Public-Private Partnerships Case Study #5

Regulation in PPP projects: the case of Port by Mathieu Verougstraete, Ferdinand Marterer and Clovis Eng (March 2015)

The Malaysian government has improved the capacity and efficiency of its port infrastructure by involving the private sector. This case study reviews the develop- ment of the largest port in the country, , and considers the role of the public partner when ports are privately operated.

PRIVATE PORT OPERATORS THE CASE OF PORT KLANG To improve port efficiency, many governments was one of the first countries to around the globe have introduced private introduce private port operators by the end of participation in port operations. Different the 1980s. Improving port efficiency was a models have been tested. The most common rising priority in order to reduce dependency one is the Landlord Port Model in which the on for external trade. Involving private partner leases a port terminal and private stevedores was seen as the best way is responsible for both the operation and to compete in the – one of related investments (e.g. wharf expansion, the world’s most crucial trade waterways with cranes and office buildings). However, the an annual throughput of 70,000 ships, for public authority remains in charge of common transhipment operations.3 facilities such as breakwaters, entrance The introduction of private operators began channels, utilities and road and rail access to ESCAP supports govern- 1 in 1986 with Port Klang, which is located the port. ments in Asia-Pacific in on the Malaysian west coast, about 40 km implementing measures While private operators could boost from , the capital city. The to efficiently involve productivity, there might be a need to regulate process started in 1985 when Port Klang the private sector in them. In particular, should tariffs be set freely Authority (PKA) incorporated Klang Container infrastructure develop- by private companies or controlled by a public Terminal (KCT) as its wholly owned subsidiary. ment. This case study authority? Following a sale-lease agreement, PKA sold is part of this effort and movable assets and leased immovable assets promotes exchange of to KCT for 21 years – including berths and experience among the Competition might not always be the optimal countries of the region. price mechanism as the number of terminal lands. In 1986, PKA subsequently sold 51 operators competing within the same port per cent of KCT shares to a private company, For further information area is limited by nature. For example, cargo Konnas Terminal Klang (KTK). consult ESCAP’s website volumes might not be enough for two or more www.unescap.org Figure 1: Port Klang stevedores to run a profitable and effective business.2 But in monopolies, private operators might be tempted to use their situation to overcharge users (particularly for captive cargoes that have no viable transport alternative than using the port).

This paper reviews the case of Port Klang and investigates how the has reformed its port sector, improved efficiency of Port Klang and prevented anti-competition behaviours while adopting regulation and tariff mechanisms to ensure competitiveness and operational capability. Source: Google Maps and Google Earth Figure 2: Privatization Timeline moves per hour (mph), three ranks behind Singapore (73 mph).7 Crane handling rate in Westports rose from 20 mph in 1996 to 35 mph in 2013.8 Today, there is usually no waiting time for vessels in Port Klang as berthing is done on arrival.

Capacity Private involvement went hand in hand with port-capacity expansion. While capacity increases resulted mainly from productivity gains in the period 2000-2006, infrastructure investments were required afterwards to cope with growing demand.

In 1992, the rest of the facilities not operated There were only 35 operational berths and 16 by KCT in Northport and Southpoint were cranes in Port Klang in 1995.9 In 2014, 58 privatized following the same model to Klang berths were operational with additional ones Port Management Sdn Bhd (KPM). KCT and in development. These berths are equipped KPM merged to become Northport (Malaysia) with 81 quay cranes. Wharfs were also Bhd in 2001. developed to accommodate larger vessels.

In 1994, PKA handed Westports to Kelang Port Klang has maintained the volume Private operators Multi Terminal Sdn (KMT) to develop a handled at an equivalent of 70 per cent of fund port facility greenfield port. At that time, there were only the capacity, leaving a buffer of 30 per cent developments and initial facilities on the island for further growth. In 2015, the capacity of with a 1 km wharf developed by PKA.4,5 KMT are committed to the port stands at 15.5 million TEUs and is considerably expanded the infrastructure and expected to reach 18 million TEUs per year increasing port the facilities, which became fully operational by 2020.10 capacity at the end of 1994. KMT consortium later became Westports Malaysia Sdn Bhd. The licensed operators fund all port facility developments and concession agreements Today, both Northport and Westports incorporate commitments from private companies are governed by term concession operators to increase port capacity. The lease agreements with the port authority, PKA. In period is sufficiently long to recoup these 2012, Northport handled 28 per cent (2.9 investments with revenues generated from million TEUs/ Twenty Foot Equivalent) and port operations. Westports 72 per cent (7.5 million TEUs) of the total box throughput.6 To offer more capacity and specialized services, subleasing is also a possible option RESULTS in Port Klang. The lessee (operator) can transfer the leasehold rights to a third party. Productivity In 2010, Shell Malaysia signed a 14-year lease agreement with Westports to build and The privatization of Port Klang operations operate a liquid bulk terminal with three contributed to improve operational petroleum tanks for downstream operations.11 performances with more commerce-oriented management. Port performance indicators Volume in the table below illustrate the evolution of productivity before and after privatization. Port Klang emerged quickly after the PPP implementation as a major port in South- Today’s berth productivity ranks high in East Asia and a regional hub. Port Klang international comparisons. In 2013, Port has experienced an annual TEU throughput Klang ranked 8th worldwide in berth increase of 10 per cent on average for the last productivity for transhipment ports with 68 15 years.

In 2014, 11 million TEUs (12th worldwide), Table: Perfomance Indicators of Port Klang before/after private involvement and 217 million tons of cargo (17th) were handled. Figure 3 illustrates the fast evolution of its container activities in the last two decades compared to some of its direct competitors. Source: Salleh, Port Klang, Malaysia, p. 379 from M. Tull et al. (2001) (PKA) Figure 3 : Container Handling at Port Klang and Selected Ports in South-East Asia

In Malaysia, each port has its own Port 35 +272% Authority, which is a government agency overseeing the port. Port Klang is under the 30 jurisdiction of Port Klang Authority (PKA), )

s 25 n which is under the purview of the Ministry of o i l l i

Transport. Having a dedicated authority per m (

20 t port allows implementation of tailored policies u p h g in each port without systematically relying to u 15 o r h t

a central body. +913% U

E 10 T After privatization, PKA’s role evolved from +507% +226% port operator to trade facilitator, landlord 5 and regulatory body, its core functions being: ‐ (i) trade facilitation, (ii) port planning and Klang Singapore Jakarta Manila development, (iii) regulatory oversight of 1995 1,133,811 11,845,600 1,300,126 1,668,031 privatized facilities and services, (iv) free zone 2013 10,350,000 32,240,000 6,590,000 3,770,000 authority, (v) asset management.12 The rest of this study will analyse the role of PKA in its Source: 1995 (Containerization International) / 2013 ( International Association of Ports and Harbours) regulatory capacity.

Tariff Regulation Tariff revision: In Port Klang, a substantial demand for changes in tariff can be TEU throughput Tariff setting is one of the most critical submitted to the Port Consultative Committee increased on elements to regulate as it impacts the project (PCC) with full justification. The PCC includes average by 10 per viability. It could also indirectly influence the members of the government from different competitiveness of the whole country given ministries, representatives of port users, such cent annually for the importance of maritime transport for as shipping associations, terminal operators the last 15 years international trade. and PKA. Aside from scrutiny from the at Port Klang. authority based on various factors, comments Different mechanisms exist to set tariffs. and feedback from port users are also taken Free tariff setting by private operators might into consideration before recommendations be optimal when competition is sufficient to are made to the Ministry of Transport. If the drive the price down. For example, there is proposal is rejected, the operators may appeal no tariff limitation by a public entity at the directly to the Ministry. New Busan port in the Republic of Korea. Conversely, tariff could be regulated to control A tariff revision in Port Klang occurred monopolistic situations. It often takes form in 2004 when Northport and Westports of “ceilings which are not to be exceeded for increased marine charges, along with a new individual shipments or – more rarely – in rate for dangerous goods cargo to adjust 13 aggregate.” operation and investment costs, which were not included in the previous rate. Another Unlike many ports in the world, in Port Klang revision took place in 2012 mainly dealing both companies have to set tariffs for port with general cargo tariff that had seen little users within the price cap set by PKA. changes over the last 40 years. Tariff setting: PKA controls tariffs to ensure The tariff review mechanism has worked well that prices remain competitive and to avoid in a manner that allows all stakeholders to anti-competitive practices that could occur be engaged in the decision-making process. in a duopoly situation. Tariffs are regulated It has also provided a platform for port users with cost-based pricing as per the provisions to participate at a critical juncture to voice under the Port Authorities Act and Port out any shortcomings or weaknesses in the Privatization Act. The authority observes the services provided. costs of providing the services and facilities and incorporates an agreed rate of return for investments made by the port operators. Other Regulation PKA also benchmarks tariffs in other ports Safety and environmental regulations must of the region like Singapore while taking into be separated from commercial activities to account country specificities (e.g. labour cost ensure that these issues are not compromised in Malaysia is cheaper than in Singapore). by profit-making considerations. Hence, PKA leads security services, marine operations, fire services and dangerous goods control. in terms of freight volume handled. The The latter is critical as the International partnership between PKA and the private Maritime Organization (IMO) estimates that operators has been decisive in this respect. more than half of global freight is classified as First, the regulator has managed to keep hazardous.14 prices competitive without jeopardizing the financial viability of the operators. The ASEAN Ports Association, which PKA Second, private operators have significantly is part of, also works on three main topics: increased port efficiency making it one of safety, human resources standards and the most competitive in the world. Third, efficiency. Adequate regulation on these the regulator has taken a series of actions to issues is essential to make maritime transport enable the observed growth in port activities sustainable. and benefited from this growth through profit-sharing arrangements incorporated in THE REGULATOR AS A KEY PARTNER concessions.

In a PPP, the public partner has a critical In the future, the existing facilities are Beyond its role to play to make the infrastructure project likely to reach their maximum capacity and regulatory role, successful. For instance, by facilitating there might be a need to establish a third trade through streamlined procedures, PKA port. An effective partnership between the PKA has also a is enhancing the port attractiveness, which regulator and the future operator will again be key role to play should result in more business opportunities critical to the success of such an additional to enhance port for the private operators. Likewise, the development.16 attractiveness. development of a free zone by PKA creates the need for more transport services. Tariff review mechanisms might also have to be revisited to respond more quickly to The regulator also needs to ensure that access market trends. For instance, automatic price to the port infrastructure is adequate. In this adjustments could be introduced to take respect, the government has invested heavily into account inflation changes and to reduce in enhancing road connections to the port administrative burden linked to the current with the development of bridges and flyovers. price review system. In the long run, the The objective is to reduce congestion in the need for price control mechanisms might be port and improve last mile connectivity.15 revisited in light of international competition Dredging is another component of port from other ports in the region. Regulation accessibility. While terminal operators support needs vary, however, according to the wharf dredging costs, PKA finances dredging specificities of each country and of each port. of common channels to enable port access to larger ships. End Notes PKA also develops the long term vision for the port. A master plan was conceived for 1 World Bank, Public-Private Partnership in Infrastructure Resource Center. the 2010-2030 period. Three key issues are 2 World Bank, Port Reform Toolkit. addressed in the plan: (i) saturation of the 3 terminals by 2018, (ii) channel dredging Qu, X. et al., The Economic Importance of the Straits of Malacca and Singapore. National University of Singapore. for growing vessels and (iii) hinterland 4 connectivity for the last mile travelled. The EDI World Bank, A. Mody (1997), Infrastructure Strategies in East Asia, The Untold Story. master plan also specifies growth targets 5 (throughput and capacity-growth rates per Hamid, A. (2013), Northport Corporate Presentation. year). These targets are part of the concession 6 Port Klang Malaysia, 2013 Annual Report. agreements signed by the private operators 7 JOC Port Productivity Database. and PKA monitors whether sufficient 8 Westports, 2013 Annual Report. investments are made to accommodate these 9 Tull, M. et al. (2001): Privatisation of Ports. University of Wollongong. future volumes. 10 Westports and Northport websites: westportsmalaysia.com, north- port.com.my (Accessed Mar 26, 2015) CONCLUSION 11 Free Malaysia Today, Bahrom, S. (Apr 12, 2013), Shell completes third phase of terminal expansion. The privatization of Port Klang is a success 12,15 in the light of productivity gains and growth Port Klang Authority, pka.gov.my (Accessed Mar 5, 2015) in throughput volumes observed over the 13 Farell, S. (2010): Observations on PPP Models in the Ports sector. years. Significant improvements were 14 International Maritime Organization (1996): IMO and Dangerous achieved, enabling the port to be one of the Goods at Sea. top 20 ports in the world for the last decades 16 Maybank IB Research (2013): A Safe Harbourw

Please note that this case study has been issued without formal editing