Regulator to control monopolistic behavior. The Government (be it national, regional or local) loses its ability to execute a long term eco nomic development policy with respect to the port business. In case the necessity arises to re-develop the port area, Government has to spend considerable amounts of money to buy back the port land. There is a serious risk of speculation with port land by private owners.

20 Box 6

Basic Port Management Models

Type Infrastructure Superstructure Port Labor Other Functions

Public Service Port Public Public Public Majority Public Tool Port Public Public Private Public/Private Landlord Port Public Private Private Public/Private Private Service Port Private Private Private Majority Private operate a dedicated terminal and threat- considered as being of secondary impor- ens to leave the port when it does not tance in achieving these goals. get its way? Relationships between ports and carriers It should be emphasized that full con- fall into four broad categories: trol of the transport/logistics chain by one consortium (a global monopolist) is First are ports that face strong inter-port not a desirable development. Because of competition in the container handling regulatory measures by the United sector. Container lines may easily shift States and the European Union, the operations to other ports if their finan- complexity of the transport/logistics cial and operational demands are not chain and the number of players, a carri- met. To attract major container lines, the er’s ability to control of the full chain Port Authority may offer them dedicat- seems an illusion. However, some Box 7 alliances may attain a significant degree of market dominance. Box 7 lists the Major Container Carriers as of fleets of the major container carriers, September 2000 showing the number of vessels operated, the number of TEUs this represents, 1. Maersk/Sealand: operating 298 vessels (682,000 TEUs), and the number of TEUs under con- 139,000 TEUs under construction. struction. 2. Evergreen Group: operating 134 vessels (318,000 TEUs), 91,000 TEUs under construction. Competition between major alliances is intense. The scale of investment in a 3. P&O Nedlloyd: operating 124 vessels (302,000 TEUs), 112,000 TEUs under construction. new generation of container vessels represents a massive commitment. To fill 4. Hanjin/DSR Senator Line: operating 80 vessels (246,000 these vessels the alliances try to secure TEUs), 39,000 TEUs under construction. local control and co-ordination over 5. Mediterranean Shipping Co: operating 130 vessels inland cargo haulage and feeder opera- (229,000 TEUs), 76,000 TEUs under construction. tions. In this way they try to secure their market share and meet perceived Source: Mainport News Rotterdam (October 2000) / Barry Rogliano Salles-Alphaliner. service needs. Port handling charges are

21 ed facilities while other, smaller lines are the present system and undermine the accommodated at common user termi- profitability of the existing common user nals. Without such dedicated facilities, terminals. Pressures at the major ports major lines would move to other com- to accept dedicated terminals are peting ports. Examples of this category intense. How long even major ports can of ports are Yokohama and Long Beach. resist such pressures depends not only on their competitive position but also on Second are ports that derive the bulk of the operational and financial strength of their business from a major container the local terminal operators. A hybrid line, and therefore, are dominated by arrangement has surfaced in recent this client. If the dominant line were to years, namely a dedicated terminal abandon the port, 80-90% of the traffic operated as a joint venture (e.g., ECT could be lost. Examples of such ports (with Maersk, Sealand and P&O are Algeciras and Salalah. Nedlloyd in Rotterdam) and Hessenatie Third are ports where, although no sin- (with MSC/CP in Antwerp)). When con- gle shipping line may dominate the fronted with the serious possibility of port’s traffic volume, there is a possibil- loosing a substantial quantity of their ity for that line to pressure the Port throughput, Port Authorities may be Authority into accepting a dedicated ter- compelled to yield to the demands of minal because of competition for transit the major container line alliances. This traffic in the larger region. An example was recently the case in Rotterdam, of this type of port is Miami, which where the Port Authority allowed serves the Caribbean, Central and South Maersk Sealand and P&O Nedlloyd to America as a hub. Competitors are run their own dedicated terminals. Kingston and Freeport (Bahamas). As the competitive positions of these ports Apart from major container lines, a lim- improve, carriers may increase pressure ited number of global stevedore compa- on Miami to grant dedicated terminals. nies have emerged during the 1990s. The largest of these are: Fourth are major world ports such as Rotterdam, Antwerp and Singapore. • Hutchison Port Holdings (Hong Such ports have a very well developed Kong) container sector with operators (PSA in Singapore, HN and NN in Antwerp and • P&O Ports (Australia) ECT in Rotterdam) that heavily invested in modern equipment and automation. • International Container Terminal They usually operate common user Services (Philippines) facilities and occupy a stronger market • Stevedoring Services of America position than their immediate competi- (United States) tors for the very largest container vessels. Container terminal operators in • PSA Corporation Ltd. (Singapore). such ports resist moves to develop dedicated carrier terminals that would upset • Eurogate (Germany).

22 These companies operate a large num- ferent ports) and intra-port competition ber of terminals all over the world. (competition between different enter- Their main objective is not to control the prises within one port complex). To transport chain, but to make a profit by reduce the risk of monopolies, Port offering terminal services. However, Authorities usually stimulate intra-port when too many terminals within a competition. However, medium sized region are controlled by one operator, and smaller ports, because of their limit- the competent authority or government ed traffic, often accommodate only one agency may decide that special regulato- port terminal operator. In such cases, ry measures are needed to protect Port Authorities often use their quasi- against the danger of a monopoly. This governmental powers to regulate port was the case in Rotterdam when charges and tariffs. Hutchinson International bought 49% of the shares of ECT. The European Box 8 Commission decided to refuse permission for this transaction on the grounds Principal Global Container that this would have allowed Terminal Operators Hutchinson to establish a dominant Hutchinson International Terminals (HIT) market-position in Northwest Europe Balbao and Cristobal (Panama), Freeport (Bahamas), since Hutchinson already owned Thamesport, Felixstowe and Harwich (UK), Rotterdam Felixstowe, Thamesport and Harwich. (The Netherlands), Hongkong,Yantian and Shanghai (China), Rangoon (Myanmar),Tanjung Priok (Indonesia)

Box 8 lists some of the principal global International Container Terminals Systems Inc. (ICTSI) port operators and the container termi- Veracruz, Ensenada and Manzanillo (Mexico), Buenos Aires nals they operated or participated in at (Argentina), Damman (Saudi Arabia), Karachi (Pakistan), Laem Chabang (Thailand), Manila (Philippines) and Dar- the beginning of the Year 2000. es-Salaam (Tanzania)

Port Management and Port Competition Maersk/Sea-Land Tacoma, Oakland, Long Beach, New Jersey, Norfolk, Charleston and Jacksonville (USA), Algeciras (Spain), Competition within and between ports Gioao Tauro (Italy), Rotterdam (The Netherlands), has a bearing on the management struc- Kaohshiung (Taiwan),Yokohama and Kobe (Japan) ture of the port and the relations P&O Ports between the Port Authority and the ter- Various terminals in China (including Qingdao), various minal operators/cargo-handling compa- terminals in Australia, Southampton and Tilbury (UK), nies. These changing relations are often Cagliari (Italy), Derince (Turkey), Buenos Aires (Argentina), Qasim (Pakistan), Nhava Sheva, Cochin, Chennai and cited as an important reason for chang- Kandla (India), Colombo (Sri Lanka), Manila (Philippines), ing the port management structure. Surabaya (Indonesia) as well as Gulf Services (USA) and Many Port Authorities consider the cre- South Asia Ports (Malaysia) ation of competitive conditions among PSA Corporation port operators the cornerstone of their Dalian, Fuzhou, Nantong (China), Aden (Yemen), Pipapav port policy. and Tuticorin (India), SinesPortugal), and Genova (Italy)

Source: Journal of Commerce/Atas (Trainmar) News number 02/00 – One can distinguish between inter-port Edition 78 competition (competition between dif-

23 Key factors affecting inter-port competi- • Efficiency and Price. Various investi- tion include: gations indicate that port costs are an important, although not decisive, • Geographic Location. A port that is factor in making choices, especially strategically located close to well- for cargo owners or their representa- established transport routes has com- tives. In a world where manufactur- petitive advantages. A strategic loca- ers seek to trim costs and improve tion typically possesses at least the customer service through the adop- following characteristics: tion of sophisticated logistics processes, efficiency and the price- • Proximity to one or more major performance ratio are increasingly maritime routes; important.

• Natural deep water, good protec- • Image of the Port. The image the tion against waves and currents, port projects is another factor in its large waterfront and land-side competitiveness. The preferred expansion possibilities; image is an optimum mix of the • Proximity to major above mentioned components. production/consumption areas; Box 9 summarizes the key elements • Good hinterland connections influencing port competition. (road, rail, pipeline and water- Port Sector Regulator way) with high frequency service offering good connectivity. When inter-port competition is muted or absent, Port Authorities and/or public • Financial Resources. A port with suf- or private terminal owners are apt to ficient financial means of its own use their monopoly market positions to and/or the capacity to raise the raise tariffs (in particular for captive car- funds required to develop and gos), which may justify regulation. The improve the port has a competitive need for such regulation may lead to the advantage over ports with limited creation of an independent Port Sector resources or no financial autonomy. Regulator.

• Institutional Structure and Socio-eco- The objectives of the Port Sector nomic Climate. The management Regulator are to ensure fair competition structure of the port must be con- among competing operators in the port; ducive to private sector investment. to control monopolies (including public Related to this is the socio-economic ones) and mergers; and to prevent anti- climate in the port. Private investors competitive practices. prefer ports with a sufficient and well-trained labor force and with A Port Sector Regulator typically has good relations between employees legal powers to counter anti-competitive and employers. practices, such as:

24 • Use of a dominant position to pre- fic volumes limit the number of contain- vent or lessen competition; er, bulk or oil terminals. Generally, when a monopoly or merger situation • Cross subsidization by monopoly does not operate against the public services of contestable services, interest, it may be permitted provided it thereby threatening fair competition; is properly regulated.

• Price fixing among competitors; The establishment of a Port Sector Regulator should only be effected in the • Use of other practices that are event of serious threats to free competi- intended to restrict, distort or pre- tion within the port. It should prefer- vent competition. ably have the character of an arbitrator Smaller ports are more vulnerable to instead of a court of law and be accept- anti-competitive abuses since their traf- ed by the port community as being independent. For a more detailed discussion Box 9

Elements Influencing Inter-port Competition

Inland Transport System

The inland transport system (road, rail, waterway, pipe-line) determines to a great extent the captive area of a port. Improvements to the inland transport system place ports in a more competitive environment. In cases where major ports may have a hinterland that covers a number of countries, their zone of competitiveness overlaps that of other ports. As a result, fierce price competition might exist.

Transshipment (sea-sea transfer of cargo)

Transshipment of cargo, in particular of containerized cargos, is a major market chased by many, if not almost all, major ports of the world. Transshipment has the advantage that it generates additional traffic (two moves for one box); it has the weakness of being "foot-loose." Cargo owners and shipping lines constantly look for the port where the price-quality ratio best serves their particular interests. As the penalty for changing ports of call for transit traffic is not very severe, carriers tend to switch their transshipment ports with little provocation.

Freight Forwarders and Multimodal Transport Operators (MTOs)

Freight forwarders and Multimodal Transport Operators play a decisive role in today’s transport evolution, in particular within the framework of the door-to-door transport of commodities. As transport and distribution specialists, they greatly influence port choice and inter-port competition.

Freight Forwarders/MTOs have their own networks in the region that provide up-to date information about technical, commercial, operational and social differences between (competing) ports. They contributed to the loss of identifica- tion with and loyalty to specific ports on the part of the consignees and shippers. Freight Forwarders and MTO’s often have representative offices in competing ports.

Switching ports is much easier to achieve for transport specialists like Freight Forwarders/MTOs than it is for shippers and consignees. In addition, as consolidators of small consignments and shipper representatives, they are relatively strong vis-a-vis transport providers and other relevant parties, which makes modification of transport routings easier. Assisted by Freight Forwarders/MTO’s, large shipping lines now can change the ports-of-call with much less difficulty.

25 of the economic regulation of ports see Value Added Facilities (VAF). Value Module 6. Added Logistics has two major components: General Logistics Services (GLS) Value Added Services and Logistics Chain Integration Services (LCIS). Generally, the function of a port as a node in the transport chain depends on General Logistics Services are, among its location and on the economic and other activities, loading/unloading, technical developments that exist in its stuffing and stripping, storage, ware- hinterland. Modern production tech- housing and distribution. These are the niques and consumption patterns more traditional logistics activities, and increase the use of transportation sys- do not directly affect the nature of the tems beyond levels suggested purely by product as it moves through the port. the growth in trade and commerce. As a result, more specialized handling, stor- Beyond these traditional activities, more age and other logistics facilities are complex Logistics Chain Integration needed. More and more, ports are Services are being developed. To carry becoming part of so-called integrated out activities that manufacturers do not logistics chains. This process of special- consider part of their core business, ization and changing demands, which logistics service providers may take over has taken place over the last two parts of the production chain (e.g., decades in most Western countries, is assembly, quality control, customizing now taking place with even greater and packing) and after sales services speed in new market economies. (e.g., repair and re-use). However, LCIS are only appropriate for certain types of From the port’s point of view, creating goods. The products that have the high- new services boosts the port’s economic est potential to benefit from such servic- performance as well as its attractiveness es include: consumer electronics, phar- to existing and potential clients. This, in maceutics, chemical products (except for turn, can help maintain and improve a those carried in bulk), clothing, cosmet- port’s competitive position. When ics and personal care products, food, assessing the wisdom of developing machinery and control engineering new services, it is important to pay products. attention to the value adding potential of the services. This potential can vary The second group of Value Added product by product and activity by Services -- Value Added Facilities (VAF) -- is very diverse. These types of activi- activity. ties cannot generally be assigned to a Numerous activities can be classified as particular type of product or freight "Value Added Services." Box 10 identi- flow. It is possible, however, to impute fies a number of them. a certain "VAF-potential" by analyzing freight flows such as dry and liquid Value Added Services can be divided bulk, general cargo, containerized cargo into Value Added Logistics (VAL) and and roll-on/roll-off. A large container

26 Box 10

Overview of Value Added Services in Ports

VALUE ADDED SERVICES

Value Added Value Added Logistics Facilities

parking facilities weighbridges General Logistics Logistics Chain customs facilities Services Integration Services truck maintenance and repair facilities loading/unloading quality control container repair and stripping/stuffing repacking maintenance bulk storage customizing cleaning facilities Tank storage assembly tanking facilities general warehousing testing trailer renting and leasing conditioned warehousing repair information and distribution centres re-use communication safety and security services offices/WTC hotels, restaurants shops

throughput might create the economic Logistics Chain Integration Services basis for establishing container repair have the best opportunity to serve these facilities; handling vast quantities of cargos. The VAL-potential for roll- chemicals requires port reception facili- on/roll-off is very limited. Trucks with ties; substantial roll-on/roll-off traffic drivers are too expensive to be delayed might justify truck maintenance and while the cargo is modified; additional- repair shops. ly, these loads are usually customer-tai- lored. Value Added Facilities, such as Box 11 broadly depicts the potential for tanking, cleaning, repair, parking, secu- both VAL and VAF activities for differ- rity, renting and leasing facilities have a ent types of cargos. better potential to serve the roll-on/roll- off market. Dry and liquid bulk flows Containerized and general cargos typi- have the lowest potential for both VAL cally have the highest VAL-potential. and VAF. General Logistics Services and the

27 Box 11

Potential for VAL and VAF

HIGH

CONTAINERS VAF POTENTIAL VAF

GENERAL CARGO

RORO LIQUID BUILT

DRY BULK HIGH LOW VAF POTENTIAL

To provide a favorable environment for includes large warehouses containing VAL and VAF, many ports are develop- goods for Europe-wide distribution ing so-called Distriparks. A Distripark (e.g., Reebok). is an area where companies are estab- PORT FINANCE OVERVIEW lished to perform trade and transport- related value added services. There is no standard development plan for a Before 1980, service ports and tool ports Distripark. As can be seen from the var- were mainly financed by the ious developments in the Netherlands, Government. The general infrastructure France, Germany and the United of landlord ports typically was financed Kingdom, there is a large variety in jointly by the Government and the Port Distriparks. For example, in Rotterdam, Authority, and the terminal superstruc- there are three Distriparks. The oldest ture and equipment by private opera- one (Eemhaven) is devoted to container tors. Fully privatized ports were the cargo distribution; the second one exception. In the event a Government (Botlek) is devoted mainly to chemicals; had no funds for expensive port infra- and the third and most recent one is also structure, either port development was dedicated to containerized cargos, and halted or money was acquired at prefer- ential rates from an International

28 Financial Institution such as the World government as that of the financing Bank. sources and responsibilities. Because of this disconnect, the interest of public Ports require expensive infrastructure to officials to increase efficiency and prof- be able to compete successfully. Until itability of port assets is usually limited recently, Port Authorities mainly relied because they are not held accountable on contributions and subsidies from for the success or failure of their invest- national Governments for building or ment decisions. improving basic port infrastructure. Such contributions usually were exclud- As mentioned earlier, the increasing role ed from port financial accounts and of private enterprise in the port sector therefore helped ports to exhibit positive exerts a direct influence both on port financial positions. management and operations, as well as on the way capital projects are financed. Whether national Governments finance The private sector has become interested basic maritime and port infrastructure in financing the construction of entire depends the Government’s political and terminals including quay walls, land economic policies. For example, if ports reclamation, dredging, superstructure are considered part of the general trans- and equipment. This has given rise to a port infrastructure of the country, then large variety of financing and manage- investments in them may be considered ment schemes such as BOT (Build, to promote the national interest. If ports Operate, Transfer), BOOT (Build, Own, are assumed to be independent econom- Operate, Transfer) and BOO (Built, ic entities, however, they have to fully Own, Operate). Each is designed to bear their own costs without direct mobilize private capital while balancing Government support. public and private interests.

In some countries, financing basic mar- Government’s views about ports are itime infrastructure is considered a pub- evolving. Increasingly, ports are consid- lic task (e.g., in France and Croatia) ered separate economic entities, because this part of infrastructure although still subject to national regional belongs to the so-called "public domain," and local planning goals. As such, they which is protected by law. To carry out should operate on a commercial basis. construction activities and/or port oper- By the same token, subsidies for port ations in this domain, a public license is infrastructure construction, especially required. This requirement could for port land, quay walls, common areas reduce intra-port competition if the and inner channels, should be avoided. licenses are granted only on a limited and discriminatory basis. Box 12 summarizes the European Union’s views and this latter point. An often-occurring problem with public (thus political) investment decisions is There still is, however, a category of port that the decision to invest does not nec- infrastructure for which it will be hard essarily originate at the same level of to find private investors—investments

29 for expensive and long-lived infrastruc- order benefits from such infrastructure ture (e.g., breakwaters and locks, investments for national and regional entrance channels and fairways, and economies may be substantial. Hence, land reclamation). The main stumbling many Governments are still willing to block for private financing of such proj- finance part or all of long-term port ects is their life span, which often investments as these contribute to the exceeds 100 years, and the "sunk invest- achievement of public policy objectives. Box 12

European Rules on Port Subsidies

Beginning in the 1960s heated discussions took place in Europe on the issue of port subsidization. Especially the UK accused Continental European countries of secretly subsidizing their ports to improve their competitive position. Indeed, most European governments subsidized directly or indirectly the development of their ports. No European rules or regulations were in place because the port sector was not included in the Treaty of Rome. However, rules were laid down within the framework of regulating subsidization of infrastructure. Art. 93 para. 3 regulates the admissibility of State subsidies in port infrastructure as follows:

• Subsidies should be necessary for the project in question to be realized. • The period of subsidization should be limited. • Subsidies must be in the interest of the European Union. • Subsidies must be compatible with the objectives of the common transport policy. • Subsidies should not disrupt competition. • The investment must be profitable from the financial and socio-economic points of view. • More than one party should benefit from the subsidy. • Subsidy of mobile assets is not permitted. • Subsidies to cover operational costs are not permitted.

The main criterion to assess whether subsidy is permitted is the issue of selective favoring of the country’s business sector. With respect to ports, the European Commission is of the opinion that investments in basic port infrastructure such as coastal works, port accesses and in operational infrastructure are not selective enough to be considered State subsidy. Investments in operational infrastructure have to be reported to the Commission.

Investments in a dedicated terminal that are not fully charged to the client are considered illegal State subsidies and are not allowed. ment" aspect of these projects. Cost Caution is warranted, however, whenev- recovery of such works often cannot be er Governments contemplate underwrit- effectuated in 20 years, which is a nor- ing such investments. mal repayment period for long-term Financing Port Projects loans for infrastructure works by International Finance Institutions. Nevertheless, the second and third- To further clarify financing approaches it is important to distinguish among

30 investments in "basic port infrastruc- Box 13 ture," "operational port infrastructure," "port superstructure" and "port equip- Categories of Port Assets ment." Understanding these distinc- Basic Port Infrastructure: tions will help us decide which invest- • maritime access channels ments should be paid for by the port, • port entrance which should be paid for by the local • protective works including breakwaters, shore protection or regional community, the central • sea locks government and private investors. • access to the port for inland transport (roads, tunnels, etc.) Box 13 lists various types of port assets • rail connection between the hinterland and the port under these four categories. • inland waterways within the port area. Operational Port Infrastructure: In addition to financing the construction, rehabilitation, acquisition and • inner port channels, turning and port basins maintenance of physical assets, ports • revetments and slopes may also need to finance organization- • roads, tunnels, bridges, locks in the port area al restructuring and associated labor • quaywalls, jetties and finger piers compensation as well as working capi- • aids to navigation, buoys and beacons tal to support operations. • hydro/meteorological systems • specific mooring buoys Each of these categories and their • Vessel Traffic Management System (VTMS) potential sources of financing is dis- • patrol/fire fighting vessels cussed below. • docks In many countries, the Government is • port land (excluding superstructure and paving) responsible for financing basic infra- • access roads to general road infrastructure structure, either directly or through a • rail connection to general rail infrastructure, marshalling yards contribution to offset its cost when • dry-docks for ship repair. undertaken, for example, by a Port superstructure: Highway Authority or a Port • paving, surfacing Authority. For example, in the • terminal lighting Netherlands, construction of maritime • parking areas access and protection works used to be • sheds, warehouses and stacking areas carried out by and for the account of • tank farms and silos the Government with the port authori- • offices ties obliged to pay one-third of the rel- • repair shops evant costs. • other buildings required for terminal operations. For the Government there are two key The following items are part of Port equipment: issues associated with making large • tugs direct investments in port facilities: • line handling vessels • dredging equipment • How to find the necessary funds; • ship/shore handling equipment • cargo handling equipment (apron and terminal). • How to recover the investment.

31 The way the Government (or any other Government. public body) funds investments is diverse: Often, basic infrastructure elements are financed by an International Finance • Direct investments coming from the Institution under a government guaran- Government investment budget; tee. However, even when International Finance Institution financing is made • Direct investments coming from a available, ports and/or Governments special (port) fund; must still face the challenge of providing matching shares for a period of some 30 • Loans from International Finance to 50 years and making interest pay- Institutions. ments over a period of 20 years.

When considering financing of opera- Direct investments, paid for by the tional infrastructure Port Authorities investment budget or a special fund, are have a number of options from which to based on the assumption that they will choose. For Service Ports or Tool Ports, have a substantial positive effect on the governments will usually finance the economy, as shown by the positive operational infrastructure, with or with- results of a cost-benefit analysis (always out the assistance of an International heavily dependent on traffic forecasts). Finance Institution. For Landlord Ports For investments broadly benefiting the made up of self-contained terminals, entire nation, it is not unusual that a investment in the terminal should be Government would not seek direct financed by the terminal concessionaire financial repayment. or the lessee, while the port provides the However, there are also situations where land (often in a condition ready for con- the Government may receive direct struction). The port may also provide reimbursement for the funds it invested the quay wall with the land, but, via a variety of rates and charges increasingly, private concessionaires assessed against the beneficiaries of the have been willing to invest in this infra- investments. These may take the form structure. of: Other financial arrangements are common. For example, in U.S. public ports, • Compensation paid by the Port the Port Authority may have access to Authority in proportion to the vol- "cheaper" money than a private sector ume of goods transported through a operator. In this case, the Authority has newly dredged channel, etc. (per ton the option to issue tax-free port revenue or per TEU); and general obligation bonds. Both give • A fixed amount per year paid by the ports access to capital markets; the for- Port Authority to the Government; or mer relies on the revenues generated by operation of the new facility to repay • A percentage of the annual port dues debt; the latter assures purchasers of the paid by the Port Authority to the debt that the Government will make

32 good on any repayments should rev- particularly since there may be restric- enues from operation of the new facility tions with respect to the use of the port’s prove inadequate. assets.

The most attractive situation, both from In the event of a major reorganization the point of view of the Landlord Port program for the Port Authority, substan- Authority as well as of the operator, is tial amounts of money may be required the conclusion of a long-term lease con- for compensation payments to person- tract with the operator (running for a nel. (See Module 7 for a detailed discus- period of 20 to 30 years) for the use of sion of labor issues affecting port part of the port area. This type of long- reform.) Such payments often have a term lease has the legal character of a short payback period. Nevertheless, tra- property right and has four advantages: ditional sources of finance may be unwilling to lend money specifically for • At the end of the contract, possession of the land reverts to the this purpose. There is, however, a possi- Government or Port Authority; bility for "triangular" financing, i.e., lending the money for some other trans- • The contract represents a property action on condition that the funds thus right that under certain conditions liberated are used to compensate dis- can be transferred to a third party. placed workers. Moreover, a national There usually is a clause in such con- Government might be willing to provide tracts stating that such transfer of funds for labor redundancy schemes property rights requires prior per- with or without the involvement of an mission from the Port Authority; International Finance Institution.

• All superstructures (buildings and Port operators and providers of services equipment) may be financed and who take over existing installations and owned by the operator; equipment from a Port Authority may have a greater need for working capital • It can be used as security for a bank than investment capital, especially in loan. their start-up periods. With respect to For the financing of common areas (all debt financing, operators face the prob- areas within the port area not being part lem of providing security, since installa- of a terminal or other port enterprise), tions and equipment often are leased the Port Authority may make use of under conditions that prevent their retained earnings, issue its own bonds being mortgaged. Since port operators (where permitted to do so by its statutes are essentially private companies, an and legal system) or make use of attractive alternative to debt financing is Eurobonds, or simply take a bank loan. through the flotation of equity shares, Except in the first case, the associated the success of which will depend largely risk is with the borrower. The problem on the degree of confidence prospective confronting public ports is what to use shareholders have in the newly founded as collateral or guarantees for the lender, company and in its management.

33 Supplier credit, provided that it includes Box 14 the financing of necessary spare parts over a period of at least three years, Multiple Terminal Ownership offers another potential source of fund- in Sri Lanka ing for the procurement of equipment, with the usual limitations of this type of The Sri Lanka Port Authority (SLPA) faces a number of financing. challenges. In 1999 the Government of Sri Lanka entered into a 30- Finally, a joint venture between the Port year concession for the Queen Elizabeth Terminal (QEQ). Authority and the operator offers what QEQ will be operated under a BOT scheme by P&O ports, may be an attractive source of finance with other partners including Evergreen Marine Corporation and John Keels (Sri Lanka). SLPA will retain a for the operator. For a specialized termi- role in the terminal as well. The Port of Colombo is cur- nal, where the likelihood of a competing rently a Service Port, and its lead container terminal, Jaya terminal being constructed is remote, a Container Terminal (JCT), is and will continue to compete joint venture may be reasonable. In actively with QEQ. most circumstances, however, the likely Given SLPA’s stake in both JCT and QEQ, as well as in effect of a joint venture between a Port many services in the port area including inter-terminal transfers, SLPA’s position as a neutral landlord is compro- Authority and an operator is to obscure mised. Looking into the future, a major expansion, the the transparency of the relationship so-called South Port, will require that the role of SLPA between the different port functions become one of a non-discriminatory landlord without a and, more pragmatically, to discourage direct hand in operations. This should improve efficiency and minimize the conflicts of interest. Moreover, a port the entry of new operators to the port. sector regulator is to be established on or before 2003 as Box 14 describes the challenges mount- agreed in the QEQ concession agreement. ed by such relationships in the case of one port authority. ports to provide lenders "comfort." Financing Ports: From a Lender’s Point of View Prospective lenders will examine closely the position of the borrower, which Port Authorities or port operators seek- might be a Port Authority or a port ing to finance new facilities or equip- enterprise. In the vast majority of cases ment typically have to offer some sort of the latter are structured as limited liabil- security to a prospective lender. ity companies. In the case of loans to a Generally they have assets and other public Port Authority, the State or support from political and business cir- Municipality usually provides a guaran- cles for the project they want to under- tee. A Port Authority might also be cor- take. In many ports, however, land is poratized with the State and/or Port Government-owned and cannot be used City as main shareholders. In both cases to secure financing. And, when a port the lender will assess the financial needs money to dredge a channel strength of the Port Authority and the entrance to remain attractive and com- public bodies owning it. This is often petitive, the channel itself does not con- sufficient to ensure financing of the ven- stitute credible security for the lender. ture without too much regard to the There are however, various options for assets comprising it. In Anglo-Saxon

34 jurisdictions, a borrower may create a tion of the terminal itself if the operator "floating charge" (similar to a mortgage) defaults. In the case of a land lease, a over all assets. This avoids the need to Port Authority is usually obliged to give consider specific elements of the port permission to transfer the lease to a assets as collateral. third party, such as transfer another port-related firm, when certain condi- A port’s most valuable asset is its land; tions are met. This might be a cargo- however, land’s value as security under- handling firm or terminal operating pinning financing varies significantly. company, or a port-based industry such Generally the land is owned by a public as a refinery or a chemical plant. body or by the Port Authority itself. In Conditions attaching to the transfer typ- landlord ports the land is concessioned ically require the new firm to use the or leased to private operators, with the facilities in accordance with their initial exception of common areas, which usu- assignment and to generate sufficient ally have a low commercial value. In sea-going traffic. many cases the concession or the lease can be mortgaged to a lender who can A port complex comprises a large vari- use it or sell it to a third party in case of ety of other assets that might be mort- default. Using the land itself as collater- gaged or used as collateral. They al, however, is more complicated. The include warehouses, quay cranes, offices land must have inherent worth and a and other buildings, tugs, dredged chan- user should be able to exploit it. If a nels, etc. Some of these assets might right to use the port area concerned provide security to a lender, especially does not accompany the mortgage on when the assets can be used in other port land, its value is considerably ports (e.g., cranes and tugs). Others, diminished. Another problem might be because they are immobile or have few that the national legislation grants only alternative uses, constitute little or no limited rights to a mortgage. Lastly, in security (e.g., dredged channels). An the event of a public Port Authority, the important aspect of securing financing is lender might be confronted with politi- the legal right of a port operator to own cal processes complicating his ability to buildings on land leased from the Port exercise his rights under a mortgage. Authority. Lenders are usually prepared This makes the security less valuable to to finance buildings and certain types of a lender. equipment in view of their intrinsic value. In most ports the concession or lease to private operators is the principal securi- Port firms, and sometimes privatized or ty for lenders, provided that the condi- corporatized Port Authorities, typically tions of the concession or lease allow take the legal structure of a joint stock or transfer of the contractual rights to limited liability company. The equity of another party. In the case of a full- such enterprises does not constitute fledged concession (including a BOT security in itself but may help to attract scheme), the financier often desires to investment funds. Rights of equity have the ability to arrange for the opera- holders to repayment usually rank

35 immediately behind the rights of a Governments and public Port lender. When a "balance sheet" financ- Authorities is increasingly common, ing is undertaken, a high level of equity despite potential conflicts of interest. (in relation to debt) means that more Sometimes, a Government may assign funds are available to absorb losses certain rights or grant concessions such before lenders come under threat. as a duty-free status (e.g., as was the case at Jebel Ali) to enhance the success One of the most important elements of of the venture. Properly focused financial security is the cash flow gener- Government support can be very impor- ated by the port or terminal. A lender tant to provide additional comfort to almost always wants the earnings of the lenders. project to provide security for his/her loan. Estimation of such earnings is Public-Private Partnerships highly complex since it involves assessing elements such as future traffic levels, As private sector involvement in financ- port revenues and expenses, the expect- ing port and other infrastructure works ed general economic development of the has increased, the tools for financing country, potential exchange rate risks, these facilities have become increasingly the future political climate, etc. The sophisticated and the legal conditions to more accurate and reliable the traffic be satisfied by the project more strict. and financial forecasts are perceived to The private sector will evaluate its par- be by prospective investors, the higher ticipation in port infrastructure/super- the probability that a Port Authority or structure projects based on the following port operator will be able to attract risk elements: capital and/or obtain loans. • Expected yield; Governments may also guarantee commercial loans against political risk and • Adequate debt/equity financing possibly use the guarantee programs structure (e.g., 65/35, 70/30, 75/25); offered by the International Finance Institutions. In the port sector, lenders • Strong sponsorship; often take security via assignment of port charges. However, much will • Solid legal contracts; depend on the terms of the concession • Transparent legal framework; or lease agreement, terms of earlier financing and the rights of third parties. • Fair and open bidding procedures; and Finally, financing can be affected by the provision of additional Government • Credible feasibility analyses (techni- support. A Government may invest cal, institutional, financial, economic equity in a firm it deems essential for and environmental). the general development of the port. It may also provide subordinated loans. Funding large infrastructure invest- Direct financial involvement of ments in green field port projects is

36 more risky because of certain complicat- national and regional levels and pre- ing factors including: venting over-investment in expensive port infrastructure. For example, the • The large proportion of necessary United Kingdom established its equity contributions (e.g., a mini- National Ports Council for this purpose. mum proportion of 60%) due to the high risk associated with long con- In the former Soviet Union, Eastern struction and payback periods; Europe and in many socialist-oriented developing countries the situation was • The difficulty of projecting future entirely different. Ports were considered traffic volumes; part of the national state structure (e.g., as an element of the Ministry of • The capital intensive nature of the Merchant Marine/Ministry of Transport) investments; and and were often controlled by national • The continuing risks associated with shipping companies. Every matter operations, such as a refusal of involving maritime policy was decided requests for tariff adjustments, centrally, with Port Authorities carrying changes in tax policy or introduction out the various day-to-day nautical and of new handling techniques that operating functions. make existing facilities obsolete. At the beginning of the 1980s the belief PORT REFORM MODALITIES in the management and operating capacities of national governments Overview faded in most market-economy countries. Central structures came under fire Today, the term "port reform" connotes and often lost part of their powers. The the changing institutional structure of privatization wave launched in the late the port business and the much greater 1970s and early 1980s by Margaret involvement of the private sector in the Thatcher in the UK also affected the port exploitation and financing of port facili- sector and resulted in a re-assessment of ties, terminals and/or services. Port the role of the government and private reform, therefore, results in changing enterprise. relationships between the public and private sectors. The demise of the communist system in the beginning of the 1990s resulted in The sharp increase in world trade over the virtual collapse of centrally con- the last 50 years focused the attention of trolled port systems in the former social- national governments on the economic ist countries. They, too, embarked on importance of ports. This was especially port reform and adapted the institution- the case in major ports developing large al and financial structure of their port industrial sites within their domain. In sectors to market conditions. the 1950s and 1960s, many nations introduced institutional changes with the aim Despite the social and economic reforms of coordinating port development at of the past thirty years, the public sector

37 has retained a strong role in port devel- Box 15 opment. Generally, in a market-oriented economy a government continues to be Reasons for Pursuing Port Reform responsible for the development of "public goods," goods that have a social General Reasons: utility, but that cannot be provided by the private sector because of low prof- • Improve port efficiency itability. Moreover, another reason for • Decrease costs and prices continuing government involvement in • Improve service quality the port sector is the strong ties to gov- • Increase competitive power ernment responsibilities in the areas of • Change the attitude with respect to port clients land use planning, environmental pro- (become more client friendly) tection, job creation and the economic Administrative/Managerial Reasons: stimulation of underdeveloped areas.

Box 15 summarizes the most frequently • De-politize the public port administration cited reasons for change in the manage- • Reduce bureaucracy ment and/or ownership of ports, as • Introduce performance–based management these have been compiled from a large • Avoid government monopolies number of documents and articles. Financial reasons: Definitions • Reduce public expenditure Many port managers and government • Attract foreign investment officials believe that the only way to • Reduce commercial risks (investments) for the public improve the performance of public port sector organizations is through the process of • Increase private sector participation in the regional privatization. They hold this view or national economy because they believe that certain charac- Employment reasons for change: teristics of the private sector are indis- pensable to achieve commercial success. • Reduce of the size of the public administrations The term "privatization" has therefore • Restructure and retrain the port labor force become synonymous (and confusingly • Eliminate restrictive labor practices so) with "port reform." Privatization, • Increase private sector employment. however, more accurately refers to one aspect of port reform–the introduction • Modernization of port administra- of the private sector into areas previous- tion and management ; ly reserved to the public sector. • Liberalization or de-regulation port Governments and port managers can services; select from among a variety of strategies for improving organizational and opera- • Commercialization; tional performance including:

38 • Corporatization; and company, including land lease rights. Land ownership usually remains with • Privatization. the Port Authority.

Each of these options may be equally The most complex form of reform is pri- valid and successful forms of port vatization. One definition of this term reform depending on the setting of the can be found in the UNCTAD publica- port in question. Each of these options tion of 1998: is defined below. "Privatization is the transfer of owner- Modernization of port administration ship of assets from the public to the pri- assumes that performance can be vate sector or the application of private improved by introducing more suitable capital to fund investments in port facil- systems, working practices, equipment ities, equipment and systems." and tools within the existing system of bureaucratic constraints. The advantage More specifically related to the port sec- of this strategy is that certain changes in tor, the following variations of privatiza- the organization can be made without tion can be defined. the requirement to change laws or national policy. Comprehensive privatization: a scheme in which a successor company becomes Liberalization/de-regulation means the the owner of all land and water areas as reform or partial elimination of govern- well as of all the assets within the port’s mental rules and regulations to enable domain (this is equivalent to the sale of private companies to operate in an area an entire port to a private company). where previously only the public sector was allowed to operate. Partial privatization: a scheme whereby only part of the assets and activities of a In the case of commercialization, public port body are transferred to the although the public port is not trans- private sector (such as the sale of exist- formed into a private company, it is ing berths, the transfer of pilotage or given more autonomy and made towage functions or a concession by a accountable for its decisions and overall public Port Authority to a private com- performance. It applies the same man- pany to build and operate a terminal or agement and accounting principles as a specialized port facility). private firms and can adopt private sector characteristics and practices to Hence, privatization expands the role of become more customer-oriented as well the private sector in the ownership as more efficient and profitable. and/or operations of existing port facilities and services, as well as in the devel- In the case of corporatization, a public opment of new port facilities. In the fol- port is given the legal status of a private lowing sections the various port reform company, although the public sector or options are described in greater detail. government still retains ownership. All assets are transferred to this private

39 Modernization of Port Administration communication technology (ICT).

The strategies of liberalization, commer- Many ports have refrained from intro- cialization, corporatization and privati- ducing corporate planning (strategic zation all aim at improving the efficien- management or strategic planning) cy of the port administration and the because port managers fear that its posi- operations through the introduction of a tive effects may be undermined by business-like environment. bureaucratic or cultural considerations.

Although these strategies can be effec- Effective corporate planning is depend- tive, some governments are reluctant to ent on strategy formulation involving implement them since they fear that group interaction. While group-based such institutional modifications may strategic decisions often can offer the lead to a disruption of services or loss of best available alternatives, a strict hier- government authority, prerogatives and archical organizational structure places power. As a result, governments some- the majority of important decisions in times prefer other less sweeping meth- the hands of a single executive. In such ods to improve organizational perform- cases, the success or failure of port ance, such as the modernization of the development and port policy is depend- port’s administration. ent on one person only, which is a risky situation. But this is precisely the most Such a strategy assumes that the per- frequently observed form of manage- formance can be improved even in the ment in traditional ports. prevailing environment of bureaucratic constraints. The advantage of this strat- Career planning and management egy is that certain changes in the organi- development are important elements in zation can be made without the necessi- a port modernization strategy. Many ty to make legal or policy changes. ports have failed to introduce career planning and career development in the Examples of improvements that can be organization, or omitted to link the two introduced without legal or policy activities. As a result, such organiza- changes are: tions are characterized by low employee motivation levels, high absenteeism, and • Adoption of corporate planning high turnover rates at management level practices; positions. • Application of human resources Efforts to improve the administrative development (HRD) planning; environment and performance should • Use of computer applications and include the rational use of computer management information systems applications and the application of mod- (MIS); and ern communication technologies. Such developments are perhaps the most sig- • Development of electronic data inter- nificant technological efforts undertaken change (EDI) and information and by ports. Many have developed

40 advanced computerized management and private port operators, the two must information systems. Also electronic be able to compete effectively and fairly. data interchange (EDI) and information This might require the introduction of and communication technology (ICT) an independent port sector regulator. are excellent tools to improve port Actually, the logic of liberalization administration and communication. should lead the public Port Authority to fully withdraw from commercial activi- In the final analysis, the Modernization ties and concentrate on any necessary of Port Administration Option generally regulatory functions. has not led to fundamental changes in the port sector, which is what the reform Liberalization is often opposed because process sets out to do. It should, there- the existence of internal as well as exter- fore, be considered as a stepping stone nal cross-subsidizies. towards a more comprehensive reform program. This, for instance, occurs when ports with a statutory monopoly cross-subsi- Liberalization dize unprofitable services in competitive markets with profits earned in monop- Liberalization sets the stage for a private oly markets. For example, in many organization to carry out certain port ports the most profitable activity is the activities previously reserved exclusive- container terminal operation, the rev- ly for the public sector (public monop- enues of which frequently support bulk oly). With this reform the private sector or general cargo facilities and services. is authorized to provide selected port services to users in a competitive envi- Other forms of cross-subsidy occur ronment with the intent of increasing when a public port organization realizes efficiency and improving port-client substantial revenues from non-maritime responsiveness. The essential feature of related activities, such as real estate the Liberalization Option is that its development, and uses these revenues implementing legislation permits the to underwrite port-related costs. With private sector to provide facilities and this type of support to draw on, the services and to compete with the exist- public organization has a competitive ing public port organization. advantage over its private counterpart.

The most important advantage of this On the other hand, the price advantage system compared to other port reform that the public port body may have had systems is that the public port operator, diminishes as competition erodes its even if inefficient, will continue to exist monopoly power and prices are set in a as a form of insurance against disrup- more competitive environment. Its price tions in service, while unsuccessful pri- levels cannot match those of the private vate port operators can be replaced. sector if it has to rely on inflated prices to subsidize other port services. The Since liberalization may temporarily former monopoly may, as a conse- introduce competition between public quence, be forced to scale back or cease

41 the unprofitable activities (which, Commercialization although unprofitable, may be vital to the nation) to compete effectively with Commercialization is the introduction of the private sector. commercial principles and practices into the management and operation of a Port On many occasions, the public sector Authority or part thereof, requiring it to continues to rely on public subsidies, operate under market disciplines. The thereby undermining fair competition process can be achieved through negoti- between the public and the private sec- ated performance contracts between the tors. This strongly argues for the clear government, acting as the owner of the separation of the regulatory and com- port, and the port management. The mercial roles in a port, with the Port agreement specifies the port’s objectives Authority taking on the former and the in terms of performance goals, service private operator the latter. quality, and social obligations.

Another potential problem associated Commercialization is characterized by with the liberalization option is the pos- the following: sibility that the public port organization will use other unfair practices to com- • Decentralization of the decision-mak- pete against private operators. The Port ing process; Authority, for example, may take actions • Relaxation of the hierarchy of the that are beneficial to the public termi- port organization, thereby allowing nals, but are disadvantageous to the pri- port management to exercise much vate terminals. An example is that of greater control over: dredging certain Asian ports. Often, the government ministry or the public • budgeting; Port Authority provides exclusive dredging services. This public entity • procurement and purchasing; can refuse to offer this service to the pri- • maintenance strategies and pro- vate operators, thereby putting those gramming; operators at a competitive disadvantage. Another possibility is that the service • salary scales and employment would be provided to the private sector conditions of labor and staff; at a higher price than the one charged to the public sector. To avoid such poten- • hiring and firing ; tial conflicts of interest, the government may also decide to liberalize or privatize • setting objectives and perform- these essential complementary services ance targets, and to create a level playing field. As a • formulation of strategies. result, the logical conclusion of the Liberalization Option is for all commer- Essentially, commercialization aims to cial activities of the port ultimately to be create an environment in which the Port transferred to the private sector. Authority runs on a commercial basis.

42 This involves a variety of business-type notes that the Government of Mexico decisions. The Chief Executive typically followed this course. has a certain freedom of action and Box 16 refers only specific matters relating to overall policy or strategy to the control- ling body (e.g., the relevant Ministry or Creation of Independent City Board). Commercialization is Port Authorities in Mexico designed to allow port management to In 1993/1994, the management of the major ports in conduct, to a large extent, its own affairs Mexico was transformed into the Administración and at the same time imposes on it Portuaria Integral (Integral Port Administrations). This responsibility and accountability for its decentralized the port system, set up individual port administrations co-ordinated by the Coordinación decisions and performance. In practice, General de Puertos, and opened the way to the privatiza- however, a common problem has been tion of operational activities in the ports such as cargo- that Governments continue to interfere handling, storage and towage. The Secretariat of Communication and Transportation retained economic in port decisions, undermining the and safety oversight of the decentralized port system. authority of port management.

Commercialization aims to provide port managers with decision-making authori- Commercialization should result in the ty and responsibility similar to that creation of a Port Authority Board to existing in private sector organizations. oversee the organization’s activities, However, since the port enterprise may removing that responsibility from the still have substantial monopoly power, central government ministry or city. At managers may not be confronted direct- the same time, however, the government ly with the hardships and necessary dis- may still need to exercise some form of cipline imposed by market competition. oversight to safeguard the public inter- Therefore, a commercialized govern- est. ment organization often will not be as Commercialized Port Authorities efficient as a comparable private firm, should: unless it is subject to competition. • Be financially independent (i.e., own Since the essence of commercialization is their assets, establish their own to require and empower port manage- budgets and make their own investment to perform as well as the private ment decisions); sector, changes in the institutional and legal structures of the port organization • Have their own personnel schemes are required to remove bureaucratic separate and distinct from the obstructions. national civil service and patterned on the schemes of private companies; A common first step in the process of commercialization and the elimination • Have a management that is responsi- of bureaucratic inefficiencies is to trans- ble for and held accountable for the form the port organization into a truly port’s performance by a Board. autonomous Port Authority. Box 16

43 Board members can be appointed by Authority into a corporation. This the national or local government, means that the Port Authority is port users and representative labor converted into a legally and finan- organizations. cially independent legal body with its own Board of Directors. The gov- In many countries the process of com- ernment retains ownership of the mercialization is only partially imple- port. By applying market principles, mented since procurement and contract- corporatization can lead to enhanced ing practices remain subject to national efficiency." government regulations. Corporatization, then, is the process in A weakness of the commercialization which a public sector undertaking, or process is that, during its introduction, part thereof, is transformed into a com- the acting public sector manager pany under private corporate law. This becomes the chief executive responsible is achieved by selling shares in a new for pushing through the changes in the company that conducts the port’s busi- organization. His performance and his ness and holds its assets, although the commitment to the commercialization of shares are issued and may be owned the Port Authority greatly influence his entirely by the government (or Port management team and the shape and Authority). The main objective is to pace of reform. In other words, man- decrease direct government control over agers accustomed to civil service proce- the company and to make it more dures and practices have to drastically responsive to market forces. Similar to change their management styles. This privatization, corporatization can has proven to be a difficult transition include financial restructuring and be a and is the reason why, in many such catalyst for the introduction of commer- processes, managers with private sector cial principles. Corporatization is, in experience soon replace the former civil effect, privatization without divestment. service senior management. A well thought-out training program may be an For political or legal reasons (often effective tool to change attitudes and both), comprehensive or partial privati- prepare management and staff for the zation may neither be appropriate nor different style and culture commercial- possible. In such cases corporatization ization brings. may offer an effective alternative for achieving more efficiency and greater Corporatization market orientation.

The next gradation on the path to full Corporatization usually features most of privatization is corporatization. One the following characteristics: port practitioner noted that: • A complete separation of the public "Corporatization goes further than management and regulatory func- commercialization in that it involves tions from the commercial activities the transformation of the public Port that are being corporatized;

44 • The Government sets clear and non- (e.g., the memorandum and articles conflicting objectives for the new of incorporation) of the corporatized firm; port enterprise, and its subsequent incorporation; • Management is given greater responsibilities and autonomy for decisions • Development of a corporate plan on operations, investments, revenues including traffic forecasts, a business and expenditures, and on commer- development plan, and pro forma cial strategy; income statement and balance sheet;

• Where no market-based scrutiny is • Capitalization and vesting of part of possible, performance is measured the assets and liabilities of the former against a range of financial and non- public company in the new corpora- financial criteria; tion;

• Rewards and sanctions for managers • Creation of a new labor statute, pro- are based on performance; vision of financial and social measures to cope with excess personnel • The government makes certain that (such as pension fund guarantees, the corporatized firm does not have redundancy payments, retraining, any comparative advantages or dis- etc.) and transfer of personnel from advantages relative to private port the former public entity, if required; firms operating under similar market risks and conditions (e.g., with • Re-training of management and staff respect to tax and interest rates). to increase commercial orientation and improve managerial procedures. Corporatization can be implemented either through incorporation under a The key difference from the other commercial code as a limited liability options discussed is that the aim of cor- company or as a statutory authority poratization is to constitute the corpora- under its own articles of incorporation. tized firm as a single, self-contained The statutory option is the most com- entity. The corporatized company’s mon approach for corporatizing Port management should be free from direct Authorities. government interference or control (bureaucratic constraints) to allow them During the initial phase of the corporati- to operate the company on commercial zation process the following principal terms. At the same time, management actions are required: should also be held accountable for their actions. • Preparation and enactment of any needed legislation; such legislation The new corporation can be organized often serves to eliminate the state with clearer lines of communication and monopoly within the affected sector; responsibility. Clearer targets can be set and adhered to. Stricter internal finan- • Development of the company charter cial controls can be introduced and,

45 where necessary, information and include: accounting systems established. This all aims to make the business more aware • In a majority of cases, the new corpo- of market and client requirements. rate entity still has a monopoly;

One of the corporatized port’s greatest • Unless competition is created, the strengths is its financial autonomy. This corporate company may not be as means that tariffs should no longer efficient as anticipated; require approval from the government or ministry (unless it is a monopoly • Governments are still able to politi- environment and the government wish- cize the corporatized firm by retain- es to exercise strict control) and that the ing the right to appoint Board mem- company should be allowed to establish bers and Executive Directors; its own procurement, contracting and • There will often be a need to intro- hiring and firing practices. In addition, duce a port sector regulator to create such companies do not rely on govern- a level playing field among compet- ment support for investments and have ing service providers. the authority to negotiate loans directly with commercial banks. The govern- Box 17 describes the process of corpora- ment, however, typically will continue tization for the Jaya Container Terminal to exert some measure of political con- in Sri Lanka. trol. Usually this is effected through the appointment of Board members. Privatization

Among the reasons for pursuing corpo- Privatization can be either comprehen- ratization over other alternatives are: sive or partial. The latter takes the form of a public-private partnership and is • To allow time for the management to usually combined with the introduction settle into its new role before con- of a Landlord Port Authority. templating full privatization; Comprehensive privatization remains an • To overcome the reluctance of pri- exception and is not a preferred option vate capital suppliers to invest in the for major ports. company; and Many reasons may prompt governments • To protect the public interest. or a Port Authority to enter into the privatization process. Having completed the corporatization of port operational activities, subsequently Removal of Trade Barriers. Outdated one can consider the corporatization of work practices, obsolete facilities, inade- the Port Authority as a regulatory body quate institutional structures and exces- (e.g., as in the case of the Port Enterprise sive charges in ports cause inefficiencies of Antwerp). that can create obstacles to foreign trade. Indirectly, the entire population of a Negative aspects of corporatization country pays for port inefficiencies,

46 which are reflected in the prices of both Harnessing the Efficiency and Know- import and export commodities. how of the Private Sector. Increasing specialization in the shipping and port industry requires highly trained person-

Box 17

Corporatization of the Jaya Container Terminal, Colombo

The Jaya Container Terminal in Colombo is part of the Sri Lanka Ports Authority (SLPA), which is solely responsible for operating all Sri Lankan Ports (Colombo, Galle and Trincomalee). After a surge of double-digit growth during the second half of the last decade, in 1999 the terminal experienced capacity constraints and could not handle container volumes efficiently, a situation that caused delays mainly for feeder vessels. An important step to improve capacity was reached with the establishment of a 30-year concession agreement with a consortium consisting of P&O Ports, P&O Nedlloyd, Evergreen and John Keels Holdings, Ltd. (Sri Lanka). The concession includes the reconstruction, operation and maintenance of the Queen Elizabeth Terminal with a capacity of one million TEUS. A second and more significant step is needed to create a "level playing field" once the Sri Lankan Government decides to corporatize the Jaya Container Terminal (JCT) to make it more efficient, and to assist Colombo in its goal of becoming a truly global transshipment hub.

The new enterprise developed a business plan, containing the following main topics: • JCT’s mission statement; • Legal structure of the firm, Memorandum and Articles of Association; • A Concession Agreement with SLPA; • Definition of institutional, financial and operational relations with SLPA; • Determination of leasehold area and asset base; • Traffic forecasts and competitive position of JCT vis-a-vis local and international competition; • Transfer of personnel and organization; • Operations and automation including the creation of a new financial system; • Profit and loss accounts and cash-flow projection situation.

JCT’s mission was:

To provide for professional container terminal management and operations, with respect to container handling, efficient and regular services for stevedoring, landing, transporting and warehousing as well as stuffing and stripping of containerized dry and wet cargo, and wharfage, in such as way that: • Internal cost discipline is maintained; • All costs are recovered; • An adequate return on capital is achieved; • Customer needs are satisfied; • Replacement and expansion investments are financed mainly by internal cash flows.

The Government and SLPA are discussing the business plan and legal charter of JCT. It is expected that after general elections at the end of 2000 the Government will support the corporatization of JCT.

47 nel, advanced systems and equipment that maintains restrictive working prac- and capital intensive cargo-handling tices cannot be effective. In the long techniques to meet the fast changing run, creating an internationally competi- demands of port users worldwide. tive port system, with all its direct and Government-owned firms, with their indirect economic spin-off effects, is cumbersome administrative procedures, more valuable than the short-term objec- poor cash flow generation, inflexible tive of maximizing local dock labor. payment schemes and lack of market orientation, usually cannot cope with Other Objectives. Governments some- these requirements. times pursue privatization for other reasons such as raising revenues for the Elimination of Political Interference. State Treasury, disposing of assets, and Although there are countries with well- encouraging competition and broader balanced political systems and minimal citizen participation in share ownership. political interference in the functioning of the state or municipal-owned port In its many variations, privatization enterprises, the appointment of political usually includes the following core fea- nominees with inadequate experience to tures: high level positions in government- • Divestiture (selling off government- owned ports is a well-known phenome- owned assets); non. In contrast, privatization of port operations often results in the selection • Deregulation; of professional port managers with an undiluted focus on the market and its • Competitive tendering; and changing needs. • Private ownership of operational Reduced Demand on the Public Sector assets with market-based contractual Budget. Partial privatization does not arrangements. necessarily mean a total withdrawal of the government from port investments. In theory, privatization provides the However, a large (often major) part of same flexibility to the management as port investments can be undertaken by commercialization. Unlike under com- the private sector without compromis- mercialization (where in the worst case ing wider social and economic benefits. scenario the government is likely to sub- Development of a modern port still sidize the company if it fails to perform requires a balanced public-private finan- adequately), a privatized terminal oper- cial package with balanced risk-sharing. ation can be permitted to fail, provided other facilities can handle its traffic. Or, Reduced Expenditure on Port Labor. existing facilities may be taken over by a Government-owned enterprises tradi- new operator who continues the opera- tionally have been a large source of tions. The management determines its direct employment; in the port sector own fate, free from significant govern- the greatest employment is in cargo han- ment influence, as long as it complies dling services. A privatization scheme with regulatory requirements.

48 REFORM TOOLS greater detail in this section.

Overview Box 18 Before deciding on a port reform process, governments should to articulate clearly the ultimate goals of reform. Spectrum of Port Reform Tools Broadly, there are two alternatives:

• The public authority in charge of the Public Management and Operations port sector (either a Service Port or a Tool Port) wants to restrict its public role by privatizing cargo handling Outsourcing operations and other non-landlord activities. In this case, existing operations have to be privatized or corporatized and Service or Tool Ports Management Contracts reconstituted as a Landlord Ports. "Partial privatization" is the goal.

• The public entity having final Lease and Rent Contracts responsibility for the port sector (most probably a national government) wants to privatize the entire Full Concession Including sector, including responsibilities that BOT/BOOT/etc. CONCESSIONS generally are considered belonging to the public domain. Ownership of port land, planning, investment and Built, Own, Operate (BOO) management are all transferred to private sector entities, which have no formal commitments to any public institution. "Comprehensive privati- Divestiture by License zation" is the goal (see Box 19 for an example of this type of privatization process). Divestiture by Sale This section focuses on the implementation of "partial privatization," since that approach has been used successfully to Private supply and Operations balance public and private interests and still meet the objectives of port reform. Box 18 shows the spectrum of port reform tools that will be discussed in

49 Contracting Out and Use of Managment Also within the framework of commer- Contracts cialization, a separate contract for the management of the public Port One tool available to governments to Authority or public terminal operator improve port efficiency and perform- may be awarded. Use of such a tool ance is contracting out to the private may be appropriate in cases where: sector of certain functions previously executed by the public port manage- • A Port Authority has experienced ment. A public enterprise may decide to poor management for an extended contract out certain of its operations period of time; through a tender-bid procedure instead • The financial condition of the Port of undertaking them "in-house" when Authority needs to be substantially the following circumstances apply: improved with a view to its corpora- • The functions can be performed at a tization/privatization at a later stage, price that is substantially lower than on terms favorable to the Ministry of the cost of undertaking them in the Finance of the country concerned; or public sector; • The Port Authority generally would benefit from the introduction of pri- • There is ample scope for competitive vate management. bidding; and The usual practice is for the government • Government policy is to transfer to agree on a management contract with gradually certain non-core activities a private sector operator. The operator of the public sector to the private agrees to employ the existing port staff sector. and to provide adequate and efficient Contracting out, however, should be service to all customers. This former handled with caution as it involves sev- requirement (retention of existing staff), eral risks: however, often emerges as the main reason for the failure of management con- • If the number of potential bidders is tracts (e.g., the Port of Mombasa). The limited, a meaningful comparison of management company may be saddled the bids may not possible; with excess labor and labor costs that cannot be sustained in a competitive • Potential bidders may form a cartel market. or otherwise collude when bidding for a contract; and A management contract is usually entered into for a specified period, gen- • Contracting out may create a mono- erally between three and five years. poly for those activities, which Upon expiration of the contract period, would be contrary to the public it may either be renewed or awarded to interest unless there is a proper regu- another party. A management contract latory oversight framework. may also be used as a stepping stone

50 towards the granting of a more exten- in port management, mainly serving as sive concession. It is important when landlord. At the same time, the role of entering into a management contract private enterprise in the sector will con- that the government or ministry has the tinue to grow. Service and Tool Ports right to impose financial penalties will gradually disappear and be trans- and/or terminate the contract in case formed into Landlord Ports; in some the private operator does not meet spec- cases, fully privatized ports will emerge. ified minimum levels of efficiency, For Landlord Ports public bodies will financial performance or throughput. retain the ultimate ownership of assets Concession Arrangements (especially land), but will transfer a major part of the financial and opera- Governments are still widely involved tional risks to the private sector. BOX 19

The Experience of the Hanseatic Landlord Ports

On the north-west European continent five universal ports – Antwerp, Rotterdam, Bremen/Bremerhaven and Hamburg–compete intensely for business generated in overlapping hinterland areas. Surprisingly, the basic organizational structure of all these ports is quite similar. They are operated in a public-private partnership, where the public entity takes responsibility only for: • setting the legal framework and the guidelines for port development • providing the port infrastructure • administering and renting out the publicly owned land • regulating and supervising ship movements.

The port business proper – cargo handling, storage, physical distribution – is left entirely to the private sector. The combination of public port ownership and private port business is often referred to as the "landlord model" or, because the above mentioned ports have a Hanseatic tradition, as the "Hanseatic model."

But is a landlord port also an efficient port? In my opinion it is. There are two main arguments to support this statement. Firstly, the landlord model opens up opportunities to adapt the port infrastructure fast to changing requirements of world trade. Secondly, this organizational system provides the possibility of competition in the port between the different suppliers for nearly every service to ships, passengers and cargo on condition that traffic and derived activity are sufficiently large. Often port administrations are confronted with the problem that land at the waterfront is limited and opportunities for port expansion are constrained due to geographical and hydrological restrictions or political borders. Even where no physical restrictions exist, growing environmental consciousness or lack of funds may make the transformation of green land into port sites or land reclamation outside the port area difficult and time consuming. As a consequence, port land is precious and has to be used very carefully, not only taking into account the present day situation but also changes in the future. The landlord model offers a good way of achieving this.

Because under the landlord model port sites are only rented out and not sold to private port operators, the sites in the established port area are at the disposal of the port administration, at least at the end of the contract period. often the port administration also has the right to terminate a contract early to relocate a company in the port area, provided it pays for the relocation costs. This would not be possible if the sites were sold. In Hamburg, this has proven useful, especially for restructuring older parts of the port, no longer suitable for cargo handling activities.

Michael Heinrich, Port of Hamburg,World Ports Development, 1999, p.16

51 Governments will act mainly as regula- Build, Operate and Transfer (BOT). tors and land developers, while private firms will assume the responsibility for Lease contracts and concession contracts port operations. The main legal instru- share the same principal characteristics: ment used to achieve this realignment of • The Government or public Port public and private sector roles and Authority conveys specific rights to a responsibilities is a "concession." private company; Concessions are widely used in the port • They have a defined term (10-50 sector today. A port concession is a years); contract in which a government transfers operating rights to private enter- • They are geographically delimited; prise, which then engages in an activity and contingent on government approval and subject to the terms of the contract. The • They directly or implicitly allocate contract may include the rehabilitation financial and operational risks. or construction of infrastructure by the concessionaire. These characteristics Leasehold Agreements. Landlord ports distinguish concessions from manage- derive a substantial part of their income ment contracts on one end of the reform from leases. Typically, only land or spectrum and comprehensive port pri- warehouse facilities are leased. Berths vatization on the other. Concessions, by may be included or excluded from the permitting governments to retain ulti- lease rent. If excluded, the Port mate ownership of the port land and Authority collects and keeps all revenue responsibility for licensing port opera- derived from berthing fees, berth occu- tions and construction activities, further pancy fees, dockage, etc. permit governments to safeguard public There are three basic forms of lease in interests. At the same time, they relieve use today: flat rate, "mini-max," and governments of substantial operational shared revenue leases. risks and financial burdens. Flat rate leases give the lessee the right There are two main forms of concession to use a fixed asset for a specific period used in ports today: of time in exchange for periodic pay- • Lease contracts, where an operator ments of a fixed amount. In the case of enters into a long-term lease on the a land lease, this can be a fixed payment port land and usually is responsible per year per square meter. Lease rates for superstructure and equipment; may vary depending on the degree of port site development (e.g., unpaved vs. • Concession contracts, where the paved land or land with or without operator covers investment costs and structures). The main advantage of this assumes all commercial risks. Such form of lease is that the lease rent is contracts are often combined with known to both parties in advance. The specific financing schemes such as flat rate lease also provides to the lessee

52 the greatest incentive to fully use the The characteristics of the mini-max lease available capacity of the terminal. are:

The main characteristics of the flat rate • The lessee’s payments to the lessor lease are: (Port Authority) for the use of structures, equipment and land are estab- • A specific sum of money is paid per lished on a scale, which is defined by square meter of port area for a spe- minimum and maximum through- cific period of time; puts;

• In principle, the lease represents a • The rent varies with the actual vol- "fair return" to the Port Authority on ume of activity recorded; the value of the property; and • The minimum rate is applicable • Lease payments may be adjusted for regardless of the volume of activity, inflation over the life of the lease. but is based on reasonable assump- tions about the expected minimum To set lease payments at the proper throughput; level, the Port Authority must be able to forecast accurately the level of business • From this minimum, a sliding pay- (and, hence, the wear and tear on port ment scale is applied until a pre- infrastructure and the traffic from which determined maximum throughput is the lessee will benefit). It should also reached; try to assess the true value of the land (e.g., in its best alternative use) and aim • The minimum rate may not fully to recover this value through the antici- cover the interest and amortization pated level of business transacted by the of the lessor; lessee. Because the lessee must make the same lease payment regardless of • When the specified maximum the revenue his business generates, he throughput level is reached, the les- has a strong incentive to make full use see pays no further rent. of the leased land and structures. With this form of lease, then, there are A flat rate lease is often the preferred pre-established floor and ceiling rents to form of lease for a port whose primary be paid; between the floor and ceiling objective is to maximize throughput and rents, the lessee will pay more or less benefits to the local economy. depending on the tonnage or number of TEUs handled. In this fashion the Port Under a mini-maxi lease the lessor gives Authority and the private lessor share to the lessee the right to use a fixed asset the risks and rewards of port invest- for a specific period of time in exchange ments and operations. The lessor has a for a variable lease payment. There is a strong incentive to operate efficiently minimum and a maximum payment and to generate traffic beyond the level depending on the level of activity at which the maximum rent is paid, recorded. since he receives the full benefit of any

53 revenues generated beyond that point. levels and throughput. Along with this potential for added rewards, however, In a shared revenue lease, the lessor also come added risks. gives to the lessee the right to use a fixed asset for a fixed period in Box 20 shows how the three different exchange for a variable amount of forms of lease would work for a notion- money. As distinguished from a mini- al terminal. max lease, with a shared revenue lease Box 20 there is a minimum payment regardless of the level of activity, but no maximum Comparison of Lease Systems payment.

The main characteristics of the shared revenue lease are: MINI-MAX LEASE • There is a minimum level of compen- SHARED VALUE LEASE sation;

• There is no established maximum FLAT RATE LEASE level; LEASE PAYMENT

• The only limit on the maximum compensation is the facility’s/ terminal’s capacity;

TRAFFIC VOLUME • Minimum compensation may not fully cover the interest and amortization of the lessor (Port Authority) for All three types of leases can be used for the lease area. so-called multi-user as well as for single- user (dedicated) terminals or berths. Both mini-max and shared revenue leases represent true partnerships between Potential lease partners for a Port the Port Authority and the lessees. Authority are: Under both arrangements, the port must • Terminal operators; carefully determine the minimum lease payment taking into consideration its • Cargo-handling companies; financial obligations, its own forecasts of traffic volumes, and its statutory and • Shipping lines; business tolerances for risk. Once minimum throughput levels are attained, the • Forwarding agents; and/or lessee and the port share the benefits • Inland transport operators. deriving from any additional activity. The shared revenue lease is the only Today it is common for shipping lines to approach in which the Port Authority be major lessors from ports. For these can maximize revenues, employment

54 leases to succeed for all parties, howev- with a shipping line, since: er, two key conditions should exist: • The operating company usually does • The shipping line lessor should gen- not rely on a contract with one single erate a large volume of cargo at the user, but will spread the risk and port (i.e., it should be a major cus- safeguard its business interests by tomer); and concluding contracts with several clients; and • The port should possess additional facilities of the same type leased to • In the case of a contract with a local- the shipping line to prevent creating ly incorporated port operator, should a monopoly (i.e., a public access a legal (contract) issue arise, it is gen- facility should be available). erally easier to enforce liens and other measures needed to compel If the port does not have other similar compliance with the lease than in the facilities (and other customers), the cre- case of a company whose home base ation of a monopoly will conflict with in another country. the interests of both the port and the national economy. In this respect, the Which form of lease is to be preferred? following points should be kept in In general, one may conclude that: mind: • If the port’s principal objectives are • Shipping lines may, at any point, to maximize throughput and provide decrease, re-route or altogether halt maximum benefits to the local econo- their services as a result of changes my through increased employment, a in financial conditions or shifts in flat rate lease may be preferable. patterns of trade. A well-known This is often the case when a port is example of this is the cancellation of newly established and wants to round-the-world service of United develop its business. States Lines in the 1980s; • If the port's principal objectives are • Shipping lines constantly merge or to maximize throughput and conclude cooperation agreements employment, with an initial need to (alliances) with other shipping lines. subsidize the terminal lessee, the Such practices may result in chang- mini-max lease may be preferable; or ing sailing schedules or the establishment of special ties with other ports; • If the port's principal objective is to and/or maximize revenues, with an initial need to subsidize the terminal lessee, • Shipping lines may re-organize their the shared revenue lease may be sailing schedules for reasons of inter- preferable. nal policy. Concession Agreements Signing a lease contract with an operating company may be less risky than A landlord port for the most part does

55 not involve itself directly in port opera- contractual relationship -- a concession tions. Instead, private port operators agreement -- has been developed. and service providers conduct their business independently and compete in The primary objective of concession the market. The Port Authority acts as a agreements is to transfer investment neutral landlord promoting the port as a costs from the government to the private whole. Together, they represent the sector. Concessionaires are obliged to interests of the entire port, with the Port construct and rehabilitate infrastructure Authority in the lead. and operate a facility or service for a fixed number of years. Concessions may Relations between the Port Authority be "positive," when a concessionaire and the private sector are twofold: pays the government for concession rights; or "negative," when the govern- • Commercial relations based mainly ment pays a concessionaire for the serv- on lease agreements; ices it provides under the agreement.

• Relations based on public oversight The benefits of concessions in the port functions of the Port Authority, such sector include: as enforcement of port by-laws, dangerous goods regulations, vessel • Better and more efficient port man- management, etc. agement (especially port operations) performed by private operators; During the last decade, relations between landlord Port Authorities and • Avoidance of the drawbacks associat- private port operators have become ed with monopolies through the increasingly complex, and the alignment inclusion of detailed concession con- of responsibilities have further shifted. ditions; One of the valued features of a Landlord Port is its clear division of responsibili- • The application of private capital to ties. Each party knows exactly its rights, socially and economically desirable liabilities and financial responsibilities. projects, freeing up government Moreover, many governments today are funds for other priority projects; seeking to diminish their financial involvement in ports and to use private • Under certain circumstances, the cre- sources to finance new port develop- ation of new revenue streams for ment including construction of basic governments; infrastructure such as quay walls. This • The transfer of risks for construction, implies not only an increased role for finance and operation of the facility the private sector in port development, to the private sector; but also increased financial exposure. In such situations, a simple and straightfor- • The attraction and use of foreign ward lease contract often is not suffi- investment and technology. cient to cover all responsibilities and liabilities. As a result, a more complex Disadvantages associated with conces-

56 sion contracts include: throughout the term of the concession; • The need for continuing close government regulation and oversight; • The SPC observes relevant safety and environmental protection standards; • The system can work properly only when the legal framework permits • The charges levied on port users are transfer of land rights to a private reasonable and do not endanger the party; competitive position of the port; and

• Winning bids are sometimes based • The SPC performs proper mainte- on unrealistic financial projections, nance and repair of all assets to placing the sustainability of the con- ensure that, on their return at the cession agreement in jeopardy; end of the concession, the Port Authority receives an operational • The danger that a concessionaire will project and facilities in good working not properly maintain the facilities order. under concession, returning them to the government in bad condition; or The Port Authority may (depending on the danger that the concessionaire legal strictures) hold a financial interest and the Port Authority disagree on in the SPC created by the concessionaire, the operational need for and finan- or it may not. If the Port Authority cial feasibility of critical investments. chooses not to participate financially in the SPC responsible for developing the Concession agreements are often devel- port assets under a concession contract, oped as a part of a BOT scheme and rep- then its role as an independent and resent specific agreements between a impartial public entity does not signifi- government/Port Authority and the cantly change. The only real change is Special Purpose Company (SPC) estab- in the shift in responsibility for invest- lished by the concessionaire to carry out construction and operation of a port ments from the Port authority to the development project. Under conces- concessionaire. sions, the ultimate ownership of the If a Port Authority not only concludes a affected assets is retained by the nation- concession agreement with the SPC, but al or local government, or by the Port also participates in the company as a Authority. At the same time, part of the shareholder, then the Port Authority’s commercial risks of providing and/or role changes more dramatically. By operating the assets is transferred to a investing risk capital the Port Authority private concessionaire. becomes more directly involved in port In agreements involving a Special operations. Sometimes this situation is Purpose Company, a Port Authority prohibited by law (Poland). If the ven- should ensure that: ture has a monopoly in the port (i.e., has the only container terminal), the situa- • The SPC provides adequate service tion might be acceptable, although a

57 conflict of interest may arise between • A Building Contract between the the roles of Port Authority as an investor SPC and a construction company for and as the regulator of the monopoly. If construction/development work the venture competes with other termi- (with the Port Authority typically nals in the port, however, participation exercising some form of quality con- of the Port Authority in the SPC will trol); give rise to a serious conflicts of interest and will undermine its independent, • Financing Documents drawn up neutral position. between the SPC and its lenders to provide finance for port develop- Depending on the specific situation, a ment; a Port Authority may provide concession agreement may consist of a partial financing; combination of contracts including: • A Management Contract between the • A leasehold agreement on non-devel- SPC and its chosen manager (operat- oped land, the formal document ing company) for provision of man- under which the Port Authority agement services in operating the grants the SPC possession of the con- port. cession area; Generally, a typical concession agree- • A Terminal Access Agreement, which ment will clearly set out the terms relat- regulates the SPC’s access to the con- ing to: cession area, and also the access by the Port Authority to the area; • The land, facilities, and equipment (e.g., container cranes, transtainers, • A Port Services Agreement, which and rail-mounted port cranes) regulates the provision by the Port included in the concession; Authority to the SPC of various port services such as pilotage, towage, • The functional requirements of the and dredging; port and/or terminal, the proposed design solution for any construction, • A Sponsor’s Direct Agreement, the construction program and time which is an agreement between the schedule, including milestones; Government/Port Authority and the SPC dealing with the issue of compe- • Rights and responsibilities of the tition; concessionaire and Port Authority (concession sponsor) with respect to • A Design Contract between the SPC the completion of the construction and a technical consultant for the program; design of new facilities (the Port Authority usually has no direct con- • Human resources development and trol over who does the design work the employment of former Port or the terms of appointment, but Authority employees, if applicable; often retains the right to review any design); • Activities permitted to be carried out

58 in the concession area; tor to carry out many of the port functions. This type of contract has not been • Equal access to common areas in the used extensively, but is an option in the port; event that a public Port Authority is not able to exercise its core functions prop- • Payment of fees, royalties, revenues erly. A master concession is a sort of and canon (lease rental) to the Port "wrap-around" agreement that includes Authority; the same basic ingredients as a normal • Termination of the concession; concession agreement, and more. The main difference between a routine con- • Return of land, facilities and equip- cession agreement and a master conces- ment after the concession period has sion is the latter’s provision for a con- expired; cessionaire to conclude wide ranging sub-agreements with other operators. • Other issues as may be required. This form of concession approaches comprehensive privatization. Various It is common practice that, during con- interests can be represented (such as ter- struction, the concessionaire and the minal operators, dredging companies, Port Authority use an independent Test construction firms, banks and the gov- Certifier to certify that all work has been ernment, itself) in the consortium or carried out in conformity with the SPC concluding a master concession. A requirements of the concession agree- key concern with master concessions is ment. Upon the return of facilities, the how to avoid potential conflicts of inter- SPC should be required to carry out any est between the public service function work needed to bring them up to an of the master concessionaire and its agreed standard. Accordingly, provi- commercial activities. This comprehen- sions must be included to inspect facili- sive approach may be most suitable for ties and identify any deficiencies. small-sized ports. A concession agreement for a "greenfield project" is less complicated than the take-over of an existing terminal or port. BOT Arrangements In such a case, no personnel or existing facilities are acquired by the SPC. A landlord Port Authority is typically However, a terminal access agreement responsible for constructing fairways, still must be drawn up between the gov- quay walls and terminal areas. Such ernment/Port Authority and the SPC to construction is usually based on a port cover such things as the building of master plan and carried out in close con- access road and rail, the provision of sultation with the future operator. water and electricity and other facilities. Sometimes construction of such facilities has already started before agreements Finally, in some instances, port reform is have been concluded with the prospec- implemented through a master conces- tive operators. This may be the case sion contract, enabling a private opera- when the market demand is strong and

59 the Port Authority is confident of find- the concession, before finally trans- ing clients, and is prepared to take the ferring to the principal, at no cost or risk that port capacity will go unused. at a pre-determined price to the As a rule, Port Authorities should per- principal, a fully operational facility. mit private operators to finance most of During the concession period, the the additional capacity (including the promoter owns and operates the quay wall). The Port Authority can then facility and collects revenues in concentrate on access infrastructure and order to repay the financing and protective works relating to port exten- investment costs, maintains and sion, and on renovation projects. Port operates the facility and makes a Authorities may sometimes have diffi- margin of profit." culties amassing from taxes the investment funds necessary to finance such Denton Hall Projects Group; A common access facilities and protective Guide to Project Finance; 1998 works. In such cases, they have sought Edition, p.47 to acquire funds either from an International Finance Institution (such BOT is a frequently used form of conces- as The World Bank) or from private sion model that in many respects has the lending institutions. For specific port character of a temporary privatization. facilities, such as container or bulk ter- BOT schemes have some features of a minals, private funding can be arranged contract (e.g., clauses that cannot be through a concession agreement as changed such as duration and pay- described above. BOT schemes are a ments) as well as those of a license (e.g., specialized form of concession designed permitting changes in activities or per- to increase private financial participa- formance by the concessionaire within tion in the creation of port infrastruc- the broad framework of the license ture/superstructure without changing agreement). the landlord structure of the concerned Under the BOT approach, the govern- port. ment grants an exclusive concession to The core of a BOT arrangement is a con- the private sector to build and operate a cession for a specified period of time port project. In return, the private sector involving the transfer or re-transfer of (sometimes a consortium of banks, con- all or some of the project assets. An tractors and operators, sometimes a illustrative definition of a BOT arrange- global operator) undertakes the risk of ment is: completing the project and operating it profitably. The concession runs for a "A project based on the granting of a number of years, after which the project concession by a principal, usually a assets are transferred back to the gov- government, to a promoter, some- ernment. After termination, the govern- times known as the concessionaire, ment/Port Authority can lease out the who is responsible for the construc- facilities, or grant another concession, tion, financing, operation and main- enter into management contract, which tenance of a facility over the term of may or may not have a new construc-

60 BOX 21

BOT Schemes and Port Development

In recent years governments have recognized the benefits of developing their ports either through privatization or, more recently, through joint ventures or so-called build-operate-transfer or ‘BOT’ schemes In this article we consider the application of BOT schemes to port development and some particular issues that arise.

Prime examples of the use of BOT schemes are the development of new greenfield terminals in Gujarat province, India, the new container terminal at Nhava Sheva, Mumbai, India, and the proposed terminals at Chittagong, Bangladesh, Colombo, Sri Lanka, East Port Said, Egypt, and Tangiers, Morocco. This follows the growing trend as international port operators such as P&O Ports, Hutchison, PSA and International Container Terminal Services, Inc. seek to develop global networks of terminals leveraging off their experience.

The benefit for the sponsors of a BOT scheme is that since this is a well recognized project finance structure they can limit their exposure to a relatively small equity injection and a management involvement with the bulk of the financing coming from limited recourse bank lending. The benefit for the government is that they will be able to obtain an expensive infrastructure development which, given the risks involved, a developer would be unlikely to be prepared to risk on a full recourse basis. If the concession agreement is between the SPC (special purpose company set up by the sponsors to undertake the project) and a port authority (rather than the government) then in order for the project to be bankable, there may need to be an agreement (an implementation agreement) under which the government guarantees the port authority’s obligations and certain undertakings are provided by the government to the SPC or directly to the sponsors which cannot be given by a port authority (such as the provision of a favorable tax treatment). The commitments from the government are likely to cover issues such as compulsory acquisition of land, free access for staff and machinery and sometimes protection for the staff in the host country. It may also be necessary, particularly in less developed countries, to look to financing for the project and related infrastructure from the IFC, ADB or other multi-lateral agencies in order for the project to be ‘bankable’.

Marc Lloyd Williams, Bill Jamieson and Norton Rose, World Ports Development, 1999, p. 20

tion component. on whether the transfer occurs before the facility becomes economically or Exceptionally, the scheme may be technically obsolete. arranged in such a way that the private company collects all port dues, includ- When designing BOT schemes, it is ing wharfage and berth dues. The Port important to consider carefully which Authority is then paid a base fixed fee parts of the port can be concessioned plus a variable fee based on either rev- and which parts should remain with the enue or cargo (tons or units) handled. Port Authority. Generally, BOT schemes In this way the Port Authority shares in can be applied to all assets that can be the increased value of the facility due to exploited as a separate business. Key improved productivity and efficiency. among these are:

The BOT scheme ends with the return of • Fairways/Channels: This part of the the project/terminal to the relevant port infrastructure can be conces- authority, usually the Port Authority, at sioned under a BOT scheme to a specified date. The value of such require the concessionaire to dredge transfer to the Port Authority depends and maintain the fairway (and,

61 optionally, to operate aids to naviga- Other port assets cannot be easily con- tion) for a specified period during cessioned as individual items. The most which he derives an income from important of these are items such as vessels using the fairways under an breakwaters, piers, connecting channels, agreed fare system (e.g., San Martin- intra-port roads, and other common Rosario Fairway, Argentina, areas. These assets, however, can be described in Box 22); part of a master concession agreement or a comprehensive privatization • Terminals: BOT schemes are usually scheme. applied to specific terminals, mainly in developing countries. There are A carefully crafted concession is central many examples of such terminals to the implementation of a BOT scheme. such as JNPT-Nhava Sheva, India; The concession contract gives the con- Queen Elizabeth Terminal, Colombo, cessionaire the right to run the facility Sri Lanka; Port of Buenos Aires, (with limited and clearly defined gov- Argentina; and many others; ernment oversight) and earn a commercial return on his investment. The con- • Entire Port Complexes: A BOT struc- cession/BOT agreement, together with tured as a master concession contract the required business plan, will set out could cover an entire port complex estimates of the likely revenues, costs, comprising a variety of terminals. debt repayment, and profit for the SPC. Here, the SPC (or port operator) This information is necessary to assess assumes defacto the role of a land- the project’s financial viability and its lord Port Authority for the assets it debt repayment capacity. Many planned has agreed to construct. The master BOT projects fail because their terms are concessionaire then offers sub-leases negotiated without taking into account of various terminals to third parties. whether or not the project is "bankable." Such a scheme can approach compre- Governments often try to negotiate a hensive privatization. The only real BOT arrangement at an early stage in distinctions are that under a BOT the project preparation cycle, before the and master concession, the transfer full scope of the project is known and of assets is temporary and the con- before a regulatory oversight regime has cessionaire has no regulatory respon- been decided. While this might gener- sibility for marine safety, environ- ate significant revenues for the government, and Vessel Traffic ment in the short run, it may saddle the Management. There are no examples concessionaire with an impossible-to- of effective implementation of this complete project. type of BOT master concession There are many variants of BOT-like scheme; but new legislation in schemes including: Madagascar provides for "une concession globale" that is equivalent to • Build–Own-Operate (BOO): meaning a master concession for small ports full privatization of the terminal, of local interest. since the port land and the facilities

62 built on it are not returned to the BTO schemes are necessary in coun- government/Port Authority; tries where legal strictures do not permit private ownership of main • Equip-Operate-Transfer (EOT): port infrastructure (e.g., Costa Rica, where port infrastructure already South Korea); exists, but superstructure is supplied by the SPC; • Build-Own-Operate-Transfer (BOOT): where ownership of land • Build-Transfer-Operate (BTO): where and facilities conveys to the conces- the new port facilities are directly sionaire, but is transferred back at an transferred to the competent authori- agreed price at the end of the conces- ty (government or Port Authority) sion period; immediately after construction. Under BTO schemes, the ownership A special case is the Wraparound BOT of the assets being financed has been (WBOT). This scheme is used in the an issue for lenders who require case of expansion of a government- asset-based collateral to secure bank owned port facility by the private sector, loans. With BTO schemes, the only which would hold title to the expansion collateral is the concession contract only. Under such a scheme, the SPC itself, which may be insufficient. would: BOX 22

San Martin - Rosario Waterway Concession

To export its products, particularly grains and cereals, Argentina depends largely on its waterways. Before 1995, the main Argentine waterway, the River Plate to Santa Fe (some 589 km) was a hazard to navigation. The water wasn’t deep enough and the river was poorly maintained. The depth of the waterway had silted up from 32 feet to 24 feet and navigation at night became impossible.

To improve the waterway, the Argentine Government issued a concession contract to deepen and maintain a 700 km plus stretch of the river and to provide Aids to Navigation according to IALA standards. After a lengthy tendering process, Hidrovia SA, (a joint venture between the Belgian dredging contractor Jan de Nul and Empema SA, an Argentinean industrial group) signed a concession contract to upgrade the waterway. The ten-year contract represents a total value of around US$ 650 million, of which a significant part will be realized from tolls on vessels using the safer and deeper fairway.

The first phase of the work included deepening to a depth of 28 feet the River Plate from Punto Indio to the Parana River and up the Parana Inferior to Puerto San Martin. A second part of this phase consisted of deepening of the Parana Medio up to Santa Fe to a depth of 22 feet. Finally, this phase included re-installation and conversion of some 500 buoys and beacons to enable Panamax sized ships to navigate safely through some particularly difficult stretches of the River. The second phase included deepening the river channel from 28 to 32 feet.

An important feature of the project was the toll, which could be applied to the entire waterway once Phase 1 was completed. The toll is calculated on a vessel’s net registered tonnage and maximum draft taking into account the services actually offered by the concessionaire. The toll is levied on all ships with a draft greater than 15 feet and is set at US$1 per net register ton. Ships with a draft less than 15 feet are charged every 3 – 6 months at a reduced rate. The waterway is divided into sections and subsections, and a ship is charged only for the sections and sub-sections actually transited. The concessionaire is responsible for collecting the tolls, while the Prefectura Naval has the authority to deny port clearances to any vessel failing to make payment.

63 • Operate the entire port facility under Comprehensive port privatization often a Project Development Agreement requires the enactment of new laws, (PDA); both to regulate the transfer of ownership and functions from the public to • Manage the government-owned sec- the private sector and to define the bor- tion under a management contract; derline between re-drawn public and and private responsibilities and tasks. Such legislation should establish: • Expand the facility under a BOT contract. • Authority for the Port Authority to establish a new "successor" company In many cases, the government effective- or companies to take over all or part ly becomes a partner in a BOT arrange- of the Authority’s business; ment by investing in certain portions of the infrastructure. Private parties • The right of the "successor" company appear to be reluctant to invest in basic to issue shares, either to the port infrastructure, not only because it Authority or to a third party; makes it more difficult to price use of • The time and manner for selling or infrastructure in a manner that permits otherwise distributing the shares to the concessionaire to realize a reason- third parties as well as for a payment able return on the investment, but also to the successor company from the because these assets are largely immo- proceeds of the sale; bile and have no comparable alternative use. Political instability, change of con- • The basic authority and mechanisms trol, anti-privatization backlashes needed for the government to shape (nationalization), unexpected new tax and direct the privatization; regulations, and other governmental actions could make comprehensive BOT • A levy on the proceeds of the disposal of shares of the successor company schemes much less attractive. (in the UK this levy was set at 50% of Comprehensive Privatization the net proceeds of the sale);

Comprehensive port privatization has, • A levy on profits accruing to the suc- until now, been developed only in the cessor company as a result of the disposal of port land transferred under UK and in New Zealand. Outright sale the privatization scheme (in the UK of port land combined with a transfer of this levy was set at 25% of the profit traditional public port tasks such as during the first five years, 20% dur- safety and environmental oversight ing the next two years and 10% dur- (e.g., harbormaster’s tasks) remains an ing the last three years of the levy exception. Other countries have intro- period); duced significant privatization schemes, but mostly with respect to port and ter- • Provisions for the transfer of Port minal operations. Authority personnel to the successor

64 company (e.g., the number and cate- • The introduction of new industrial gories of personnel, salaries, benefits, relations practices; pension rights) and/or their dis- missal (e.g., separation package, re- • A more commercial and entrepre- training allowance, re-hiring prefer- neurial approach to management of ences); the business; and

• Terms for the transfer of "public • Greater competition. tasks," to the successor company or other entity such as aids to naviga- These features, it was argued, would tion, pilotage, handling of dangerous result in improvements to the port sys- goods, and protection of the environ- tem’s financial and operational perform- ment; ance.

• The tax regime applicable to the suc- Note, however, that not all of the above- cessor companies; and mentioned benefits are due exclusively to comprehensive privatization; other • Authority for the government to dis- port reforms may generate similar bene- solve the Port Authority once it is fits. satisfied that the objectives of the enabling legislation have been met A vast majority of maritime nations con- and to transfer all remaining proper- siders comprehensive privatization to be ty, rights and liabilities to the succes- incompatible with national and regional sor company. interests. Specific reasons why governments and Port Authorities have Privatization legislation may include refrained from pursuing full privatiza- additional elements, depending on the tion are diverse, but often include one or local situation, the structure of the for- more of the following: mer Port Authority and the specific legal, institutional and socio-economic • A public monopoly can easily situation in the country concerned. become a permanent private monopoly; In the UK, the benefits of comprehensive port privatization most often cited are: • The macro-economic benefits of large port complexes to the regional and • The generation of revenue for the national economy are perceived to be Treasury; threatened by comprehensive priva- • The ability of privatized companies tization; to diversify their businesses; • The danger of discriminatory treat- • Greater access to capital markets; ment of customers;

• The removal of restrictions on invest- • The risk that, in practice, privatiza- ment and borrowing; tion may undermine competition;

65 • Fear of over-investment in and buyer) significantly reduced the orig- duplication of dedicated terminals inal debt of the new port company. for major clients, which could unbal- Certain privatized Trust Ports, there- ance demand for additional public fore, realized very high profits (as transport infrastructure; high as 20-30% of turnover) at the expense of port users and taxpayers. • Neglect by the private owners of the Although difficult to prove, privati- port’s public service function; zation via a concession, rather than out-right sale, would probably have • Reluctance of labor unions to aban- raised considerably larger revenues don government protection and their for the public Treasury. fear of losing jobs; • Transfer of port regulatory functions • Reluctance of public authorities to to the private sector has raised seri- lose political control, including ous issues. The new privatized ports patronage; and are essentially self-regulating and • Reluctance of public authorities to have little incentive to safeguard and lose income generated by the port enhance inter-port competition. The business. driving force behind the new port owners is corporate interest rather Background on the UK’s port privatiza- than public interest. The question, tion is provided in Box 23. After ten then, is who protects the public inter- years of experience in the UK with com- est? prehensive privatization, some conclu- sions can be drawn. Generally, the UK • In terms of investments and profits, model of port privatization is highly privatized UK ports have done better determined by local factors and ideolog- than the still-existing public ports. ical considerations that are unique to the Privatization led to an injection of British experience. However, it appears cash, but only for purchasing exist- that: ing assets. Former Trust Ports claimed that investments were ham- • The valuation of port assets sold to pered by financial institutions look- private parties was judgmental since ing only for short-term returns. there was no established market during the time of privatization. • The abolition of the National Dock Subsequent trading of port shares Labor Scheme had a more profound suggests that the original prices were effect on labor stability than the sell- only 25% of their true market value. ing of port land.

• Ports were sold at significantly dis- • Where terminals were already pri- counted prices. Discounted sales (in vately operated (i.e., in Landlord addition to the ruling that 50% of the Ports), selling the underlying port sale proceeds from disposal of Trust land made little difference. For Ports should be returned to the example, port land at Dover (a for-

66 BOX 23

Impetus Behind Full Privatization in the UK

The United Kingdom is the only example of a country having lengthy experience with comprehensive port privatization. A number of ports in the UK, however, still operate in the public domain. It is instructive to analyze the UK experience to discern the circumstances leading the UK to adopt a comprehensive privatization approach.

The UK, as an island where no significant city is more than 100 miles from at least two ports, has strong competition among its ports. Thus, there appears no need for anti-monopoly controls specifically for the ports industry, other than those provided generally by the Monopoly and Mergers Commission for Industry.

Over the last fifty years, British port structures have evolved in response reacted to three principal needs:

• To modernize institutions and installations, many of which dated back to the early years of the industrial revolution, to make them more responsive to the needs of users;

• To achieve financial stability and improve financial performance, with an increasing proportion of financing coming from private sources; and

• To achieve labor stability and a degree of rationalization followed by a greater degree of labor participation in the port enterprises.

In the UK, chronic labor unrest and outdated work rules constituted major reasons for port reform. In fact, the Ports Act 1991, which started the full privatization process, was introduced and could be successful only after the abolition of the National Dock Labour Scheme in 1989. This Scheme gave port workers a virtual guarantee of lifetime employment, contributing heavily to inefficiency and subsequent poor financial performance in the port sector.

One of the main structural problems of the port system in the UK – especially among Trust Ports – was the composition of their Boards, which were defined in statutes. These Boards tended to be strongly representative of port users, who were by nature reluctant to authorize tariff increases sufficient to generate the revenues needed to allow for depreciation and subsequent re- investment in port facilities. Those tariff increases that were authorized tended to be offset by increasing labor costs, which increased steadily as a result of pressure from organized labor, supported by the National Dock Labour Scheme. The ports, therefore, operated with inadequate surpluses and with depreciation allowances based on historical costs. Without substantial surpluses, the ports had to raise the money they needed for their modernization from fixed interest loans and bonds. The net result of these factors was that the port operated with net deficits, leading to de-capitalization over the post war period, up to around 1970.

The main instrument for port privatization in the UK is the Ports Act 1991. This law provides for the formation by Harbour Authorities of Limited Companies under the Companies Act, and for the subsequent sale of their shares. All property, rights, liabilities and statutory functions are transferred to the new port company. Ministerial approval is required for the sale of shares and for the subsequent dissolution of the harbour authority. The company has to pay the Government 50% of the proceeds of the sale of shares, less any amount set aside for assistance to maximize employee participation. Where the company later sells port land, a 25% levy is charged on the proceeds of sales during the first five years, 20% for the next two years, and 10% for the years 8 through 10.

Under the Ports Act, after July 1993 the Transport Secretary could, in the case of harbor authorities with annual revenues of more than £5 million, initiate privatization of an unwilling harbor authority, unless that authority articulated compelling arguments against it.

Privatization began before the Ports Act 1991. The Thatcher Administration privatized the British Transport Docks Board (BTDB) under the Transport Act 1981. Subsequently, the Associated British Ports was established, floating 49% of its shares in 1983. The BTDB’s management formed the first management of the new company. The privatization of BTDM was notable for its vigorous development of national resources.

Another form of privatization was applied to another group of nationalized ports, the Sealink Harbours (British Railway Board). These ports were sold to Sea Containers Ltd. by negotiated tender.

These experiences encouraged discussions among the management of a group of Harbour Authority ports in favor of privatization by means of a Management Buy-Out (MBO) or Management/Employee Buy-Out (MEBO). The legislative mechanisms needed to implement such reform are complicated, requiring the promotion of a private bill. This is costly and time consuming and may – in the event of opposition by interested parties – result in unwelcome modifications to the original bill. As a result of the perceived uncertainties associated with this process, only a few ports opted to pursue this course.

67 mer Trust Port) or Portsmouth (a agement can be observed in the port of municipal port) did not affect port Rotterdam, where Very Large Crude output, since port operations in both Carriers (VLCCs) discharge crude oil ports were already in private hands. from various oil-producing countries. Rotterdam has a virtual monopoly in • Some nationalized and Trust Ports this traffic in Northwest Europe as a were sold under a M(E)BO scheme to result of its very deep access channel to former public officials. These man- the North Sea (78 feet). Pipeline systems agers reaped windfall profits by sell- have been constructed to connect the ing their shares at a later date. port with various refineries in the hinterland, for example in Belgium and • There are limited possibilities for Germany. Thus, the inland transport port cities to re-develop obsolete port chain is effectively controlled by one land. On the other hand, land spec- port, creating a stable environment for ulation by privatized ports has the transport of crude oil as well as an become a reality, since older port attractive location for balancing refiner- facilities often are situated near the ies. The Rotterdam Municipal Port valuable real estate of city centers. Management was instrumental in developing the pipeline systems, but did not The UK experience, therefore, has yield- invest in them. A separate private com- ed very mixed results and provides few pany was established to invest in the arguments supporting comprehensive necessary infrastructure and carry out privatization (i.e., the sale of port land the oil transport function. and transfer of all public functions to the private sector) when other, less radi- Some Port Authorities also seek to cal reforms can achieve the same objec- attract customers to their port facilities tives. by facilitating and/or co-financing terminal facilities outside their port area. Port as Transport Chain Facilitators This more expansive view of a Port Authority’s role has the potential to Increasingly, major terminal operators influence "traditional" port management are trying to secure their strategic posi- structures, in particular in ports struction by offering complementary terminal tured on the landlord model. facilities located either in the foreland or hinterland. This practice is most appar- A Port Authority’s involvement in ter- ent in connection with containerized minal operations beyond its homeport cargos. In the event that an operator may not be focussed solely on improv- engages in operating other facilities such ing logistics chains. The main objective as inland terminals, rail facilities or even might be to maximize the Port entire port complexes abroad, its objec- Authority’s revenue by making more tives and motivations are broader than widespread use of its operational those of a localized operator. expertise and management, especially in the case where the Port Authority acts as The phenomenon of supply chain man- terminal operator as well.

68 Port Authorities seeking to become Box 24 transport chain facilitators should be aware of possible conflicts of interest Singapore Creates PSA Corporation and the potential loss of their neutral position. Managing a port area includ- The Port of Singapore is a very successful container port and, since 1986, the busiest port in the world in terms of ing attendant public functions is differ- shipping tonnage, most of it containerized transshipment ent from optimizing a logistics chain, cargo. Singapore was a service port, combining land owner- which can be considered a supporting ship, statutory functions and cargo operations within one organization, and one of the few successful public service function for the ports industry, and for ports in the world. In 1996, however, the Government of that reason essential from a point of Singapore decided to fundamentally change the manage- view of competition. ment structure of the port. The Government changed the port’s structure by creating a The PSA Corporation is a prime exam- corporatized entity (PSA Corporation) whose structure ple of globalization of terminal opera- would be sufficiently flexible to permit it to operate and tions. Since its establishment, it has invest in the region, especially in container terminals located on major shipping lanes. Corporatization of part of the become a leading player in the global Port Authority’s business meant increased financial autono- terminal operating business and today my and generated greater cash flows. It also enhanced owns, manages and operates a chain of Singapore’s position as a hub port and was expected to contribute to the economic development of Singapore and container terminals and logistics hubs the surrounding region. The PSA Corporation will be listed throughout the world. Before taking on on the Stock Exchange of Singapore. this expanded role, PSA had to change Since the PSA Corporation has a monopoly position in thoroughly its legal structure. Box 24 Singapore, it is regulated. The Maritime and Port Authority describes what this entailed. of Singapore was established by an Act of Parliament (The Maritime and Port Authority of Singapore Act 1996) to provide that oversight. The main tasks of the new Authority (MPA) are to promote the use, improvement and develop- MARINE SERVICES AND PORT REFORM ment of the port, to control vessel movements and ensure navigational safety, to license and regulate marine services and facilities including conventional cargo terminals, and to Overview regulate the port industry’s economic behavior. The Act states that no person shall provide marine or port facilities without a public license or exemption from MPA. The This section discusses a variety of Authority may control and fix the tariffs charged by marine services and how they are affect- licensees for handling and storage of origin-destination ed by port reform. Special emphasis is cargo (i.e., non-transshipment cargo). Transshipment cargo is not regulated because the transshipment business is an placed on how these services might be international and highly competitive one. The original serv- outsourced, concessioned or privatized. ice port structure has thus been changed into one of a landlord port Marine services are port-related activi- The newly formed PSA Corporation acts as a regulated ter- ties undertaken to ensure the safe and minal operator under Corporate Law. It is free to operate as expeditious flow of vessel traffic in port a global terminal operator. The question remains whether approaches and harbors and the safe MPA will allow other private operators to carry out container operations in the Port of Singapore. The legal possibility stay at berth when moored or at anchor. exists, but the introduction of intra-port competition has "Safe" means that port conditions ensure not yet materialized. that vessels using the port, the port environment and the marine environ-

69 ment are protected from danger. Harbormaster’s Function "Expeditious" means that vessels are not unduly delayed and that the vessels’ Generally, the Harbormaster (or Port port transit times, as a part of the total Captain) manages port activities relating turn-around time in the port, are kept to to maritime safety and the protection of a minimum. the marine environment. The legal basis of the Harbormaster’s function is usual- Although ports may define marine serv- ly embedded in a port by-law or, in the ices differently, and may have different case of a State-owned port, in a specific responsibilities for providing them, in law or ministerial decree. The this section we will use the term to refer Harbormaster often has specific legal broadly to services having a nautical powers to act in emergency situations. bearing, be it maritime safety, vessel Typically, he is part of the Port traffic efficiency or marine environment Authority organization and heads the protection. Marine Department. In some countries, he may work for an independent public Other services (e.g., fire fighting, immi- entity such as the Coast Guard. gration and customs services and port state control) may also affect port effi- The Harbormaster is responsible for ciency and safety. While important to ensuring the efficient flow of traffic the overall operation of a port, these through port and coastal waters (includ- other services are not dealt with in this ing allocation of vessels to public berths) section. and – on behalf of the Government or Port Authority – for coordinating all The specific marine services rendered by marine services. The Harbormaster a Port Authority depend largely on the operates out of a port coordination cen- scope of the port’s marine responsibili- ter (or Captain’s Room), which is often ties and jurisdiction. The scope of the part of an elaborate vessel traffic man- ports’ marine jurisdictions do not follow agement system. a general rule, and there exists no international legislation or standard practice Frequently, Harbormasters have police that defines the responsibilities of Port powers and act as head of the port Authorities. Usually, marine services police. The main functions of such rendered by a Port Authority are geo- police are enforcement of the port by- graphically delimited by the area direct- laws, especially with respect to traffic ly under control of the Authority, which regulations, protection of the environ- may encompass only the waterfront of ment and accident prevention. riparian berths (i.e., the ports’ domain). However, there are countries where the When part of a Port Authority, the Port Authority is also responsible for Harbormaster also usually serves as managing lighthouse services outside its head of the Pilotage Service. In the immediate area of control. This extend- event that the Pilotage Service is not ed area may cover harbor waters and part of the Port Authority, he is respon- approaches as far as the open sea. sible for coordination between this serv-

70 ice and port users. Finally, the In a fully privatized port, the Harbormaster is sometimes responsible Harbormaster should not be part of the for regulatory oversight of the carriage port management, but should be and storage of dangerous goods in the employed by a national or regional mar- port area as well as for ensuring the itime administration. proper use of port reception facilities. Pilotage In view of the public character of the Harbormaster’s responsibilities, this In a port reform process, pilots often are function is rarely privatized. To do so the first ones to demand privatization. would raise a conflict of interest Pilots usually constitute a closed group between the public interest (safety, envi- of professionals (often Master Mariners), ronment, equal treatment under the law) who are keenly aware of their unique and private interests from the port position in the port environment. industry. For example, since port time Successful vessel management relies of ships is an important cost and opera- heavily on the efficient functioning of tional factor, the Harbormaster will the pilot organization, a fact that pilots always be under pressure to grant pref- may use to maximum advantage when erential treatment to shipping lines. port reform is being undertaken. Impartial and consistent application of In many countries, pilots (or pilot organ- operational safety measures for ships izations) have been more or less success- carrying dangerous or environmentally fully privatized. This type of privatiza- sensitive goods such as gas carriers, tion, however, carries the risk of creating chemical parcel tankers, and VLCCs, is a private sector monopoly in pilotage essential to the safe functioning of any services, especially when pilots are pri- port. The Harbormaster, therefore, vatized on a national or regional scale. should not function within a purely Pilotage is an essential part of traffic commercial environment, but must have management, and safe passage of ves- freedom of action to carry out his public sels through a port area requires expert tasks in an unimpeded and unbiased teamwork of a vessel traffic manage- manner. ment organization (Captain’s Room), tugs, mooring gangs and pilots. A pri- Although the Harbormaster might be vate sector pilot monopoly that has the part of a Port Authority’s management ability to bring port operations to a com- team, he should be free to exercise his plete and rapid stop represents a signifi- jurisdiction as independently as possible cant risk for ports, carriers, and shippers from the commercial management of the alike. As a consequence, retaining pilots port. In carrying out emergency meas- as part of a Port Authority’s marine ures in the event of accidents and indus- department may be desirable even when trial disasters, he should have full free- other aspects of port management and dom of action and possess the ultimate operations are privatized. authority and responsibility for direct- ing all necessary activities. There are two ways of privatizing of the

71 pilotage function. Pilots can be Box 25 self-employed and work under the oversight of a Maritime Authority The Creation of a National Pilotage Monopoly that serves as the regulator and in the Netherland licensor of the individual pilots, or pilots can organize themselves into In 1988,The Netherlands Pilotage Service became an independent organization, the pilots acting as private entrepreneurs. The objec- a private company. tives of the government in the privatization of the pilot services were to reduce the governing executive burden and to improve efficiency The pilotage company should have and adequacy of the pilot services. its own infrastructure and facilities A public entity, the Nederlandse Loodsen Corporatie (The Netherlands such as pilot boats, communication Pilot Corporation, NLC) was created to manage the register of equipment, pilot stations, etc. licensed pilots and be responsible for education and training of Sometimes a pilot organization licensed pilots. All licensed pilots constitute the NLC. (especially in smaller ports) might In every region, the licensed pilots have set up a legal entity, the also operate a vessel traffic man- Regionale Loodsencorporatie (Regional Pilot Corporation, RLC).The agement system (radar). The Port licensed pilots are all shareholders of the Loodswezen Nederland BV Authority or Maritime (Pilotage Service of the Netherlands Ltd.) which is responsible for the exploitation of the independent private enterprise. All supporting Administration should regulate the staff is employed by this company. The company collects the pilotage privatized pilot organization with fees and makes payments to the pilots in accordance with the finan- respect to the following points: cial statute. The ownership of the capital goods used by the pilots is incorporated • Training requirement and pilot in the Loodswezen Materieel BV (Pilotage Services Matériel Ltd.). qualifications; Individual pilots, united in regional partnerships, the so-called "Pilot Associations," render the pilotage services. Supporting services are • Standards for obtaining a cer- provided by the Loodswezen Nederland BV. Five Foundations are tificate or license, and its revo- responsible for education, social allowances, management of pension funds and allowances for special situations. cation; Privatisation in The Netherlands did not bring an end to the debate • Roles and responsibilities of the about pilot services. The Government Audit Office directed harsh crit- organization for operation of a icism at the privatisation process and asserted that the efficiency improvements did not benefit the shipping lines or the government, vessel traffic management sys- but solely the pilots. Notwithstanding the counter arguments the tem; Government Audit Office’s criticism,The Netherlands’ privatization of pilots is not considered a successful one. • Communication equipment and To a certain extent, the government’s objectives have been attained. channels; The increase in the amount of pilot activity and the reduced number of licensed pilots have led to higher efficiency. However, pilotage • Investigation of incidents and became a virtual monopoly and the efficiency improvements have led follow-up actions; primarily to a very substantial rise of the pilots’ incomes.

• Pilotage tariffs and financial The cost structure of the Pilotage Organisation is not transparent. The fees are non-negotiable, contrary to the fees for other marine services record keeping; and pilot fees in other ports.The magnitude and rigidity of pilot fees create strong pressures to reduce other cost elements in the highly • Medical fitness and continued competitive maritime transport sector. proficiency; and Overall, the present situation has proven unsatisfactory to port users.

72 • Reporting requirements to the rele- Mooring Services vant Port Authority. Mooring services in smaller ports can be Tugboat Operations provided by the local stevedore. In larger ports, a mooring service is usually Tugboat operations are typically carried performed by a specialized private firm. out by private firms. If the volume of Especially in a complicated nautical situ- vessel traffic is not sufficient to support ation (e.g., single point mooring buoys, a tugboat service on a commercial basis, specialized piers for chemicals or gasses, a Port Authority may be obliged to pro- ports with large tidal differences), moor- vide such service itself. Sometimes ing activities require expert skills and neighboring ports can share tugboat equipment. A Port Authority may services to reach volumes sufficient to choose to regulate this activity when sustain a commercial operator. only one specialized firm exists. Aspects to be regulated include: In many instances traffic density allows only for one private tugboat company to • Minimum manning requirements; operate in the port area. In such cases, the Port Authority should regulate the • Communication equipment and service with respect to the following channels; items: • Number of mooring boats and their characteristics; and • Minimum crew size; • Tariffs. • Minimum bollard pull; Vessel Traffic Services and • Communication equipment and Aids to Navigation channels;

• Roles and responsibilities relating to Vessel traffic services (VTS) usually are the vessel traffic management sys- part of a Port or a Maritime Authority. tem; and Such services are provided in port areas and in densely used maritime straits • Tariffs. (such as the Dover Channel) or along a national coastline (e.g., the coast of The The optimum situation is where a num- Netherlands). In principle, it is possible ber of tugboat firms compete vigorously to privatize VTS services under a in the port. In that event, the Port Concession Agreement. Aspects of these Authority should not have to regulate services that should be regulated by the tariffs. Regulation of other aspects of competent authority include: tug operations such as manning can be at the discretion of the Port Authority • System functions such as vessel man- and will depend on the local situation. agement and control, emergency functions, information and communication functions;

73 • Types and specifications of radars dump waste into the sea or into port and tracking software; waters. Control of such dumping practices is extremely difficult, especially for • Manning levels and qualifications; chemical cargos. To spread waste management costs, ports can include all or • Reporting duties; and part of the waste management costs in • Tariffs. the general port dues. Transport of waste from the ship to a reception facili- Responsibility for aids to navigation ty also poses a challenge, especially in usually rests with a national Maritime larger port areas. Port Authorities Authority in port approaches and in should directly provide or organize the coastal areas, and with a Port Authority provision of transport barges or trucks in port areas. Often, provision and for this purpose. maintenance of buoys and beacons is contracted out. Since Aids to The entire waste management system, Navigation are generally part of an inte- including personnel and facilities, grated maritime infrastructure, the costs should be closely controlled by the com- of providing these services are included petent Authority. When private firms in the general port dues. It is, therefore, are engaged in waste handling, the difficult to privatize them. Authority should employ experts from its organization to ensure compliance Other Marine Services with all relevant laws, rules and regulations. The control of dangerous goods for maritime cargoes is usually performed by a Larger ports use patrol vessels and vehi- specialized branch of the Port Authority. cles for a variety of public control func- The same goes for the handling of dan- tions. In some ports, such patrol vessels gerous goods in port terminals. also have fire-fighting equipment on Oversight and regulation of land trans- board. Port patrol services are part of port of dangerous goods is normally a the Harbormaster’s resources and, there- responsibility of the central government. fore, should not be privatized. The highly sensitive and technical nature of this work makes it inadvisable Generally, emergency response services to privatize it. are carried out by a variety of public organizations such as the Port Authority Waste management services in ports (Harbormaster), fire brigade, health often are privatized under strict control services and police. Some ports have of a Port Authority or another compe- sophisticated tools available to aid in tent body. Privatization carries risks, crisis management, such as prediction however, especially with respect to the models for gas clouds. Such tools are disposal of dangerous chemicals. often integrated in a traffic center of the Proper waste management can be local VTMS. Private firms (e.g., tugboat expensive for shipping lines. With high companies) may play a subsidiary role costs, ship captains might be tempted to in crisis management in the event that

74 they are equipped with fire-fighting Box 26 summarizes the prevailing equipment. When a port does not have approaches for handling the most patrol vessels available, a contract with important port functions. a tugboat company should be entered to guarantee availability of floating fire- fighting capability.

Control of dredging operations by a Port Authority is of utmost importance. Often, Port Authorities or the competent Maritime Administration does not have enough expertise to exercise sufficient control over both maintenance and capital dredging. Port Authorities with large water areas under their control should employ sufficient competent personnel to prepare dredging contracts and oversee dredging operations. Sounding is an activity that should preferably be carried out (or contracted out) by the Port Authority itself. Dredging is usually carried out by private firms. It might be cost effective for some ports to use their own dredges, especially when continuous and important maintenance dredging is required. Box 26

Prevailing Service Providers Under DifferentDiagnosis Port Management Models

Model Port Nautical Nautical Port Superstructure Superstructure Cargo Pilotage Towage Mooring Dredging Other Administration Management Infrastructure Infrastructure (Equipment) (Buildings) Handling Activities Services Functions

Public Pu Pu Pu Pu Pu Service Pu Pu Pu Pu Pu Pu Pu Port Pr Pr Pr Pr Pr

Private Pu Pu Pu Sector Pr Pu Pr Pr Pr Pr Pr Pr Port Pr Pr Pr

Pu Pu Pu Pu Pu Tool Pu Pu Pu Pu Pu Pu Pr Port Pr Pr Pr Pr Pr

Landlord Pu Pu Pu Pu Pu Pu Pu Pu Pu Pr Pr Port Pr Pr Pr Pr Pr Pr

75 FOOTNOTES

1) Dr. Klaus Harald Holocher, Port Management Textbook, Volume 1, Breman 1990.

2) The World Bank, Port Development Strategies for Asia, Phase 1; National Ports and Waterways Institute, Louisiana State University, July 1992

3) Stephen McDonagh, Port Development International, March 1999.

4) Alfred J. Baird; Port privatisation: objectives, extent, process, and UK experience; 4th Annual World Port Privatisation Conference, 22- 24 September 1999, London.

5) TWU Papers, The World Bank; Concessions in Transport; Shaw, William and Thompson; Discussion Paper, November 1996.

6) Maritime Policy Management, 1997, vol. 24, no. 4; Private profit, public loss: The Financial and economic performance of U.K. ports; p. 319.

7) Dr Alfred J. Baird, Napier University, Edinburgh; Port privatisation, objectives, extent, process, and the UK experience; 4th World Port Privatisation Conference, London, 22-24 September 1999.