Port Reform Toolkit Reform Port © 2007 the International Bank for Reconstruction and Development / the World Bank

The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of Public-Private Infrastructure Advisory Facility (PPIAF) or the Board of Executive Directors of the World Bank or the governments they represent.

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For all other queries on rights and licenses, including subsidiary rights, please contact the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected].

ISBN-10: 0-8213-6607-6 ISBN-13: 978-0-8213-6607-3 eISBN: 0-8213-6608-4 eISBN-13: 978-0-8213-6608-0 DOI: 10.1596/978-0-8213-6607-3 Acknowledgments This Second Edition of the Port Reform Toolkit has been produced with the financial assistance of a grant from TRISP,a partnership between the U.K. Department for International Development and the World Bank, for learning and sharing of knowledge in the fields of transport and rural infrastructure services.

Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure Trust Fund (Netherlands Ministry of Transport, Public Works, and Water Management) for the enhancement of the Toolkit’s content, for which consultants of the Rotterdam Maritime Group (RMG) were contracted.

We wish to give special thanks to Christiaan van Krimpen, John Koppies, and Simme Veldman of the Rotterdam Maritime Group, Kees Marges formerly of ITF,and Marios Meletiou of the ILO for their contributions to this work.

The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technical 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 their infrastructure 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

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)

Nathan Associates (USA)

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

PA Consulting (USA)

The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel, Ronald Kopicki, Cornelis “Bert” Kruk, and Bradley Julian of the World Bank Transport Division.

Comments are welcome. Please send them to the World Bank Transport Help Desk. Fax: 1.202.522.3223. Internet:[email protected] Contents

OVERVIEW xviii

MODULE 1 FRAMEWORK FOR PORT REFORM 1 1. Introduction and Objectives 1 2. Context for the Framework Module 3 3. The Port Business Environment 5 4. A Road Map for the Port Reform Process 10 4.1. Setting Reform Objectives and Planning for the Creation of Value 10 4.2. Reform Policy Decision Context 11 4.2.1. Methods of Private Sector Involvement 11 4.2.2. Modes of Public Interest Oversight 12 4.2.2.1. Regulatory Oversight: Economic and Technical Issues 12 4.2.2.2. Oversight Administration 13 4.2.3. Port Sector Funding: Financial Implications and Risk Allocation 14 4.2.4. Legal Framework Adaptation 15 4.2.5. Service Packaging and Restructuring 16 4.2.6. Labor Adjustment and Settlement 17 4.2.7. Responsibility for Implementing Port Reform 18 4.2.8. Sequencing of Transactions 19 4.2.9. Transaction Preparation 19 5. Implementing Port Reform: Pulling It All Together 20 MODULE 2 THE EVOLUTION OF PORTS IN A COMPETITIVE WORLD 21 1. Overview of the Competitive Landscape 21 1.2. Rivalry among Existing Competitors 23 1.2.1. Hinterland Market Access 24 1.2.2. Ability to Service Transshipment Trade 24 1.2.3. Regional Port Capacity and Demand 24 1.2.4. Ability to Create Competition within the Port 24 1.2.5. Stakes at Risk 25 1.2.6. Ability to Absorb Losses 25 1.2.7. Ability to Control Operations 25

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1.2.8. Limits on Rivalry within Ports 25 1.2.9. Government Willingness to Subsidize Operations 26 1.3. Threat of New Competitors 28 1.3.1. Capital Expenditure for New Port Facilities 28 1.3.2. New Distribution Patterns 28 1.3.3. Provisions in Operating Agreements 28 1.3.4. Natural Barriers 29 1.3.5. Magnitude of Switching Costs 29 1.3.6. Cost Advantages and Customer Loyalties 29 1.4. Potential for Global Substitutes 29 1.4.1. Other Global Sources for Products Moving through the Port 29 1.4.2. Substitute Products for Exports and Imports 30 1.4.3. Magnitude of Switching Costs for Substitution 30 1.4.4. Demand Elasticity of Exports and Imports 30 1.4.5. Importance of Port Costs in Total Delivered Price 30 1.5. Bargaining Power of Port Users 32 1.5.1. Concentration of Port User Power 32 1.5.2. Impact of Changing Business Relationships 32 1.5.3. Presence of Large Value-Adding Tenants 33 1.5.4. Importance of Port to the Economy 33 1.5.5. Ability to Replicate Port Services 33 1.5.6. Facility Investments by Port Users 33 1.6. Bargaining Power of Service Providers 34 1.6.1. Experience and Capabilities of Service Providers 34 1.6.2. Participation in Facility Financing 35 1.6.3. Choke Points in the Port 35 1.6.4. Ability to Absorb Downtime 35 1.6.5. Interrelationships between Providers and Port Users 35 1.6.6. Rights and Obligations Conveyed by Contractual Agreements 35 1.7. The Bottom Line 36 2. Port Dynamics in the 21st Century 36 2.1. Globalization of Production 36 2.1.1. Vertical Specialization 36 2.1.2. Focused Manufacturing 37 2.1.3. Expanded Logistics Reach 37 2.1.4. Increased Sourcing Alternatives 37 2.1.5. Impact of Globalization on Ports 37 2.2. Changing Technology 37 2.2.1. Containerization of World Trade 39 2.2.2. Future Containership Designs 40 2.2.3. Impact on Port Operations 41 2.2.4. Need for Container Port Productivity Improvements 41 2.2.5. Growing Role of Information Technology 42 2.2.6. Port Requirements for Large Cruise Ships 42 2.2.7. Other Technology Affecting Port Services 44 2.3. Shifting Bargaining Power 44 2.3.1. Consolidation among Ocean Carriers 45 2.3.2. Emergence of Global Logistics Service Providers 51

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2.4. Changing Distribution Patterns 52 2.4.1. Becoming a Hub 52 2.4.2. Benefits of Hub Status 54 2.4.3. Hub Problems 54 2.4.4. Inland Container Terminals Shifting Activities from the Port 56 2.5. Environmental and Safety Concerns 56 2.5.1. Growing Environmental Concerns 56 2.5.2. Recent Environmental Article 56 2.5.3. Issue of Substandard Ships 56 2.6. Impact of Changing Dynamics on Ports 59 3. Challenges and Opportunities 59 3.1. Transferring Port Operations to the Private Sector 59 3.1.1. The Need for Change 59 3.1.2. Impact of Privatizing Operations 59 3.1.3. Lessons Learned from Past Privatizations 60 3.1.4. Contingency Plan 61 3.2. Opportunities for the Private Sector 61 3.2.1. Terminal Operations 61 3.2.2. Towage Services 61 3.2.3. Maintenance Dredging 63 3.2.4. Information Technology 63 3.2.5. Environmental Facilities and Ship Safety 63 3.2.6. Other Port Services 63 References 67

MODULE 3 ALTERNATIVE PORT MANAGEMENT STRUCTURES AND OWNERSHIP MODELS 69

1. Objectives and Overview 69 2. Evolution of Port Institutional Frameworks 70 3. Port Functions, Services, and Administration Models 73 3.1. Interaction with Port Cities 76 3.2. Role of a Port Authority 77 3.3. Role of Port Operators 78 3.4. Roles of a Transport Ministry 78 3.5. Port Functions 80 3.6. Port Administration Models 81 3.6.1. Service Ports 82 3.6.2. Tool Ports 82 3.6.3. Landlord Ports 83 3.6.4. Fully Privatized Ports 83 3.7. Globalization of Terminal Operations 84 3.8. Port Management and Competition 87 3.9. Port Sector Regulator 89 3.10. Value-Added Services 89 4. Port Finance Overview 92 4.1. Financing Port Projects 93

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4.2. Financing Ports: From a Lender’s Point of View 97 4.3. Public-Private Partnerships 98 5. Port Reform Modalities 99 5.1. Strategies and Reform Options 100 5.1.1. Modernization of Port Administration 101 5.1.2. Liberalization 101 5.1.3. Commercialization 102 5.1.4. Corporatization of Terminals 104 5.1.5. Corporatization of a Port Authority 106 5.1.6. Privatization 107 6. Reform Tools 109 6.1. Contracting Out and Use of Management Contracts 109 6.2. Concession Arrangements 110 6.2.1. Leasehold Agreements 112 6.2.2. Concession Agreements 114 6.2.2.1. Master Concession 116 6.2.2.2. BOT Arrangements 117 6.3. Comprehensive Privatization 120 6.4. Ports as Transport Chain Facilitators 123 7. Marine Services and Port Reform 124 7.1. Harbormaster’s Function 125 7.2. Pilotage 126 7.3. Tugboat Operations 126 7.4. Mooring Services 127 7.5. Vessel Traffic Services and Aids to Navigation 127 7.6. Other Marine Services 128 References 130 MODULE 4 LEGAL TOOLS FOR PORT REFORM 131 1. Introduction and Overview 131 1.1. National Ports Commission 132 2. General Approach for Drafting a Ports Law 132 2.1. Preface 134 2.2. Definitions 134 2.3. Objectives and Functions of a Port Authority 136 2.4. Corporatized Ports—Special Considerations 138 2.5. Implementation Problems 138 3. Port Authority and Terminal Operations 139 3.1. Licensing 140 3.2. Marine Management 140 3.3. Financial Issues 142 3.4. Violations 143 3.5. Appealing Port Authority Regulations 143 3.6. Liability for Damages 143 4. Port Regulations 145 4.1. Port Operating Regulations 145 4.1.1. Vessel Traffic Management 145

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4.1.2. Pilotage 146 4.1.3. Order and Safety in the Port 146 4.1.4. Reporting and Communication 146 4.1.5. Dangerous Cargoes: Transport and Handling 146 4.1.6. Pollution and Reception Facilities 149 4.1.7. Regulation of Other Port Functions 149 5. Port Competition Modalities 150 5.1 Legal Structure of Port Competition Regulation 151 6. Full Concession Agreements 154 6.1. Full Concession, Leasehold, and Land Rent 154 6.2. Full Concession and BOT Schemes 154 6.3. Full Concession Agreement Structure 156 6.3.1. Preconcession Documents 157 6.3.2. Definitions 157 6.3.3. Conditions Precedent Sample 161 6.3.3.1. Part 1—Conditions Precedent to be Fulfilled by the Operator 161 6.3.3.2. Part 2—Conditions Precedent to be Fulfilled by the Port Authority 162 6.3.4. Term of the Concession Agreement 163 6.4. Concession Parties 163 6.5. General Rights and Obligations of the Operator 164 6.6. General Rights and Obligations of the Port Authority 165 6.7. Transfer of Rights, Obligations, and Assets 166 6.8. Performance Parameters 168 6.8.1. Productivity Targets 169 6.9. Transfer of Employees 171 6.10. Force Majeure 171 6.11. Lease of Facilities 173 6.12. Site Access 175 6.13. Governing Law 175 6.14. Freedom to Set Tariffs 175 6.15. Taxes 175 6.16. Concession Fee 176 6.17. Insurance and Indemnity 176 6.18. Physical Security 176 6.19. Unclaimed Cargo and Carriers 178 6.20. Information and Communication 178 6.21. Termination and Prolongation 179 6.21.1. Termination Due to Noncompliance 179 6.21.2. Termination Compensation 179 6.21.3. Option to Continue 180 6.21.4. Bankruptcy 181 6.22. Expiration of Concession 182 6.23. Arbitration 182 6.24. Costs 183 6.25. The Tender Process and Transaction Preparation 184 6.26. Miscellaneous Conditions 186 7. BOTs and Construction 186 7.2. BOT and BTO Arrangements 187

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7.2. BOOT Arrangements 188 7.3. Functional and Technical Design under a BOT Arrangement 188 7.4. Design and Construction Flaws 190 7.5. Building Conditions 190 7.6. Construction Program 191 7.7. Zero Date 191 7.8. Drop Dead Date 192 7.9. Extension Events 192 7.10. Completion Tests and Take-Over 192 7.11. Hand-Back and Transfer of Facilities 193 7.12. Lender Security 194 7.13. Change in Law 194 Annex I—Checklist of Concession/BOT Agreement Provisions 196 MODULE 5 FINANCIAL IMPLICATIONS OF PORT REFORM 203 1. Introduction 203 1.1. Cost Risk 204 1.2. Revenue Risk 204 Part A—Public-Private Partnerships in Ports: Risk Analysis, Sharing, and Management 206 2. Introduction 206 3. Characteristics of the Port Operator 207 3.1. General Aspects 207 3.1.1. National Environment 207 3.1.2. Industrial and Commercial Dimension 208 3.2. Specific Aspects Particular to the Port Sector 208 3.2.1. Vertical Partnership with the Concessioning Authority 208 3.2.2. Horizontal Partnership with Numerous Players 209 3.2.3. Long-Term Commitment 210 4. Risk Management 211 4.1. Country Risks 211 4.1.1. Legal Risk 211 4.1.2. Monetary Risk 212 4.1.3. Economic Risk 213 4.1.4. Force Majeure 213 4.1.5. Interference or “Restraint of Prices” Risk 213 4.1.6. Political Risk 214 4.2. Project Risks 215 4.2.1. Construction Risks 215 4.2.2. Hand-Over Risks 216 4.2.3. Operating Risks 216 4.2.4. Procurement Risks 217 4.2.5. Financial Risks 217 4.2.6. Social Risk 218 4.3. Commercial or Traffic Risk 218 4.4. Regulatory Risks 219 4.4.1. Regulatory Tools 219 4.4.1.1. Technical Regulations 220

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4.5. Economic and Financial Regulation 221 4.5.1. Scope of Operator Activity 221 4.5.2. Public Service Obligations 221 4.5.3. Noncompetition Guarantees 222 4.5.4. Pricing Controls 222 4.5.5. Fee or Subsidy 223 4.6. Golden Share or Blocking Minority 224 4.7. Risk and Port Typology 224 4.7.1. Operator Handling Only Its Own Traffic 224 4.7.2. Operator Acting on Behalf of a Third Party in a Competitive Situation 224 4.7.3. Operator Acting on Behalf of a Third Party in a Monopoly Situation 225 4.7.4. Transit or Transshipment Traffic 225 4.7.5. Mixed Situations 226 4.8. Other Concessioning Authority Guarantees 226 4.9. Contractual Risks 227 4.9.1. Contract Management 227 4.9.2. Indexation Risk 228 4.9.3. Credit Risk—Bonds 228 4.10. Approach of the Different Partners to Risk and Risk Management 228 4.10.1. Concessioning Authority 229 4.10.2. Project Sponsors 229 4.10.3. Lenders 230 5. Concluding Thoughts 230 Part B—Principles of Financial Modeling, Engineering, and Analysis: Understanding Port Finance and Risk Management from Public and Private Sector Perspectives 231 6. Introduction 231 7. Measuring Economic Profitability from the Perspective of the Concessioning Authority 231 7.1. Differential Cost-Benefit Analysis 231 7.2. Commonly Used Economic Profitability Indicators 232 7.3. Assessing the Economic Costs of the Project 233 8. Rating Risk from the Perspective of the Concession Holder 233 8.1. Financial Profitability and “Bankability” of the Project 233 8.2. Assessing the Project Risks by Producing a Rating 234 8.2.1. Commonly Used Financial Profitability Indicators 234 8.2.1.1. Payback Time 234 8.2.1.2. Project IRR 236 8.2.1.3. Project NPV 236 8.2.1.4. Investment Cover Ratio 236 8.3. Project Discount Rate—Cost of Capital 236 8.4. Financial Debt Remuneration Requirement 237 8.4.1. Inflation 238 8.4.2. Risk Rating by Determining rd 238 8.4.3. Debt Remuneration Requirement Conclusion 238 8.5. Equity Remuneration Requirement 238 8.5.1. Sharing of Public-Private Financial Commitments: Arbitration between Financial and Socioeconomic Profitability 240

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9. Financial Project Engineering 240 9.1. Financial Structuring within the Framework of a Project Finance Set-Up 240 9.2. Debt Structuring 242 9.3. Long-Term Commercial Debt 242 9.3.1. Foreign Currency Loans 243 9.3.2. Guaranteed Commercial Debt 243 9.3.3. Export Credits 243 9.3.4. Financial Credits with a Multilateral Umbrella (A- and B-loans) 244 9.3.5. Bonded Debt 247 9.3.6. Structuring Equity and Quasi-Equity 247 9.3.6.1. Equity Provided by the Public Sector 247 9.3.6.2. Equity Invested by the Project’s Sponsors 248 9.3.6.3. Equity Invested by Multilateral Institutions 248 9.3.6.4. Equity Invested by Bilateral Institutions 249 9.3.6.5. Specialist Investment Funds 249 9.4. Managing Exogenous Financial Risk 249 9.4.1. Interest Rate Risk Management 250 9.4.1.1. Interest Rate Swaps 251 9.4.1.2. Firm Financial Instruments in the Over-the-Counter Market 252 9.4.1.3. Firm Financial Instruments in the Organized Markets 252 9.4.1.4. Conditional Financial Instruments (interest rate options) 252 9.4.2. Foreign Exchange Risk Management 252 9.4.3. Counterpart Risk Management and Performance Bonds 254 9.5. Financial Engineering and Political Risk Management 254 9.5.1. Guarantees Offered by Multilateral Agencies 255 9.5.2. Guarantees Offered by Export Credit Agencies 257 9.6. The Use of Private Insurers for Covering Political Risks 257 10. Financial Modeling of the Project 257 10.1. Construction of the Economic Model 257 10.1.1. Capital Expenditure Types 257 10.1.2. Operating Revenues and Expenses 258 10.1.2.1. Operating Revenue and Charges in Terminal Management Operations 259 10.1.2.2. Operating Finance Requirement 259 10.1.2.3. Operating Account Balance 259 10.1.3. Tax Flows 260 10.2. Construction of the Financial Model 260 10.2.1. Cash Flow Statement 260 10.2.2. Profit and Loss Account (income statement) 260 10.2.3. Balance Sheet 261 References 261 Appendix: Risk Checklist—Principal Risks in a Port Project 263 MODULE 6 PORT REGULATION: OVERSEEING THE ECONOMIC PUBLIC INTEREST IN PORTS 267 1. Introduction 267 2. Regulatory Concerns When Formulating a Port Reform Strategy 268 2.1. How Ports Compete 270 2.2. Assessing Port Sector Competition 271

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2.2.1. Transport Options 272 2.2.2. Operational Performance 272 2.2.3. Tariff Comparisons 273 2.2.4. Financial Performance 274 2.3. Costs of an Inadequate Regulatory Framework 274 3. Strategies to Enhance Port Sector Competition 277 3.1. Structural Strategies 277 3.2. Structural Remedies 279 3.3. Regulatory Strategies 280 3.4. Decision Framework for Selecting Port Competition: Enhancement Strategies and Remedies 282 4. Designing a Port Regulatory System 283 4.1. Step 1: Specify Regulatory Objectives and Tasks 285 4.2. Step 2: Conduct a Legal Review of the Regulatory System 286 4.3. Step 3: Determine Institutional Arrangements for Regulatory Oversight 286 4.4. Step 4: Determine Degree of Regulatory Discretion 293 4.5. Step 5: Identify Appropriate Regulatory Tools and Mechanisms 294 4.6. Step 6. Specify Operating and Financial Performance Indicators 296 4.7. Step 7: Establish an Appeal Process and Procedures 299 4.8. Step 8: Incorporate Regulatory Details into Laws and Contracts 299 5. Summary and Conclusions 302 Annex A. Port Tariffs: General Structure, Items, and Flow of Charges 304 Endnotes 308 References 310

MODULE 7 LABOR REFORM AND RELATED SOCIAL ISSUES 313 1. Context for Labor Reform 313 2. Key Labor Issues 317 3. Labor Involvement in Port Reform 318 4. Organizing to Address Labor Reform: A Task Force Approach 321 5. The Institutional Framework for Labor Reform 323 5.1. Redefining the Concept of Social Equity 323 5.2. Meeting Commercial Needs 324 5.3. Fostering Competition 325 5.4. Government’s Role 325 5.5. Time Frame for Port Labor Reform 326 6. Developing the Workforce Rationalization Plan 326 6.1. Alternatives to Dismissals 327 6.2. Elements of a Staff Retrenchment Program 328 6.3. Pitfalls in Designing and Implementing Severance Packages 329 6.4. Rationalizing the Workforce: When and By Whom? 331 6.4.1. Prereform Rationalization 331 6.4.2. Postreform Rationalization 332 6.5. Who Should Pay for the Expenses of Port Labor Rationalization? 333 7. International Support for Labor Adjustment 334 8. Postreform Labor Management Relations 336

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References 336 Annex I. World Bank Labor Adjustment Projects 337 Annex II. List of Organizations That Have Obtained and Renewed an International Labour Organization Portworker Development Program License 351 MODULE 8 IMPLEMENTING PORT REFORM 353 1. Strategic Preparation: The Interministerial Working Group 353 1.1. IWG Mandate and Composition 354 1.2. Hiring Advisers 354 1.3. Time Frame 355 1.4. IWG Workplan 356 2. Redefinition of Authorities and Powers 356 2.1. Regulatory Principles 356 2.2. Port Authorities and Consultations 356 2.3. Public Infrastructure Pricing 356 2.4. Labor Redeployment 359 2.5. Contract Management Principles and Procedures 359 3. Legal Adaptation 359 4. Transaction Preparation 359 4.1. Financial Model 360 4.2. Due Diligence 360 4.3. Contractual Document Preparation 360 4.4. Bidding Documents’ Preparation 360 References 363

BOXES

Module 1 Box 1: Port of Cartagena (Colombia) Performance Improvements since Private Concessioning in 1994 2 Box 2: Argentina: Selected Performance Indicators for the Port of Buenos Aires 3 Box 3: Port Projects with Private Participation in Developing Countries 5 Box 4: Investments in Port Projects with Private Participation in Developing Countries by Project Type, 1992–2004 6 Box 5: Public-Private Roles in Port Management 9 Box 6: Port Reform Decision Tree 11 Box 7: The Public-Private Balance of Risk and Regulation 15 Box 8: Shifting the Boundary of a Public-Private Partnership 20

Module 2 Box 1: The Competitive Landscape 22 Box 2: Checklist of Key Questions for Positioning in the Global Port Market 23 Box 3: Load Centers Competing for the Gulf Market 26 Box 4: Intraport Competition in the European Union 27 Box 5: Reebok Logistics Center in the Maasvlakte Distripark 31 Box 6: Enlarging Venezuelan Export Markets of Coal and Crude Oil 32 Box 7: Suppliers to Container Terminal 34

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Box 8: Evolution of Containerized Shipping 38 Box 9: Development of Container Vessel Sizes as a Percentage of the Global Fleet 39 Box 10: Ships on Order as of September 2005 40 Box 11: Evolution of Cellular Fleet 40 Box 12: Future Containerships Require Increasingly Larger Cranes 41 Box 13: Impact on Port Productivity of Unit Voyage Cost of Large Containerships 43 Box 14: Ceres Paragon Terminal in Amsterdam, the Netherlands 44 Box 15: Port User Information Network 45 Box 16: Felixstowe Cargo Processing System (FCPS) 46 Box 17: Physical Requirements to Accept Cruise Ships 47 Box 18: Podded Electric Drive Impact on Requirements for Ship Assist in Port 47 Box 19: Top 10 Container Carriers as of June 2006 48 Box 20: Worldwide Container Traffic 49 Box 21: Global Terminal Operators 2005 Throughput League Table 49 Box 22: Key Milestones of Hutchison Port Holdings in the 1990s 50 Box 23: Hub and Spoke Container Distribution 53 Box 24: Hub Options on the Asia–Europe Route 55 Box 25: Duisburg Inland Container Terminals 57 Box 26: How a Major Transshipment Terminal and Pretty Bay Beach Coexist 58 Box 27: The Green Award Initiative 59 Box 28: Estimated Available Market in the Port Sector 61 Box 29: The Port of Hong Kong—Why is it so Successful? 62 Box 30: Ballast Water Treatment Plant in the Port of Portland 63 Box 31: Middle East Navigation Aids Service 64 Box 32: Checklist for Negotiating a Terminal Privatization 65 Module 3 Box 1: “White Elephants” in Port Development 71 Box 2: Institutional Formats of Greenfield Ports 73 Box 3: Examples of Port Economic Multiplier Effects 74 Box 4: Value-Added Development Efforts in the Port of Rotterdam 75 Box 5: Strengths and Weaknesses of Port Management Models 84 Box 6: Basic Port Management Models 85 Box 7: Top 10 Carriers as of June 2006 86 Box 8: Global Terminal Operators 2005 Throughput League Table 87 Box 9: Portfolio of the Largest Terminal Operators as of June 2005 88 Box 10: Elements Influencing Interport Competition 90 Box 11: Overview of Value-Added Services in Ports 91 Box 12: Potential for VAL and VAF 92 Box 13: European Rules on Port Subsidies 94 Box 14: Categories of Port Assets 95 Box 15: Multiple Terminal Ownership in Sri Lanka 96 Box 16: Reasons for Pursuing Port Reform 99 Box 17: Creation of Commercialized Port Authorities in China 104 Box 18: The Port of Aqaba: Corporatization and Privatization 108 Box 19: The Experience of the Hanseatic Landlord Ports 110 Box 20: Spectrum of Port Reform Tools 111 Box 21: Comparison of Lease Systems 113 Box 22: BOT Schemes and Port Development 118

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Box 23: San Martin-Rosario Waterway Concession 119 Box 24: Impetus behind Full Privatization in the United Kingdom 122 Box 25: Singapore Creates PSA Corporation 124 Box 26: The Creation of a National Pilotage Monopoly in the Netherlands 127 Box 27: Prevailing Service Providers under Different Port Management Models 129 Module 4 Box 1: Singapore: Transforming a Service Port into Landlord Port 133 Box 2: Panama: Enabling Legislation for a Concession 134 Box 3: Eastern Europe: Decentralizing Port Management 134 Box 4: Latin America: Allowing Private Stevedoring Operations 136 Box 5: Object of Port of Rotterdam, Ltd. 136 Box 6: Caution: Single National Ports Authority can be Hazardous to Economic Health 137 Box 7: Functions of Corporatized Port Authorities 137 Box 8: Division of Shares in Corporatized Port Authority 138 Box 9: Violated Neutrality: A Port Director with Two Hats 140 Box 10: Maritime Domain: A Potential Impediment to Port Development 141 Box 11: Marine Management Tasks to be Separated from Corporatized or Privatized Port Tasks 142 Box 12: Harbormaster’s Powers and Functions 142 Box 13: Reference Clauses on General Regulations of the Authority 144 Box 14: Reference Clauses on Specific Regulations of the Authority 144 Box 15: Reference Clauses on Damages 144 Box 16: Reference Clauses on Liability 145 Box 17: Reference Clauses on Port Safety and Environmental Protection 147 Box 18: Reference Clauses on Reporting 148 Box 19: Reference Clauses on Loading and Discharging Dangerous Cargoes 149 Box 20: Reference Clauses on Waste Management 150 Box 21: The Buenos Aires Case 152 Box 22: Sample Port Competition Act 153 Box 23: Full Concession, Lease, and Rent Contracts—Landlord Port 155 Box 24: Main Schedules to a Concession or BOT Agreement 157 Box 25: Reference Clause on Term of Concession 163 Box 26: Reference Clause on Nomination of Operator of a Container Terminal 164 Box 27: Reference Clauses on General Rights and Obligations of the Operator 165 Box 28: Reference Clauses on General Rights and Obligations of the Port Authority 166 Box 29: Reference Clauses on Permitted Activities 167 Box 30: Reference Clauses on Newly Built Assets in the Concession Area (BOT arrangement) 167 Box 31: Reference Clauses on Transfer of Assets 169 Box 32: Reference Clause on Productivity Targets 171 Box 33: Reference Clauses on Selection and Transfer of Personnel 172 Box 34: Reference Clauses on Force Majeure 172 Box 35: Reference Clauses on Lease of Facilities 173 Box 36: Reference Clauses on Site Conditions 173 Box 37: Reference Clauses on Access to the Site 175 Box 38: Reference Clause on Governing Law 175 Box 39: Reference Clause on Price Discrimination 176 Box 40: Reference Clause on Taxes 176 Box 41: Reference Clauses on Concession Fee 177 Box 42: Reference Clauses on Insurance and Indemnity 177

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Box 43: Reference Clauses for Security 178 Box 44: Reference Clauses on Unclaimed Cargoes 178 Box 45: Reference Clauses on Information and Communication 179 Box 46: Reference Clause on Termination by the Port Authority 180 Box 47: Reference Clause on Termination by the Operator 180 Box 48: Reference Clauses on Termination Due to Noncompliance 181 Box 49: Reference Clauses on Prolongation 181 Box 50: Reference Clauses on Bankruptcy 181 Box 51: Reference Clauses on Expiration of Concession 183 Box 52: Reference Clause on Arbitration 184 Box 53: Reference Clause on Costs 185 Box 54: Clauses on Miscellaneous Conditions 186 Box 55: Reference Clauses on Construction and Maintenance (Landlord Port Situation) 187 Box 56: Reference Clauses on Scope of a Concession Agreement (including a BOT arrangement) 189 Box 57: Reference Clauses on Construction Program 190 Box 58: Reference Clauses on Infrastructure Design 191 Box 59: Reference Clauses on Technical Design and Construction Problems 191 Box 60: Reference Clauses on Site Conditions 192 Box 61: Reference Clauses on Construction 192 Box 62: Reference Clauses on Zero Date 193 Box 63: Reference Clauses on Drop Dead Date 193 Box 64: Reference Clauses on Extension Events 193 Box 65: Reference Clause on Take-Over Tests 193 Box 66: Reference Clauses on Hand-Back of Facilities 194 Box 67: A Case of Legal Limitations Adversely Affecting a Port Concession 195 Box 68: The Case of St. Maarten 196 Box 69: Reference Clause on Lender’s Security 197 Box 70: Reference Clauses on Law Changes 198 Module 5 Box 1: Richard’s Bay Coal Terminal: A Wholly Private Terminal 219 Box 2: Port Réunion: A Single Container Terminal Using Several Handling Contractors 223 Box 3: Owendo Ore Terminal in Gabon 225 Box 4: Container Terminals in the North European Range 225 Box 5: Container Terminal Operator in the Port of Klaipeda 226 Box 6: Port of Djibouti: Transit and Transshipment 226 Box 7: Djibouti Fishing Port: Public Service and Semi-Industrial Activity 227 Box 8: Horizontal and Vertical Partnerships in the Port of Maputo, Mozambique 227 Box 9: The Country Ranking Developed by Nord-Sud Export 235 Box 10: An Example of Export Cover by COFACE in a Port Project 245 Box 11: Principal Guarantees Offered by an Export Credit Agency for Project Financing: The COFACE Example 246 Module 6 Box 1: Intraport Competition in Buenos Aires, Argentina 271 Box 2: Port Sector Competition Factors 272 Box 3: The Case of Israel: From National Monopoly to Port Monopoly 275 Box 4: Potential Anticompetitive Behavior in the Port Sector 276 Box 5: Predatory Pricing and Service Bundling in Cartagena, Colombia 276

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Box 6: Competition Enhancement 277 Box 7: Dividing the Port into Terminals to Induce Competition 279 Box 8: Terminalization in Limited-Volume Ports: The “Overlapping Competition” Strategy 280 Box 9: Subsidy Bids for Management Contracts in Low-Volume Ports 281 Box 10: Checklist for Port Sector Restructuring or Unbundling 281 Box 11: Decision Framework for Port Competition Enhancement 282 Box 12: Reviewing Port Regulatory Responsibilities in Victoria, Australia 287 Box 13: Establishing a Port Sector Regulatory Agency in Colombia 288 Box 14: A Simple Port Regulatory Structure for Sri Lanka 290 Box 15: Safeguards for Creating an Independent Regulatory Body 292 Box 16: Reconciling Independence with Accountability 293 Box 17: Price Cap versus Rate-of-Return Regulation 295 Box 18: Port Production Process 297 Box 19: Port Performance Indicators 300 Box 20: International Arbitration 301 Box 21: Checklist of Regulatory Items for Port Operating Contracts 302 Box A-1: Relative Weights of Different Port Charges 304 Box A-2: Relationship between Port Charges and the Location Where the Charge is Incurred 305 Box A-3: Transaction Complexities Pre- and Postprivatization 305 Box A-4: Port Charges in Miami, Florida 306 Box A-5: Port Charges in Cartagena, Colombia 307 Module 7 Box 1: Changes in Economic Policies: Impact on Port Labor 314 Box 2: Trends in Gang Strength, 1970s and 1980s 316 Box 3: Labor Competition in India and Brazil 317 Box 4: Factors Prompting Port Labor Reform 317 Box 5: Port Labor Reform in the European Union 318 Box 6: Possible Effects of Reform on Employment 319 Box 7: Working with Labor Unions: The Ghana Case 322 Box 8: Sample Reference Clauses in a Concession Agreement on Employee Transfer 323 Box 9: The Productivity Commission of Australia 324 Box 10: Institutional Framework for Labor Reform Key Findings 325 Box 11: Job Security in Ports 326 Box 12: Social Plans at Moulinex 328 Box 13: Port Staffing Benchmarks 330 Box 14: A Downsizing Decision Tree 332 Module 8 Box 1: Hiring and Managing Advisers 355 Box 2: Port Reform Process 361 Box 2a: Port Reform Process 362

xvii Overview

OBJECTIVES The process of institutional reform is complex. Moreover, most countries undertake the kinds of fundamental institutional reforms that shift boundaries between the public and private sectors less than once in each generation. Hence, the knowledge necessary to carry the reform process forward needs to be built up in most countries from a near-zero base. The Port Reform Toolkit is designed to flatten the learning curve for institutional renewal by providing background information, concrete examples, specific tools, and methods which policymakers and reformers require to proceed with the confidence that genuine knowledge affords. The complex reform process through which the Toolkit navigates policymakers is a worthwhile journey. Although the reasons for engaging in port reform are many and varied, the benefits can be quantified as they accrue to operators, shippers, consignees and businesses. A successful reform program may free governments of unnecessary expenditures, releasing funds for more socially needed government programs, unplugging bottlenecks to trade and economic development and motivating the adoption of new regulations that protect the environment and improve workers’ and navigational safety. Although the main audience for the Toolkit is public officials in developing countries who are responsible for port sector reform, the Toolkit will also be of interest to other government officials and to executives of port service companies, shipping companies, and port consultants, as well as companies dependent on port services. The Port Reform Toolkit is aimed to provide policymakers and practitioners with effective decision support in undertaking sustainable and well-considered reforms of public institutions that provide, direct, and regulate port services in developing countries. In particular the purpose of the Toolkit is to provide public officials with support in: • Understanding the needs, challenges, and risks for sector reform and institutional redesign that are emerging from the changing business environment surrounding port operations • Choosing among options for private sector participation and analyzing their implications for redefining interdependent operational, regulatory, and legal relationships between public and private parties • Preparing legislation, contracts, and institutional charters to govern private sector participation • Managing the transition to increased private sector involvement The Toolkit draws together practical institutional designs and transferable modalities for increasing private sector involvement without compromising the public interest. It presents “best international practices” in a manner that is relevant to decision makers. The Toolkit is designed to be easily understood by non-specialists. Thus it attempts to make general points with concrete examples. It is illustrated with experience drawn from recent port reform activities around the world.

xviii Overview

ARCHITECTURE OF THE TOOLKIT The Toolkit is made up of eight modules plus a financial model. The framework module sets the stage for all of the modules that follow. It provides a unifying “decision framework” that policymakers can use to guide them—step by step—through the processes of reforming and re-inventing port institutions. It also provides a common language and a set of concepts used throughout the Toolkit that represent the common language port reformers use in communicating with their various constituencies. Importantly, the framework module also includes a road map for the modules that follow. It explains the interrelationships of these modules with one another and their relevance to the framework presented in this keystone module. The framework module therefore lays out an ordered set of decisions that are linked together logically as well as in their time order for consideration. For each decision, the Toolkit attempts to articulate the principal options and alternatives that are available to policy makers and to assess the expected consequences associated with each option based on recent international experience. The framework is presented in the form of a decision tree, which thus provides a background for understanding the sequence of all the Toolkit modules, which are displayed as follows:

Module 1: Framework for Port Reform Readers of this module should be able to grasp the overall approach of port reform through an overview of all the various issues to be dealt with throughout the reform process, as detailed in the subsequent seven modules.

Module 2: The Evolution of Ports in a Competitive World Readers of this module should be able to understand the roles and functions of ports and be able to place their ports in the context of current and historic port developments. They should also be able to understand the major trends shaping port dynamics in the 21st century.

Module 3: Alternate Port Management Structures and Ownership Models Readers of this module should be able to reach a decision about the most effective, efficient, and feasible structure of their ports based on the identification of their ports’ strengths and weaknesses and given each country’s/region’s unique economic, political, and social environment.

Module 4: Legal Tools for Port Reform Readers of this module should be able to understand and take steps to develop specific port reform measures based on the port’s/government’s economic, financial, political, and social goals and within institutional and legal frameworks. The module includes updated reference clauses and checklists for preparing concession agreements and other legal instruments.

Module 5: Financial Implications of Port Reform Readers of this module should gain an appreciation for port finance and its relationship to reform as well as how the financial risks and rewards vary from one reform option to another. Some of the financial implications that need to be taken into account include risk allocation among port stakeholders, potential sources of funding for the reform process, and pricing port services to achieve revenue and public policy objectives. A comprehensive financial model is also included as an annex to Module 5.

Module 6: Port Regulation Readers of this module should gain a solid understanding of oversight mechanisms and methods, the role of regulatory bodies, inspections, audits, the reporting requirements, and the interplay between competition and regulation.

xix Overview

Module 7: Labor Reform and Related Social Issues Readers of this module should be able to plan for and implement rationalization of port labor in a manner that treats affected parties fairly while achieving essential efficiency and economic improvements.

Module 8: Implementing Port Reform Readers of this module should receive practical advice on how to take the many elements of port reform and put them into a procedurally logical and politically feasible sequence of steps that maximize the chances for success. A wider range of reform models and of public/private partnership formats exists for the delivery of port services than for any other infrastructure-intensive service sector. This is because the ensemble of services provided by ports is wider and requires more diverse and specialized skills and involves more categories of service-indivisible assets than other public/private institutions. Although the Toolkit does not elaborate on all models available to sector reformers, it does define the options on either end of the public/ private spectrum as well as the most common risk-sharing arrangements, such as concessions and terminal operating leases. Importantly, it also provides tools for assessing hybrid options and for understanding their merits and risks. In dealing with reform in the port sector, the World Bank has tried to pool knowledge from around the world. This knowledge is abundant. Over the past 15 years, more than 200 port projects involving private participation in developing countries and investments totaling over US$ 21 billion have been completed. The problem confronting public policy makers when they take up the challenge of port reform is not a lack of information, but rather a lack of useful knowledge that they can use to support their own process of reform. The Toolkit makes use of a diversity of communication media to convey knowledge and insight to its users, including narrative text, mini case studies, graphics, models, and stylized representations of decision processes. The objective of the World Bank in developing and disseminating this information is to provide not only a comprehensive but also an easy-to-use Toolkit for port reform.

xx PORT REFORM TOOLKIT SECOND EDITION

MODULE 1 FRAMEWORK FOR PORT REFORM

THE WORLD BANK MODULE 1 O:10.1596/978-0-8213-6607-3 DOI: 0-8213-6608-4 978-0-8213-6608-0 eISBN-13: eISBN: 978-0-8213-6607-3 ISBN-13: 0-8213-6607-6 ISBN-10: [email protected]. fax202-522-2422, USA, DC20433, Washington, 1818 HStreetNW, World Bank, pleasecontacttheOfficeofPublisher, includingsubsidiaryrights, For allotherqueriesonrightsandlicenses, The World Bankencourages disseminationofitsworkandwillnormallygrant permissionpromptly. withoutthepriorwrittenpermissionof World Bank. orinclusioninanyinformationstorage andretrieval system, recording, includingcopying, electronicormechanical, No partofthisworkmaybereproducedortransmitted inanyformorbymeans, Copyrightisheldbythe World Bankonbehalfofboththe WorldThe materialinthisworkiscopyrighted. BankandPPIAF. World Bankconcerningthelegalstatusofanyterritoryorendorsementacceptancesuchboundaries. andotherinformationshownonanymapinthisworkdonotimplyjudgmentthepartofPPIAFor denominations, colors, Theboundaries, Neither PPIAFnorthe World Bankguarantees theaccuracy ofthedataincludedinthiswork. governments theyrepresent. of Public-Private Infrastructure Advisory Facility (PPIAF)ortheBoardofExecutiveDirectors World Bankorthe andconclusionsexpressedhereinarethoseoftheauthor(s)donotnecessarilyreflectvie interpretations, The findings, All rightsreserved. © 2007 The InternationalBankforReconstructionandDevelopment/ The World Bank ws MODULE 1 4.2.2.1 Issues and Technical Regulatory Oversight: Economic 4.2.2.2. Oversight Administration 12 13 4.2.3. Port Sector Funding: Financial Implications and Risk Allocation Financial Implications and Risk 4.2.3. Port Sector Funding: 4.2.4. Legal Framework Adaptation 4.2.5. Service Packaging and Restructuring 4.2.6. Labor Adjustment and Settlement Port Reform 4.2.7. Responsibility for Implementing 4.2.8. Sequencing of Transactions Preparation 4.2.9. Transaction 14 18 16 15 17 19 19 4.2.1. Methods of Private Sector Involvement 4.2.1. Methods of Private Oversight Interest 4.2.2. Modes of Public 11 12 Countries by Project Type, 1992–2004 Type, Countries by Project 6 Concessioning in 1994 2 4.1. Setting Reform Objectives and Planning for the Creation of Value of Value Objectives and Planning for the Creation 4.1. Setting Reform Decision Context 4.2. Reform Policy 10 11 5. Implementing Port Reform: Pulling It All Together It All Together 5. Implementing Port Reform: Pulling 20 1. Introduction and Objectives and Objectives 1. Introduction Framework Module 2. Context for the Environment 3. The Port Business the Port Reform Process 4. A Road Map for 10 3 1 5 Box 5: Public-Private Roles in Port ManagementBox 6: Port Reform Decision Tree and RegulationBox 7: The Public-Private Balance of Risk PartnershipBox 8: Shifting the Boundary of a Public-Private 15 20 9 11 Box 2: Argentina: Selected Performance Indicators for the Port of Buenos Aires Selected Performance Indicators Box 2: Argentina: Participation in Developing Countries with Private Box 3: Port Projects with Private Participation in Developing Box 4: Investments in Port Projects 3 5 BOXES since Private Improvements Box 1: Port of Cartagena (Colombia) Performance MODULE ONE CONTENTS MODULE Port Reform: A Toolkit

Acknowledgments This Second Edition of the Port Reform Toolkit has been produced with the financial assistance of a grant from TRISP,a partnership between the U.K. Department for International Development and the World Bank, for learning and sharing of knowledge in the fields of transport and rural infrastructure services.

The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technical MODULE 1 contributions of the following organizations.

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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)

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: 1.202.522.3223. Internet:[email protected] MODULE

1 MODULE 1 Framework for Port Reform SECOND EDITION

1. INTRODUCTION AND OBJECTIVES he process of institutional reform is complex. Most countries undertake the kinds of fundamental institutional reforms that shift bound- Taries between the public and private sectors less than once in each generation. Hence, in most countries the knowledge necessary to carry the reform process forward needs to be built up from a near zero base. The Port Reform Toolkit (Toolkit) is designed to shorten the learning curve for institutional review and renewal by providing background information, concrete examples of successful and unsuccessful reforms, and specific tools and methods that policy makers and reformers require to proceed with the confidence that genuine knowledge affords.

The complex reform process through which the Generally, the benefits the main stakeholders Toolkit navigates policy makers is a worthwhile can expect from port reform include: journey. While the reasons for engaging in port reform are many and varied (as discussed in • Governments: At the macroeconomic Module 3), the benefits are real and can be level, improvement of external trade com- quantified as they accrue to exporters, con- petitiveness by reducing transport costs, sumers, shippers, and entrepreneurs. A success- particularly the cost of port services, and ful reform program will help free governments improving port efficiency at the sea/land of unnecessary expenditures, releasing funds for interface; at the microeconomic level, high priority social programs; ease bottlenecks easing the financial burden on national to trade and economic development; and moti- budgets by transferring part of port vate the adoption of new regulations that investments and operating costs to the protect the environment and improve worker private sector, and incidentally, raising and navigational safety. revenues from asset divestitures.

1 Framework for Port Reform

• Transport and terminal operators: More port charges and shipping tariffs declined cost-effective port operations and servic- sharply, labor productivity nearly quadrupled, es, allowing for more efficient use of and cargo volumes have jumped by more than transport assets and better competitive 50 percent (see Box 2). positions in transport markets, and more business opportunities in growing sectors The objective of the Toolkit is to provide support (for example, container operations). for policy makers in undertaking sustainable and well-considered reforms to public institutions • Shippers, exporters, and importers: that provide, direct, and regulate port services in Reduced port costs and, potentially, developing countries. In particular, the Toolkit lower maritime freight rates, allowing offers public officials with support in: lower costs of imported goods and inter- MODULE 1 mediate products and enhanced competi- • Understanding the need for and tiveness for exports. challenges associated with sector reform • Consumers: Lower prices for consumer and institutional redesign in light of the goods and better access to a wider range changing business environment affecting of products through improved access and port operations. increased competition between suppliers. • Choosing among options for private Two illustrative examples of port reform benefits sector participation and analyzing their are Colombia and Argentina. In Colombia, the implications for redefining interdependent liberalization of port labor practices along with operational, regulatory, and legal relation- the transfer of most port services to the private ships between public and private parties. sector resulted in large and rapid improvements • Preparing legislation, contracts, and insti- in productivity, lower fees for port users, and tutional charters to govern private sector very attractive returns for the concessionaires participation. (see Box 1). Similarly, in Argentina, the improvements following the concessioning of terminal • Managing the transition to increased operations in Buenos Aires have been dramatic: private sector involvement.

Box 1: Port of Cartagena (Colombia) Performance Improvements since Private Concessioning in 1994 PERFORMANCE MEASURE COLPUERTOS (1993) SPRC (2003)

Containership waiting time 10 days < 2 hours Containership turnaround time 72 hours 7 hours Gross productivity/hour 7 moves/ship hour 52 moves/ship hour Berth occupancy 90 percent 50 percent Cost per move $984 $224 Bulk cargo productivity 500 tons/vessel/day 3,900–4,500 tons/vessel/day Hours worked per day 16 24 Cargo dwell time 30+days 2 days Port costs $984/per move $222/per move Source: Kent, Paul E., and Anatoly Hochstein. 1998. “Port Reform and Privatization in Conditions of Limited Competition: The Experience in Colombia, Costa Rica, and Nicaragua.” Maritime Policy and Management 25(4): 313, and Sociedad Portuaria Regional de Cartagena.

Note: COLPUERTOS is the former national public port entity and SPRC is Sociedad Portuaria Regional de Cargagena, a regional port entity resulting from the reform process.

2 Framework for Port Reform

Box 2: Argentina: Selected Performance Indicators for the Port of Buenos Aires Indicator Before 1993 1996

Cargo (thousands of tons) 4,000 6,000 MODULE 1 Containers (thousands of TEUs) 300 540 Capacity (thousands of containers per year) 400 1,000 Operational area (hectares) 65 95 Productivity (tons per worker per year) 800 3,000 Average stay for full containers (days) 2.5 1.5 Cost for container imports ($ per ton) 450 120 Port tariff for exports ($ per ton) 6.7 3.0 Port tariff for imports ($ per ton) 2.1 1.5

Source: Puertos (Colombia General Port Superintendent; July 1997).

Resources that address port institutional reform • A Road Map for the Port Reform Process in a comprehensive and systematic way or that • Implementing Port Reform: Pulling It All clearly explain the processes involved in re-engi- Together neering public port institutions are not readily available. The Toolkit is designed to fill this 2. CONTEXT FOR THE knowledge gap and to provide port reformers FRAMEWORK MODULE with decision support tools, tested and proven The Toolkit is made up of eight modules. The institutional reform tactics, and guidelines that first of these, this framework module, sets the represent “best international practice.” stage for all of the other modules that follow. It The Toolkit draws together practical institutional provides a unifying “decision framework” that designs and alternative approaches for increasing policy makers can use to guide them step-by- private sector involvement without compromising step through the processes of reforming and re- the public interest. It presents best international inventing port institutions. It also provides a practices in a manner that is relevant to decision common language and a set of concepts that are makers, and is designed to be easily understood used throughout the Toolkit and that represent by nonspecialists. It supplements general points the common language port reformers use in with specific examples drawn from recent port communicating with their various constituen- reform activities around the world. cies. Importantly, the Framework Module also includes a road map for the other modules that While the main audience for the Toolkit is pub- follow. It explains the interrelationship of these lic officials in developing countries who are modules with one another, and their relevance responsible for port sector reform, the Toolkit to the framework presented here. should also be of interest to other government officials, to executives of port service companies This module lays out an ordered set of decisions and shipping companies, as well as port con- that are linked together functionally as well as sultants and companies that use port services. temporally. For each decision, the Toolkit attempts to articulate the principal options and In addition to this introduction, this framework alternatives available to policy makers and module includes the following sections: assesses the expected consequences associated with each option based on recent international • Context for the Framework Module experience. The framework is presented in the • The Port Business Environment form of a “decision tree” that provides a

3 Framework for Port Reform

context for understanding the subsequent the oversight mechanisms and techniques modules, which are summarized briefly below. and elements of the public interest. It provides a solid understanding of oversight • Module 2: The Evolution of Ports in a mechanisms and methods; the role of reg- Competitive World. This module outlines ulatory bodies, inspections and audits; the roles and functions of ports and the reporting requirements; and the interplay forces shaping port dynamics in the 21st between competition and regulation. century. Readers of this module will place their ports in the context of current and • Module 7: Labor Reform and Related historic port developments and under- Social Issues. This module focuses on the stand the major trends shaping the ports institutional, legal, and industrial frame-

MODULE 1 of the future. works for port reform; establishing a productive dialogue among port stake- • Module 3: Alternative Port Management holders; rationalizing the workforce; Structures and Ownership Models. This and overcoming roadblocks. Readers will module describes different port structures learn to plan for and implement rationali- and ownership models and identifies their zation of port labor in a manner that strengths and weaknesses. Upon comple- treats affected parties fairly while achiev- tion, readers will be able to determine the ing essential efficiency and economic most effective, efficient, and feasible improvements. structure for their ports, while taking into account each country’s or community’s • Module 8: Implementing Port Reform. unique economic, political, and social How do you get from concept to effective environment. implementation of port reform? This module offers practical advice on how to • Module 4: Legal Tools for Port Reform: take the many elements of port reform This module focuses on the legal and and put them into a procedurally logical contractual options for port reform and and politically feasible sequence of steps examines their strengths and weaknesses. that maximizes the chances for success. Readers of this module will come to understand and develop specific port A wider range of reform models and public-pri- reform measures and legal frameworks vate partnership formats exists for the delivery based on the port’s and government’s of port services than for any other infrastruc- economic, financial, political, and social ture-intensive service sector. This is because the goals and objectives. ensemble of services provided by seaports is vast and requires more diverse and specialized • Module 5: Financial Implications of Port skills and involves more categories of service Reform. Risk allocation among port than other public-private institutions. Although stakeholders, potential sources of funding the Toolkit does not elaborate on all models for the reform process, and pricing port available to sector reformers, it does define the services to achieve revenue and public options on either end of the public-private spec- policy objectives are highlighted in this trum as well as the most common risk-sharing module. Readers of this module will arrangements, such as concessions and terminal appreciate port finance and its relation- operating leases. Importantly, it also provides ship to reform as well as how the finan- tools for assessing hybrid options and for cial risks and rewards vary from one understanding their merits and risks. reform option to another. • Module 6: Overseeing the Economic In dealing with reform in the port sector, the Public Interest in Ports. This module World Bank has tried to pool knowledge from defines the public interest and describes around the world. This knowledge is abundant:

4 Framework for Port Reform over the past 13 years, more than 200 transac- decision processes. The World Bank’s objective tions have been completed that involve is to provide a comprehensive, easy-to-use tool increased private sector participation in the port for port reform. sector (see Boxes 3 and 4). The problem confronting public policy makers when they take 3. THE PORT BUSINESS MODULE 1 up the challenge of port reform is not a lack of ENVIRONMENT information, but rather a lack of useful knowl- Three broad forces, detailed below, are generat- edge to help them navigate through their own ing momentum for port reform in developing process of reform. and industrialized countries alike: The Toolkit uses a diversity of communication • External forces of competition and tech- media to convey knowledge and insight to its nology from the shipping industry. users, including narrative text, mini case studies, graphics, and stylized representations of • The acknowledged financial and operational benefits of private participation in infrastructure development and service delivery. Box 3: Port Projects with Private Participation in Developing Countries • The diversification and globalization of investors and operators in the port industry. Port Projects with Private Participation in Developing Countries that Reached Financial First is the need to restructure port operations to Closure, 1992–2004 deal with the external factors that affect port viability, including national competition for global 1992 9 markets, changes in port and transport technology, 1993 15 and increased competition among ports. Port 1994 19 institutional models developed in the 19th and 1995 25 early 20th century significantly constrain ports 1996 19 from competing effectively on a service quality 1997 23 basis, limit their agility and market responsive- 1998 26 ness in mobilizing resources, and constrain their 1999 20 ability to share risks with private sector partners. 2000 22 In planning how responsibility for future port 2001 10 development and operations will be divided 2002 7 between the private and public sectors, and in 2003 13 deciding on desired levels of investment to be 2004 12 funded or guaranteed from public sources, policy Total 220 makers must increasingly regard the competitiveness of their port(s) in relation to other ports in Port Projects with Private Participation in their region, and compared to the supply chain Developing Countries by Type of Project, alternatives available to their users. In general, 1992–2004 these alternatives are more abundant today than Concession 106 they were 15 plus years ago. Consequently, the Divestiture 14 port business is more competitive today than it Greenfield project 82 was when most port authorities were originally Management and 18 chartered. New institutional models are needed lease contract for this new era of increased competition. Total 220 The second force generating momentum for Source: PPI Database, World Bank reform is private participation in infrastructure

5 Framework for Port Reform

Box 4: Investments in Port Projects with Private Participation in Developing Countries by Project Type, 1992–2004 (US$ Million) Greenfield Management and Year Concession Divestiture Project lease contract Total 1992 160 – 88 – 248 1993 346 149 3 498 1994 850 – 149 – 999 1995 653 – 1,364 4 2,021

MODULE 1 1996 411 30 1,257 – 1,698 1997 2,165 80 1,649 – 3,894 1998 827 6 433 8 1,275 1999 1,777 29 667 2,473 2000 398 400 1,611 1 2,409 2001 825 442 3 1,271 2002 334 38 976 7 1,355 2003 781 1,131 1,911 2004 117 1,231 3 1,351 Total $9,644 $583 $11,147 $28 $21,402

Source: PPI Database World Bank Database Definitions Divestitures. A private entity buys an equity stake in a state-owned enterprise through an asset sale, public offering, or mass privatization program. Greenfield Projects. A private entity or a public-private joint venture builds and operates a new facility for the period specified in the project contract. The facility may return to the public sector at the end of the concession period. Management and Lease Contracts. A private entity takes over the management of a state-owned enterprise for a fixed period while ownership and investment decisions remain with the state. Concessions. A private entity takes over the management of a state-owned enterprise for a given period during which it also assumes significant investment risk.

and superstructure. In recent years, world gov- recent experience of port reform include ernments and lending agencies have come to Argentina, Brazil, Canada, Chile, China, acknowledge that private sector participation Colombia, Egypt, Estonia, Germany, India, can be a powerful force for enhancing the per- Indonesia, Japan, the Republic of Korea, Latvia, formance of port assets, as with other infra- Lithuania, Malaysia, Mexico, Mozambique, structure assets. National and regional seaports Nigeria, Oman, Panama, the Philippines, are realizing that they cannot compete effective- Poland, Russia, Tanzania, Thailand, and the ly without the efficiencies offered by private United Kingdom. Moreover, the pace of private operators and, equally importantly, without investment in the sector is accelerating. As Box 4 access to capital provided by private investors. demonstrates, private investment in the sector In response, there has been a steady increase in has increased progressively since 1990. Over recent years of private participation in port this period, private sector investment in ports operations around the world. Countries with increased from $243 million in 1992 to $3.9

6 Framework for Port Reform billion in 1997, and to a cumulative amount of for regional competitive conditions could be more than $21 billion by the end of 2003. significant, and will require due attention from public authorities. The structure of this global The private sector, which has driven recent port industry should, therefore, be considered by development, has rapidly matured and has policy makers when adopting specific reform MODULE 1 organized itself into distinct specialized subsec- models. Module 2 provides a detailed overview tors. Today, the port services industry is a of prevailing trends in the global port and $50–55 billion global business that is expected maritime industry. to grow to $75–80 billion in 2009 and includes several distinct specialized segments. The range of services ports offer differs widely. So, too, do the service reputation and estab- The third force affecting reform is the develop- lished commercial relationships with carriers ment of a global market for port development that global service operators can bring when services, with specialized niches each containing they are selected as investors or operators. In a number of international companies that offer general, modern ports offer two kinds of services: specialized service capabilities. The market core and value-added services. The core services today broadly includes four groups of operators: provided by most ports include, but are not 1) The first wave of “global stevedores,” the limited to: first to have expanded their operations • Marine services: internationally from a strong home base. ~ Access and protection. 2) The second wave, comprising regional operators now entering the international ~ Pilotage. market following the success of their ~ Towage. predecessors. ~ Vessel traffic management. 3) Shipping lines, investing in terminals. ~ Fire protection service. 4) Niche investors, looking more specifically ~ Chandlering. at small- to medium-scale facilities. • Terminal services: The top five global operators accounted for more than 28 percent of the total container ~ Vessel tie-up services. handling market in 2005. The second wave ~ Container handling and transfers. includes 10 or so stevedoring groups mainly from the United States, Europe, and Asia, and ~ Traditional breakbulk and neobulk is now challenging the first global stevedores cargo handling. on new development opportunities. The major ~ Dry and liquid bulk cargo handling. shipping lines are reorganizing their terminal operations as separate corporate entities to ~ Container stuffing and stripping. also enter the market. The niche investors, a ~ Bagging and packaging. dozen identified so far, can be expected to continue to carve out specific market segments ~ Cargo storage, acceptance and delivery. in the future. • Repair services: But in this market, as well as in the shipping ~ Dredging and maintaining channels industry, consolidation has changed the and basins. competitive landscape, at least between the ~ Equipment repair and maintenance. different groups above, and within the groups themselves. The consequences of consolidation ~ (Dry dock) ship repairs.

7 Framework for Port Reform

~ Container and chassis repairs. For the purposes of defining asset “rights” of ownership, lease, rental, casual use, and so forth, • Estate management services. it is helpful to differentiate port assets into three • Information management services. categories: 1) long-lived, high cost infrastructure A number of these services can be outsourced to (for example, breakwaters, channels, and turning specialized private sector service providers via a basins) in which incremental benefit can only number of different methods. In general, the arbitrarily be assigned to individual port users; 2) appropriateness of specific methods is deter- long-lived, high cost infrastructure (for example, mined by two main factors: quays and terminals) for which incremental use and benefit can be apportioned in various ways • The nature of the service itself (for exam- and assigned to discrete service delivery systems;

MODULE 1 ple, public responsibility or commercial and 3) superstructure and equipment whose use activity): Public responsibility, for is clearly associated with specific users and spe- instance in vessel traffic management, cific service delivery systems. means that regardless of the arrangement Much of the preparation for port institutional adopted to deliver the service, the ulti- reform therefore involves: mate operational and legal responsibility for the service remains with the public • Identifying the critical basic public func- sector, usually the port authority. This is tions and public responsibilities that will critical when considering how to optimize define the role of the national and local service delivery while keeping up with the public authorities in charge of the port public characteristics of the service. sector. Commercial activities in ports also entail • Identifying the assets needed to support some level of public responsibility, but to each function and category of service, various degrees. The minimum is usually assessing the adequacy of these assets, the duty for the port authority to ascer- and determining which services and relat- tain the qualifications of service providers ed assets to package together and which operating on the public domain through among these to tender to private a licensing process. Equally significant is investors or operators. the requirement for a port authority to ensure the availability of basic port serv- Box 5 presents the most common options for ices, including commercial services, to all transferring specific categories of rights to repo- users on a nondiscriminatory basis. sition specific categories of core port services from the public to the private sector. The differ- • The nature of the assets required to deliver ent port models indicated in the table are each category of service: The assets defined and discussed in Module 3. required to deliver many marine services, for example, are mobile and can be In addition to providing core port services, moved at relatively low cost from one increasingly ports are delivering nontraditional port to another. Most of the assets services to their customers as well. These non- required to provide access and protection traditional services typically expand the role of or to deliver terminal services, however, port service providers in the supply chains of are immobile, and have long economic shippers. These services create value for ship- lives. Moreover, the use of these long- pers by expanding the scope of markets they can lived assets is indivisible among discrete economically access by reducing the delivered service units. In other words, a large cost of products they sell, or by reducing the cost portion of their costs are fixed regardless to complete buy/sell transactions. These services of the volume of service units over which allow ports to participate in specialized port serv- it is amortized. ice niches and to differentiate themselves from

8 Framework for Port Reform

Box 5: Public-Private Roles in Port Management

Port Cargo Port Nautical Nautical Port Superstructure Superstructure Handling Mooring Other Activity Administration Management Infrastructure Infrastructure (equipment) (buildings) Activities Pilotage Towage Services Dredging Functions

Public MODULE 1 service port Tool port

Landlord port

Private service port

Public Responsibility Private Responsibility

competing ports by means other than price and stuffing, groupage, consolidation, and turnaround times. distribution.

Improving logistics is now a widely accepted • Value-added logistics (VAL), including means for companies to improve their competi- activities such as repackaging; customizing; tiveness. Logistics, in short, is a procedure to assembly; quality control; testing; repair; coordinate all aspects of the manufacturing and on-terminal auto-accessorizing; grain distribution process to ensure the delivery of the storage and fumigating; news print right products to the right markets at the right storage and transfer; and in-container time. The key elements to develop an advanced garment assembly. logistics strategy usually include: • General value-added services, commonly • Understanding the cost and operating known as VAS, may include such services behavior of the entire supply chain and as equipment maintenance, equipment using this understanding to inform renting and leasing, cleaning facilities, decisions about where to locate manufac- tanking, safety, security services, offices, turing, assembly, and distribution centers. and information and communication services of various kinds. • Promoting strong relationships with carriers and vendors that include quality VAL activities, in particular, are growing in certification procedures. importance as producers concentrate on meeting the demands of customers for high • Designing a flexible transportation quality specialized products. New players in this system that allows for quick routing and field—third-party logistic services providers— mode selection changes. have emerged to take over parts of the production • Integrating the logistics information chain (assembly, quality control, customizing, system with the manufacturing and packaging, and so forth) and of the after-sales purchasing processes. (repair, reuse) service. There are a significant number of activities that Ports are in a natural position to participate can be classified as value-added services in the in this logistics revolution, bringing together field of logistics. Generally, they fall into two all modes of transport, information systems, categories: and land for the construction of facilities. • General logistics services, including stor- Undoubtedly, containerized and general cargo age, loading and unloading, stripping and have the highest VAL potential.

9 Framework for Port Reform

4. A ROAD MAP FOR THE PORT prominently in deliberations of public policy REFORM PROCESS makers concerning public interest objectives underlying port reform. Embarking on port reform requires a strong vision combined with proper planning and All of the reform design issues touched on organization. The following sections will high- above need to be assessed in the context of the light the main components for putting together operating scale of a particular port and the a road map for the port reform process, which interest and willingness of private companies to are elaborated further throughout the toolkit, invest in the particular set of services offered to and include setting of objectives to policy deci- them. For example, intraport competition for sions; methods of involving the private sector; services such as stevedoring or terminal opera-

MODULE 1 public interests oversight; financing and risk tions may be feasible in a large volume port, allocation; legal framework; labor reform; and but not feasible in a small volume port. implementation. Modules 3 and 6 describe circumstances under 4.1. Setting Reform Objectives and which competition for licenses, rights, or fran- Planning for the Creation of Value chises may be an effective way to sustain competition and maintain incentives for continuous Port reform should only be undertaken after a service enhancement. The modules also identify full and complete assessment of the objectives circumstances under which competition in the that public officials are trying to achieve. market may not be feasible. Furthermore, Institutional reform or, indeed, private sector Module 3 in particular discusses advantages of involvement, should not be an end in itself, but designing competition between or among pri- only a means to achieve specific and well- vate operators into the tendering process for the defined public interest objectives. The objectives delivery of specific categories of service. underlying port reform may be as varied as the need to expand or to modernize container Where competition “in the market” for specific handling capacity, the desire to stimulate the categories of port services is not workable, com- growth of a distribution-based economy petition “for the market” may still be an option centered on a regional hub port, or the need to for protecting the public interest. While continu- reduce government expenditures on the sector ing and robust competition among multiple serv- so that limited public funds can be applied to ice providers is the best way to ensure low prices other more pressing social needs. In any case, for services rendered, such competition may not the private provision of port services and infra- be feasible in all port environments due to physi- structure is only one tool among others that are cal constraints or small cargo flows. In such an available to officials to solve specific problems environment, it is still essential to maximize the and to achieve specific public interest objectives. economic benefits of competition and to mini- Thus, the decision process should begin with mize the risks associated with monopoly service the consideration of the objectives that port through competitive bidding. For the provision reform is designed to achieve. Module 3 reviews of still other categories of service (for example, those possible objectives in greater detail. those that have significant consequences for the efficient use of assets for both shipping lines and The delivery of port services has become an for terminal operators), retention of these services increasingly risky undertaking. Increased in the public domain may be the best option. competition between or among ports, large capital Module 3 addresses this issue of packaging core outlays, more specialized investments, and the and noncore services into bundles for private expansion of port activities beyond traditional participation. services all increase the possibility of economic losses from port operations. Considerations of Port reformers should carefully choose the risk and return on social capital should figure objectives they seek to achieve before settling on

10 Framework for Port Reform any specific reform model because different • Port sector funding: Financial implica- objectives will require different types of reforms. tions and risk allocation. Options for private sector involvement, invest- • Legal framework adaptation. ment, and risk sharing range from open entry to service contracts, management contracts, leases, • Service packaging and asset restructuring. MODULE 1 joint ventures, control of corporate entities and • Labor adjustment and settlement. concessions all the way to full divestiture. Differing forms of private sector involvement • Implementation responsibility. result in different allocations of risk, different • Sequencing transactions. responsibilities for government, and different • Transaction preparation. types of government oversight. Module 5 delves into the issue of risk sharing at greater length. For each of these key decision points, several options exist. Box 6 shows a notional decision 4.2. Reform Policy Decision tree leading port reformers through the many Context steps involved in the process. The port reform decision process must begin 4.2.1. Methods of Private Sector with the clear definition of the objectives that Involvement the reforms are intended to achieve. The next step is to delineate all of the key institutional The nature of private sector involvement in the design and reform decisions needed to move the port sector will be prescribed by the adoption process to a successful result. Next, for each of a specific institutional model. To assist port decision point along an ordered reform path, reformers in determining which model might options and alternatives should be developed best apply to their circumstances, Module 3 and assessed. In particular, all of the possible describes four port management models that outcomes resulting from the selection of any cover the spectrum of private sector involve- specific option need to be fully evaluated with ment in ports, including: the public service port, respect to the stated objectives of reform. the tool port, the landlord port, and the private service port. A useful tool for laying out the port reform process and feasible options is a decision tree. Within these models, a broad array of options Key branches comprising this port reform deci- exists with respect to the specific form the pub- sion tree include: lic-private partnerships may take. These can significantly affect the agility and responsiveness of • Methods of private sector involvement. service providers, their market orientation and • Modes of public interest oversight. efficiency, and their decision-making autonomy.

Box 6: Port Reform Decision Tree public modalities interest asset labor sequencing of transaction implementation for psd oversight restructuring settlement funding transactions preparation responsibility

settle pre- engage separate option "a" "two-tier" combination transaction combine private financial advisor and public sector for each transaction funding with fee most attractive constraints terminals first or one agency responsible "packaging" for implementing sector terminals and reform; one transaction other assets manager assigned to each transaction Source: Author.

11 Framework for Port Reform

The appropriateness of specific models for par- proposed increases in capacity on regional mar- ticular ports needs to be judged, ultimately, by kets, since one country’s efforts to increase its how well they help achieve the objectives of the share of regional trade typically evoke competi- reform program. However, a number of other tive responses. factors should also be considered, including: Thus, regardless of which port reform model is • The strategic fit with the identified needs selected, strategic transport planning will of the existing and potential market. remain a critical responsibility of governments. Enhancing international competitiveness • The competitive consequences for other requires, among other things, implementing and ports in the same range. maintaining a cost-effective transport system,

MODULE 1 • The compatibility with other approaches with the port interface being a critical link to to public-private partnerships used in international markets. A national ministerial other transport infrastructure projects as body, therefore, should be in charge of develop- well as other sectors of the economy. ing the long-term strategic vision for national • The fit with the investment capacity and waterfront development plans. The port reform interests of potential strategic investors. vision should also encompass other land transport reforms to ensure the complementary 4.2.2. Modes of Public Interest Oversight development of interconnected links in the transport infrastructure. Many examples exist The two key issues involving public interest around the world of the inefficiencies and bot- oversight are what powers and authorities need tlenecks created when road and rail links are to be retained by a public oversight body after not developed at a pace adequate to handle reform, and how that body needs to be consti- increased port activity. Further, this planning tuted and at what level of government it needs effort will have to take into account various to operate. stakeholders’ interests in the long-term develop- As noted above, increased private sector partici- ment of coastal areas within the framework of a pation in the delivery of port services should be national Integrated Coastal Zone Management viewed as an instrument to achieve well-defined (ICZM) policy. public interest objectives. Thus, a key element 4.2.2.1 Regulatory Oversight: Economic and in port reform must be the creation of a mecha- Technical Issues. Safety is a major concern with nism to protect the public interest and make ship movements in and around port mooring and certain that the objectives of reform are met. In berthing areas and with cargo handling opera- creating such a mechanism, it is important to tions ashore. Requirements for handling and keep public statutory and regulatory oversight storage of hazardous cargoes must be clearly responsibilities separate from commercial spelled out in port regulations and should be activities. based on international conventions with due Government oversight typically takes several allowance for specific local conditions. forms, such as strategic planning, technical reg- Technical regulation of operations is required to ulation, and economic regulation. Planning the ensure compliance with security, safety, labor, future development of ports and sharing those and environmental protection standards, as well plans with private developers who can help as to set and monitor appropriate minimum implement them is a continuing responsibility of performance requirements (especially if compe- governments. As discussed above, every port’s tition is weak). Forms of technical regulation vision of its future needs to be realistically set in and the necessity for them do not change signifi- the context of its commercial environment and cantly with port reform. Consequently, technical its competitive position versus other ports. It regulation is not dealt with in detail in the must also take into account the likely effects of Toolkit (more information on the safety and

12 Framework for Port Reform handling of hazardous cargoes can be found at In general, the difference in public sector the International Maritime Organization’s Web responsibilities before and after institutional site www.imo.org). reform is the difference between “rowing” the boat and “steering” the boat, respectively.

A complex set of mutual obligations typically Postreform oversight powers are typically indi- MODULE 1 bind private operators and users to act in con- rect and designed to induce socially beneficial cert and in compliance with the rules in the pro- actions on the part of the private sector. vision and use of port services. The develop- Oversight may involve the creation of incentives ment and enforcement of operating rules and for private sector investment, the tendering of regulations represents another oversight respon- investment opportunities, compatibility of all sibility that most public authorities assume or private investments with a master plan, and retain as part of their essential functions. coinvestment under certain circumstances. Module 4 elaborates on the kinds of mutual Module 6 discusses various aspects of economic obligations among private service providers and public interest oversight in depth. between them and public service integrators that are needed to ensure the safe and efficient 4.2.2.2. Oversight Administration. Once the delivery of services. These technical regulations areas for continuing government oversight have are typically articulated in a set of port rules been defined, it is necessary to determine an and regulations. Module 4 will discuss the con- institutional framework for administering the tent of a model set of rules and corresponding oversight. Port administration may be central- enforcement mechanisms that have been used ized or decentralized; each approach has its effectively in various port reform efforts. strengths and weaknesses. Centralized adminis- Finally, this module also describes the legal tration permits a broader national economic sources such as decrees, laws, contracts, licens- and multimodal perspective for directing port ing agreements, and sectoral policies used to development policy. Decentralized administra- define and enforce obligations on private operation permits a more narrow local perspective tors and port users. that aligns port development with the economic interests and priorities of municipal or regional Economic regulation, which usually aims at economies. monitoring market entry and pricing, is necessary when competition is weak or nonexistent. In addition to discrete national and local Conversely, when significant competition approaches to port oversight responsibility, a develops, either internally or externally, the two-tiered option also exists. For example, a need for strong economic regulation decreases. national port council can be formed, to which Indeed, when competitive pressure is well local port authorities report. Under the best of established, there may be little reason to main- circumstances, this two-tiered arrangement tain any price regulation other than a require- allows for the balancing of national and local ment to publish tariffs, a continuing prohibi- interests and the reconciliation of both tion against undue discrimination against simi- through deliberative processes. In the worst of larly situated port users, and retention of a circumstances, the two-tiered bureaucracy may mechanism by which the government can mon- lead to excessive interference in port opera- itor the competitiveness of the market and tions and management or contradictory investigate alleged anticompetitive activity. The policies that interfere with planning and level of competition faced by an individual investment decisions. port, therefore, has important implications for The degree of decentralization in policy making the nature and degree of regulatory oversight and regulation should: of port operators. Ports with abundant intra- and interterminal competition require minimal • Reflect the objectives of the port reform economic regulation. program.

13 Framework for Port Reform

• Consider the institutional capacity manage and enforce navigation safety and authority of the relevant levels of measures; enforce environmental protec- government. tion regulations; monitor the concessions and leases governing private sector activi- • Provide a balance between national eco- ties in the port area; and market the port nomic goals (such as seamless transport to attract new investors. flows and export promotion) and local concerns (such as labor activity, environ- • The private operating companies would mental degradation, and industrial carry out commercial activities related to development). cargo traffic management and handling and market their services to attract new In addition, whether port regulatory responsi- port users. MODULE 1 bilities should be concentrated at the central level or decentralized to the local level should In such a setting, the national body serves three be looked at with two concerns in mind: the key roles: it establishes the basic rules of partici- consistency of the approach with those general- pation to be applied by all entities, public and ly followed throughout the country, and the private; it regulates the public port authorities, need for a transparent and efficient user-friendly in particular with respect to their infrastructure regulatory system. The former would call for pricing policies; and it provides an appeal level some sort of nationwide unit, likely at the min- for dispute resolution in case private commer- isterial level, although at arm’s length from the cial operators believe they are unfairly treated ministry of transport to guarantee independ- by their local port authority and regulator. ence; the latter could lead governments to con- 4.2.3. Port Sector Funding: Financial sider local (state/province) regulatory units clos- Implications and Risk Allocation er to the field and, therefore, better able to tailor decisions to meet local conditions. The two key issues concerning financial risk To provide for a clear separation of policy and are: regulatory responsibilities at both the national • Which categories of port assets should and local levels, a three-tier institutional frame- private investors be at risk for providing, work has also been employed effectively. For maintaining, and repairing versus those example, under the assumption that reforms for which the public sector will be will result in a landlord port arrangement with responsible? commercial activities fully carried out by private operators, the new public oversight • On what basis should user fees or subsi- framework could be devised along the following dies be used to cover the cost of long- lines: lived port assets? Module 5 describes the many types of risks • A central body comprising senior repre- involved in port projects and assesses the risks sentatives from relevant ministries, munic- associated with the reform models developed in ipalities of port cities, and port authorities Module 3. Module 5 also identifies the financial would work out national port policy and tools that decision makers can use to systematical- strategic planning objectives, and would ly assess the financial risks and potential rewards establish the main sector regulations to be associated with specific investment programs. enforced by the port authorities. (A financial simulation model to assess the • The port authorities, autonomous public viability of specific investment operations is also institutions or public joint-stock compa- included as an Appendix to Module 5). Port nies, would be granted the right to use reformers should carefully consider what risks state-owned land; administer, maintain, the public sector can afford to bear and on and develop port infrastructure assets; what basis specific risks should be transferred

14 Framework for Port Reform to the private sector. Port planners have avail- public sector and is charged back to users though able to them a number of risk mediation tactics, a number of different regimes. Modules 3 and 6, which are also described in Module 5. respectively, deal with the operational and institutional aspects and the regulatory aspects of charg-

Port operations require several categories of long- ing for port infrastructure. MODULE 1 lived assets, some of which are inherently more amenable to private investment and user fee Most port charges involve some combination of recapture than others. For some long-lived, high public components for the support of publicly cost infrastructure assets, such as breakwaters, financed common use infrastructure and private channels, and turning basins, charges for incre- components for the provision of terminal infra- mental use can only be assigned arbitrarily to structure. The combination of these two pricing individual users because the marginal benefit factors determines the competitiveness of ports derived from using this common infrastructure compared to other competing ports. In general, significantly outweighs the marginal cost of the greater the degree of competition, the less replacing it. Consequently, a charge schedule the need for regulatory intervention. Module 6 developed by a private developer and based on discusses the limited set of circumstances under user benefits could result in monopoly profits which regulatory intervention into pricing deci- and less use than economically desirable. Port sions made by private service providers may be assets also include long-lived, high cost infra- appropriate. structure, such as quays and terminals, whose incremental use can be meaningfully assigned to Box 7 illustrates how the four port management users and whose marginal cost and marginal and operation models array themselves on benefit can be balanced through a number of scales measuring private sector risk and the price regulation regimes or intraport competi- need for independent government oversight. tion. Finally, port assets include long-lived 4.2.4. Legal Framework Adaptation superstructure and equipment whose use is closely associated with specific users and specific To initiate wide-ranging reform, the legal frame- service delivery systems. Equipment is a mobile work that underpins the institutional arrange- asset and can be competitively provided or easily ments of the sector may require significant redeployed. On-dock storage and transshipment amendment. To ensure credibility, openness, facilities can be awarded through competition and assigned to their most productive use through open tender. Box 7: The Public-Private Balance of Risk All three categories of assets can be provided or and Regulation maintained by the private sector. However, from high the perspective of private investors, the first private category involves the greatest risk, has the service port longest payback, and involves the highest risk tradeoff between their ability to set prices inde- landlord pendently without regulatory constraint and the port level of investment they are prepared to make. tool port In general, private investors are prepared to make sector riskprivate larger investments when they are unconstrained by public regulators or when the price schedules (including service escalation mechanisms) they propose in advance low port of awards are accepted and locked in for a long low high importance of regulation term. In other situations, the funding of long- Source: Author. lived, high cost infrastructure remains in the

15 Framework for Port Reform

and transparency in the reform process, and to may apply only to specific localities (for attract international participation and long-term example, ship movements, access, traffic financial commitments from potential investors, safety, and tariff structure). a sound and precise legal framework for defin- Since amending a law most often requires going ing public-private partnerships is essential. In through a legislative process, the earlier in the particular, prior to any reforms involving build- reform process this can be initiated the better. operate-transfer (BOT) arrangements, govern- Sector laws and laws governing contract award ments should enact a concession law spelling and management between public and private out the principles of the process and establish- entities are the most critical elements to be ing the rules and responsibilities for each party. enacted. Port regulations can usually be put in Further, governments should consider putting in place by a ministerial decree. Module 4 offers MODULE 1 place a complementary set of regulations guidance and examples in the drafting of sector describing how the concession law will be laws reflecting the sector model to be imple- applied in practice. mented as well as guidance on the contents of Since there are ways other than concessions for concession contracts and port regulations. securing private participation in port activities, 4.2.5. Service Packaging and Restructuring the national legal framework for public-private partnerships must also incorporate these ele- Once the main institutional options for sector ments, or at least establish which entity will be reform are decided upon, the issue of asset responsible for monitoring them. The basis of restructuring must then be addressed. The two any licensing process, for example, must be key issues involving asset restructuring are what made clear in the law, which can then specify degree of competition should be designed into that port authority regulations will articulate port service markets and what assets (and relat- more precisely the implementation criteria. ed services) should be tendered as packages for The following legal documentation should be single source awards. reviewed to assess the need for modification or Port assets can be divided among sets of services the need for complementary statutes: and tendered as separate packages in a number • Sector laws: Legislation establishing the of different ways. The consequences of either national institutional framework govern- bundling assets (and corresponding services) or ing ports and clearly describing the man- unbundling them has a direct effect both on date of all public entities involved. competition among private service providers and on the efficiency with which a port can • Concession laws or contracts: Since a operate. widely used option for private sector participation in port activities is concessions, In larger ports, competition among terminal the basic legal framework enabling public operators is both desirable and practical. In authorities to enter into such contractual smaller ports, competition is less feasible arrangements must be in place, including because the economies of scale required to a clear and transparent process for attract specialized service providers are not awarding contracts and standard contrac- sufficient to assure them of a reasonable profit tual language providing for appropriate while maintaining charges at reasonable levels. monitoring arrangements. Moreover, effective coordination of cargo • Port regulations: The set of provisions handling and marine services can be better governing the daily operations in the assured in smaller ports by integrating them in port; some may apply universally within a single source service. Module 6 reviews the the country (for example, environmental consequences of such options from an economic protection and labor rules), and some regulatory perspective.

16 Framework for Port Reform

4.2.6. Labor Adjustment and Settlement dislocations. In particular, worldwide experience strongly suggests that port labor should be The process of port labor reform often requires involved in the port reform process from its ear- governments to eliminate provisions from existing liest conceptual phase. Again, experience indi- labor regimes that unduly constrain flexibility cates that the best way to build confidence in MODULE 1 and productivity. Overstaffing, in particular, has the reform process by all affected parties is to been a pervasive feature of most port organiza- broaden the sphere of participation and respon- tions in both the developing and developed sibility to include port users, port labor, and world. Achieving more cost-efficient operations port and maritime employers. Such broad par- will generally require significant reductions in ticipation will allow all stakeholders to share the workforce. Therefore reducing the work- common concerns about competitiveness of force in a socially acceptable way must be a port services and gain a better understanding of prominent concern of public authorities and an how any weakening of this competitiveness integral part of the reform process. would be detrimental to all. This is particularly Addressing the overstaffing issue as one of the true for the workforce, which would be the first first steps in the reform process, before involving to bear the consequences of reduced economic the private sector in operations, will usually activity, both inside and outside the port. facilitate the overall reform process. Since over- Significantly, the International Transport staffing in ports is often the result of govern- Workers Federations (ITF), while cautious ment policies that view port organizations as about the social consequences of port reforms, instruments of social policy and natural shelters appreciates the need to improve port efficiency, for the unemployed, governments should take possibly through increased private sector partic- the lead responsibility in resolving this issue. ipation. It insists, however, on the critical need Often this means creating programs to ease the to involve labor unions from the start so that transition of port labor into other sectors. mutually acceptable labor rationalization strate- Doing this, in turn, requires the application of gies can be designed to make the whole process significant financial and management resources both economically and socially sustainable. early in the reform process. Institutions for allocating available work among If port services and infrastructure are tendered members of a qualified labor pool based on sen- to the private sector before the labor issue is iority or some other rank-ordering principle resolved, for the process to stand a fair chance have grown up within most traditional ports. to succeed, care should be taken that the private Unions typically control entry into these pools operators are allowed to adjust their workforce of qualified labor, the result being to close the over time to actual operational requirements port labor market to competition and to new and that existing social protection programs entrants. Opening labor markets to competition will ensure the labor adjustment process will be is one of the objectives sometimes sought by smooth and not provoke undue labor unrest. port reformers. In this context, one of the key This may sometimes require the establishment issues to be addressed is the role of these dock of special government-funded programs to labor boards or union labor pools and how accompany staff retrenchment, possibly by com- they affect management discretion over the plementing general social programs with sector- recruitment, qualification, and use of specific specific assistance made available over a defined employees. and limited period of time. Three key questions arise when considering In all cases, this means that organizational and workforce reductions in the port reform budgetary resources must be mobilized early in process: Who will be responsible for “buying the reform process to ensure appropriate and out” surplus labor, when in the process will socially acceptable treatment of potential labor labor separation negotiations be completed, and

17 Framework for Port Reform

on what basis will postreform labor-manage- rarely possible for a port authority to reform ment relationships be conducted? itself, since the inherent conflicts are too great for even a well-meaning port authority to adopt Theoretically, labor contract issues can be and implement significant change. Moreover, resolved either before or after port services and the work of implementing port reform is diverse infrastructure have been transferred from the and requires special skills. Some of it, for exam- public to the private sector. Either the public ple, involves developing regulatory frameworks, sector or the new private sector operator can some of it involves labor negotiations, and some manage negotiations and can absorb the liabili- of it involves preparing individual transactions. ty associated with separating surplus employees. Typically, however, resolving labor separation In deciding which agency of government should

MODULE 1 issues before transactions are completed relieves manage port reform, many questions arise. investors of uncertainty and enhances the Should reform be carried out by a temporary perceived value of the investment. In general, it agency of government whose sole purpose is is a good idea to make a clean break in labor port reform, or should it be delegated to a contract coverage and the basis for employee standing government agency? Should the min- selection and work assignments at the same istry responsible for ports also be responsible time that the rights to control port assets are for the process of reform, or should this fall to conveyed. This may involve not only buying out an agency dealing with privatization generally, individual laborers under the terms of existing and over which the ministry responsible for contracts, but also buying out the contract ports has only indirect control? Should the itself, thereby giving private operators a clean process be managed at a national, regional, or slate to negotiate new agreements. Module 7 local level? Should different reform units be reviews in depth the issues relating to labor organized for “greenfield” port developments adjustment policies in port reform and proposes and for the privatization of existing facilities? ways to handle them in a manner that meets the What powers should the reform unit have? joint objectives of institutional reform and How should the unit be funded? To whom will social sustainability. it answer? How will it obtain information from other organizations? Can part of its responsibil- For additional information on labor reform, ities be subcontracted? And importantly, what consult the World Bank’s Toolkit Labor Issues access will the unit have to key political deci- in Infrastructure Reform and the International sion makers? Labor Organization’s report, Social Dialogue in the Process of Structural Adjustment and Often, for the reform process to be implement- Private Sector Participation in Ports: A ed successfully, the mandate given to the reform Practical Guidance Manual. unit must come from the highest levels of gov- 4.2.7. Responsibility for Implementing Port ernment, and the reporting must follow the Reform same route. This avoids frequent interministerial conflicts over competence and jurisdiction. The key issues of port reform implementation The agencies and individuals comprising mem- responsibility concern what government agency bership of the reform unit also must be defined is responsible for port sector reform and what unequivocally by the political leadership. skills and competencies are required to implement a port sector reform program successfully. Several organizational options are available for The delegation of responsibility for managing implementing port sector reforms. One agency port sector reform typically comes in the form can manage the entire process with individual of a special decree, law, or other explicit delega- transaction managers within that agency tion of authority. To what organization of gov- assigned responsibility for completing discrete ernment should this authority be delegated? It is transactions. Or, multiple agencies can be

18 Framework for Port Reform assigned responsibility for sector reform and From the commercial perspective, several possi- task forces created from these several agencies ble strategies should be considered when sched- to accomplish component tasks and to complete uling and programming port reform programs individual transactions. that include several components and multiple

transactions. For example, the most valuable MODULE 1 In managing the politics of reform, it is impor- assets might be tendered first to attract tant to account for stakeholder interests and investors and to increase their confidence in and concerns. Stakeholders in ports include labor, familiarity with procedures in which they would existing public agencies, environmental groups, encounter in future transactions. Another strate- shippers, shipping companies, and other users gy is to offer all components at the same time— of port services (for example, fishermen or the a “big bang” approach. This has the benefit of navy). Module 8 will examine workable allowing some transaction preparation costs to processes for actively including stakeholder be shared among several transactions and also interests in policy decisions, or for otherwise allows a new set of competitive conditions to factoring their interests into key decisions. become effective more or less simultaneously.

The reform unit will typically require consultant 4.2.9. Transaction Preparation services to assist in the reform process. Issues relating to the use of consultants include deter- At implementation, port reform requires the mining what skills are needed, the criteria by completion of a number of complex transac- which consultants will be chosen, the degree to tions in connection with the tendering of service which consultant services should be bundled franchises and asset ownership, or use rights. together, and how consultants should be com- Transactions can be completed only after an pensated (for example, a flat fee or a success fee). elaborate preparation and due diligence process. Two key issues associated with transaction Module 8 will provide some insights on these preparation are whether transaction preparation various aspects of implementing the reform should be outsourced or completed by in-house process. government staff, and what kind of technical assistance the group responsible for transaction 4.2.8. Sequencing of Transactions preparation within government will require. In addition to preparing the variety of transac- In general, three approaches to transaction tions associated with port reform for tendering preparation are possible: or other actions, those charged with reform also have to consider the order in which the transac- • Engaging a separate financial advisor for tions will be undertaken. each transaction. When port operations are transferred to the pri- • Engaging one advisor for the entire set of vate sector, the public sector retains only an transactions. indirect relationship with the service provider. • Engaging no outside advisor, instead, The new relationship entails new tasks to be learn about transaction preparation by performed in the public sector. New skills are preparing them in house. required to perform these tasks, requiring a period of training and possible assistance from Financial advisors add credibility to the claims consultants or advisers from other ports. A and representations made in marketing a trans- range of measures can be adopted to help to action. They are also helpful in assessing the build the public sector’s capacity to perform its market for port assets without compromising new role as contract monitor and regulator. transaction integrity, and in packaging transac- Preparing for this new role should be one of the tions to be marketable. However, some financial first steps in the reform transaction process. advisors are better than others. Engaging one is

19 Framework for Port Reform

Box 8: Shifting the Boundary of a Public-Private Partnership

transaction strategic preparation preparation service designs service designs institutional model institutional model

redefinition of authorities legal adaptation and powers sector laws contracting laws rules, regulations, tariffs, procedures MODULE 1

Source: Author.

itself a significant transaction involving risks. services that are the specific target for Consequently, financial advisors should be reform. selected with care, using a competitive process • Preparation of redefined authorities and as with other transactions. powers: Redefinition of authorities and 5. IMPLEMENTING PORT powers results in regulations, rules, tar- REFORM: PULLING IT ALL iffs, and procedures to ensure that all port activities are adequately coordinated TOGETHER and operate in a manner consistent with Port reform that shifts the boundary between the public interest. the roles of the public and private sectors • Preparation of a legal framework: The legal entails four broad categories of preparations: framework for the port sector must reflect the principles set out in the strategic analy- • Preparation of a port reform strategy: sis and the redefinition of institutional rules. Strategic preparation involves careful analysis of the port’s competitive position, • Transaction preparation: This process strengths, weaknesses, opportunities, results in the development of tendering threats, role in the national economy, processes that are transparent, open, and prospects for growth, and other issues. competitive. This analysis results in the selection of a Box 8 illustrates these four sets of preparations particular institutional model and the and how they interrelate, and Module 8 identification of a set of assets and explains them in more detail.

20 PORT REFORM TOOLKIT SECOND EDITION

MODULE 2 THE EVOLUTION OF PORTS IN A COMPETITIVE WORLD

MODULE 2 The World Bank encourages dissemination of its work and will normally grant permission promptly.

ISBN-10: 0-8213-6607-6 ISBN-13: 978-0-8213-6607-3 eISBN: 0-8213-6608-4 eISBN-13: 978-0-8213-6608-0 DOI: 10.1596/978-0-8213-6607-3 MODULE TWO CONTENTS 1. Overview of the Competitive Landscape 21 1.2. Rivalry among Existing Competitors 23

1.2.1. Hinterland Market Access 24 MODULE 2 1.2.2. Ability to Service Transshipment Trade 24 1.2.3. Regional Port Capacity and Demand 24 1.2.4. Ability to Create Competition within the Port 24 1.2.5. Stakes at Risk 25 1.2.6. Ability to Absorb Losses 25 1.2.7. Ability to Control Operations 25 1.2.8. Limits on Rivalry within Ports 25 1.2.9. Government Willingness to Subsidize Operations 26 1.3. Threat of New Competitors 28 1.3.1. Capital Expenditure for New Port Facilities 28 1.3.2. New Distribution Patterns 28 1.3.3. Provisions in Operating Agreements 28 1.3.4. Natural Barriers 29 1.3.5. Magnitude of Switching Costs 29 1.3.6. Cost Advantages and Customer Loyalties 29 1.4. Potential for Global Substitutes 29 1.4.1. Other Global Sources for Products Moving through the Port 29 1.4.2. Substitute Products for Exports and Imports 30 1.4.3. Magnitude of Switching Costs for Substitution 30 1.4.4. Demand Elasticity of Exports and Imports 30 1.4.5. Importance of Port Costs in Total Delivered Price 30 1.5. Bargaining Power of Port Users 32 1.5.1. Concentration of Port User Power 32 1.5.2. Impact of Changing Business Relationships 32 1.5.3. Presence of Large Value-Adding Tenants 33 1.5.4. Importance of Port to the Economy 33 1.5.5. Ability to Replicate Port Services 33 1.5.6. Facility Investments by Port Users 33 1.6. Bargaining Power of Service Providers 34 1.6.1. Experience and Capabilities of Service Providers 34 1.6.2. Participation in Facility Financing 35 1.6.3. Choke Points in the Port 35 1.6.4. Ability to Absorb Downtime 35 1.6.5. Interrelationships between Providers and Port Users 35 1.6.6. Rights and Obligations Conveyed by Contractual Agreements 35 1.7. The Bottom Line 36 2. Port Dynamics in the 21st Century 36 2.1. Globalization of Production 36 2.1.1. Vertical Specialization 36 2.1.2. Focused Manufacturing 37 2.1.3. Expanded Logistics Reach 37 2.1.4. Increased Sourcing Alternatives 37 2.1.5. Impact of Globalization on Ports 37 2.2. Changing Technology 37 2.2.1. Containerization of World Trade 39 2.2.2. Future Containership Designs 40 2.2.3. Impact on Port Operations 41 2.2.4. Need for Container Port Productivity Improvements 41 2.2.5. Growing Role of Information Technology 42 2.2.6. Port Requirements for Large Cruise Ships 42 2.2.7. Other Technology Affecting Port Services 44 2.3. Shifting Bargaining Power 44 2.3.1. Consolidation among Ocean Carriers 45 2.3.2. Emergence of Global Logistics Service Providers 51 2.4. Changing Distribution Patterns 52

MODULE 2 2.4.1. Becoming a Hub 52 2.4.2. Benefits of Hub Status 54 2.4.3. Hub Problems 54 2.4.4. Inland Container Terminals Shifting Activities from the Port 56 2.5. Environmental and Safety Concerns 56 2.5.1. Growing Environmental Concerns 56 2.5.2. Recent Environmental Article 56 2.5.3. Issue of Substandard Ships 56 2.6. Impact of Changing Dynamics on Ports 59 3. Challenges and Opportunities 59 3.1. Transferring Port Operations to the Private Sector 59 3.1.1. The Need for Change 59 3.1.2. Impact of Privatizing Operations 59 3.1.3. Lessons Learned from Past Privatizations 60 3.1.4. Contingency Plan 61 3.2. Opportunities for the Private Sector 61 3.2.1. Terminal Operations 61 3.2.2. Towage Services 61 3.2.3. Maintenance Dredging 63 3.2.4. Information Technology 63 3.2.5. Environmental Facilities and Ship Safety 63 3.2.6. Other Port Services 63 References 67 BOXES Box 1: The Competitive Landscape 22 Box 2: Checklist of Key Questions for Positioning in the Global Port Market 23 Box 3: Load Centers Competing for the Gulf Market 26 Box 4: Intraport Competition in the European Union 27 Box 5: Reebok Logistics Center in the Maasvlakte Distripark 31 Box 6: Enlarging Venezuelan Export Markets of Coal and Crude Oil 32 Box 7: Suppliers to Container Terminal 34 Box 8: Evolution of Containerized Shipping 38 Box 9: Development of Container Vessel Sizes as a Percentage of the Global Fleet 39 Box 10: Ships on Order as of September 2005 40 Box 11: Evolution of Cellular Fleet 40 Box 12: Future Containerships Require Increasingly Larger Cranes 41 MODULE 2 Box 13: Impact on Port Productivity of Unit Voyage Cost of Large Containerships Large Cost of of Unit Voyage on Port Productivity Box 13: Impact the Netherlands in Amsterdam, Paragon Terminal Box 14: Ceres NetworkBox 15: Port User Information System (FCPS) Processing Cargo Box 16: Felixstowe to Accept Cruise ShipsBox 17: Physical Requirements for Ship Assist in Port Drive Impact on Requirements Box 18: Podded Electric June 2006 10 Container Carriers as of Box 19: Top 43 Container TrafficBox 20: Worldwide League Table Throughput Operators 2005 Box 21: Global Terminal 1990s of Hutchison Port Holdings in the Box 22: Key Milestones Container Distribution Box 23: Hub and Spoke Route on the Asia–Europe Box 24: Hub Options Inland Container Terminals Box 25: Duisburg 47 44 Bay Beach Coexist and Pretty Terminal Box 26: How a Major Transshipment Initiative Award Box 27: The Green the Port Sector Market in Box 28: Estimated Available is it so Successful? Box 29: The Port of Hong Kong—Why Plant in the Port of Portland Treatment Box 30: Ballast Water 46 Box 31: Middle East Navigation Aids Service 47 49 Privatization Box 32: Checklist for Negotiating a Terminal 50 58 45 48 53 49 55 62 63 57 61 65 59 64 MODULE 2 contributions ofthefollowing organizations. The First Edition ofthePort Reform Toolkit wasprepared andelaborated thanksto thefinancingandtechnical oftheILO Meletiou andMarios for theircontributions KeesMarges formerly to thiswork. ofITF, Group, Maritime andSimme Veldman oftheRotterdam Koppies, John We wishto give specialthanksto Christiaanvan Krimpen, for whichconsultants oftheRotterdam Group Maritime (RMG)were contracted.Toolkit’s content, and Water Public for Management) theenhancement ofthe Works, of Fund (NetherlandsMinistry Transport, Financial assistance wasalsoprovided through agrant from The Netherlands Transport andInfrastructure Trust andrural services. infrastructure inthefieldsoftransport and sharingofknowledge for learning for International Development andthe Department World Bank, between theU.K. apartnership TRISP, This SecondEdition ofthePort Reform Toolkit hasbeenproduced withthefinancialassistance ofagrant from Acknowledgments a:1225232.Internet:[email protected] 1.202.522.3223. Fax: Please sendthemto the World Bank Transport HelpDesk. Comments are welcome. andBradle Kruk, Cornelis “Bert” Ronald Kopicki, The preparation andpublishing ofthePort Reform Toolkit underthemanagementofMarcJuhel, wasperformed e ie www Web site: For more information seethe onthefacility throughof theirinfrastructure private involvement. sector PPIAF isamulti-donortechnical aimedathelpingdeveloping assistance facility countries improve thequality The Public-Private Facility Advisory Infrastructure (PPIAF) PA Consulting (USA) United Nations Economic Commission for LatinAmericaandtheCaribbean (Chile) Nathan Associates (USA) ISTED (France) LLP(USA) Holland andKnight Netherlands) The Rotterdam Group Maritime (The Netherlands) (The Management Rotterdam MunicipalPort HoldingRotterdam (formerly as Consultancy known Mainport TEMPO), International Associates Maritime (USA) The WorldBank The ofForeign French Affairs Ministry The NetherlandsConsultant Trust Fund .ppiaf .or g . y Julianofthe World Bank Transport Division. MODULE

2 MODULE 2 The Evolution of Ports in a Competitive World SECOND EDITION

he port sector has radically changed over the past two centuries. During the 19th century and first half of the 20th century, ports Ttended to be instruments of state or colonial powers and port access and egress was regarded as a means to control markets. Competition between ports was minimal and port-related costs were relatively insignifi- cant in comparison to the high cost of ocean transport and inland transport. As a result, there was little incentive to improve port efficiency.

How times have changed! Most ports today are 1. OVERVIEW OF THE competing with one another on a global scale COMPETITIVE LANDSCAPE and, with the tremendous gains in productivity in ocean transport achieved over the past several In the 21st century, five forces will interact to decades, ports are now perceived to be the shape the competitive landscape facing port remaining controllable component in improving authorities and port service providers: the efficiency of ocean transport logistics. This has generated the drive today to improve port 1) The rivalry among existing competitors. efficiency, lower cargo handling costs, and 2) The threat of new competitors. integrate port services with other components 3) The potential for global substitutes. of the global distribution network. Because of the capital intensity of such efficiency improve- 4) The bargaining power of port users. ments, these have also generated the drive to 5) The bargaining power of port service unbind ports from the bureaucratic control providers (see Box 1). of public entities and encourage private sector operation of a wide range of port-related These forces will impact ports of all sizes, driv- activities. ing requirements for port expansion, service

21 The Evolution of Ports in a Competitive World PORT USERS Carriers Shippers Tenants • • • BARGAINING POWER OF Number of competing ports able to economically access the same hinterland markets Ability to control efficiency of port services, particularly customs clearance procedures Rules and policies on number of competitors and/or criteria for operating within the port • • • MODULE 2 PORT RIVALRY DETERMINANTS OF THE INTENSITY port user to the Balance of demand and supply for port services and facilities in the region Stakes at risk in preserving existing business Ability to absorb losses and/or cross-subsidize operations Ability to segment operations in the port to create competition among service providers Size and importance of the • • • • ENTRANTS between ports COMPETITORS service providers POTENTIAL FOR THREAT OF NEW Substitute products Other sources of supply Other assembly sites other sources of supply GLOBAL SUBSTITUTE Potential of new ports or • • • Intensity of rivalry within and Ability to utilize other ports or RIVALRY AMONG EXISTING New port facilities in the region New service providers in the port Start up of regional load centers • • • NEW PORT ENTRANTS POWER OF PORT USERS Provisions in leases and other agreements protecting service providers from new entrants in the port providers and customer loyalties Capital intensification in ports and terminals that creates barriers by raising cost of entry Natural barriers to expansion Magnitude of switching costs to utilize other ports or service providers within the port Cost advantages of existing service Changes in regional distribution patterns and ability of carriers to utilize load centers in place of direct service Importance of the port to local economy Existence of large value-adding tenants that the port wants to retain Degree to which individual port users control a large percentage of traffic in the port Business realignments and alliances among port users that result in more powerful players The services provided by the port can be replicated elsewhere Cost of switching to other ports or service providers • • • • • • • • • • • • DETERMINANTS OF BARGAINING DETERMINANTS OF THE THREAT Ability to control negotiations by the threat of curtailing or canceling services Concessions Labor Contractors • • • SERVICE PROVIDERS BARGAINING POWER OF DETERMINANTS OF SERVICE PROVIDER BARGAINING POWER Extent to which service provider participates in financing the activity Ability of service providers vs. port management to absorb downtime Interrelationships among service providers and port users Legal rights conveyed in leases and other use agreements Experience and unique capabilities that the service provider brings to port Existence of "choke points" in the port that facilitate slowdowns or stoppages in port operations • • • • • • Author. Source: Box 1: The Competitive Landscape

22 The Evolution of Ports in a Competitive World improvement, pricing decisions, and other manage- the competitive landscape. In some ports, there ment actions. Winners and losers will emerge in will be little if any rivalry given the location of the global port sector, largely dependent on how the port, the type of services being provided, the port managers strategically position themselves in rules on number of companies able to operate the evolving competitive landscape (see Box 2). within the port, and other factors. In other situ- MODULE 2 ations, rivalry among competitors will be 1.2. Rivalry among Existing intense and often result in pricing that strips the Competitors suppliers of profits. There are several factors, The intensity of rivalry within the port and discussed in the following sections, that deter- between ports is the first of five forces shaping mine the intensity of port rivalry.

Box 2: Checklist of Key Questions for Positioning in the Global Port Market ere are some key questions that port • Can manufacturers and assemblers shipping managers and port service providers through the port shift to other sites? Hshould ask when developing long-term • Are there potential developments that could strategy for market positioning. impact the ability to substitute globally? Rivalry among Existing Competitors • How significant is port cost in determining Which other ports have access to my hinter- market competitiveness of port customers? land market? • What barriers or incentives can prevent port • Is future supply and demand for port servic- customers from switching products or sites? es in the region expected to be in balance? Bargaining Power of Port Users • Are competing ports able to absorb losses To what degree do individual port users control through cross-subsidizing services? traffic through the port? • Who has the greatest stakes at risk in main- • What is the potential for business realignments taining and growing traffic volume? or alliances among customers in our port? • Where do we have a comparative advantage • How would these realignments or alliances over our competitors? change their bargaining power? • What actions can we take to attract and lock • To what extent can the services provided by in customers? our port be replicated elsewhere? Threat of New Competitors • What are the bargaining strengths and Are new ports being planned in the region that weaknesses of the port and port users? potentially access my market? • How can the port’s bargaining strength be • What is the status of these plans and the improved? likelihood the project will proceed? Bargaining Power of Service Providers • Will changes in distribution patterns create a Which service providers are potential choke new form of competitor? points in the port? • What actions can we take to minimize the • What options are available to the port if nego- impact on our existing market base? tiations with specific service providers fail? • Which other companies are potential service • Has the service provider or port the greater competitors in the port? capability to absorb port downtime? • Can switching costs and other barriers be • Does the service provider bring financing created to prevent market entry? capability to negotiations with the port? Potential for Global Substitutes • Are there interrelationships between service Are there other sources for products being providers and port users? exported through our port? • What legal rights have been conveyed to the • Have ultimate users of cargo through our service provider by the port? port the ability to use substitute products? Source: Author.

23 The Evolution of Ports in a Competitive World

1.2.1. Hinterland Market Access market and the Indian subcontinent. However, the strategic location of these ports has not pre- In some situations, only one port can logically cluded rivalry for business. Singapore is in an provide access to hinterland markets. This may increasing rivalry with Port Klang, and more result from geographical features, lack of ade- recently with Tanjung Pelepas. Several ports in quate transport infrastructure from all but one the Mediterranean, such as Port Said East, port, political issues, or other factors. The port Tangier, and Damieta, are increasingly compet- of Djibouti currently has a virtual monopoly on ing with Algeciras, Malta Freeport and Gioia access to the Ethiopian market as a result of the Tauro for regional transshipment trade. Salalah conflict between Ethiopia and Eritrea and the and Aden are now serious rivals to Colombo lack of transport infrastructure from neighbor- and Dubai for the Gulf and Indian subcontinent

MODULE 2 ing Somalia. Dar es Salaam is the major entry transshipment markets. These rivalries are often point to Tanzania, as well as the neighboring intense and create substantial pressure on trans- landlocked countries of Zambia, Burundi, shipment pricing. Rwanda, and Malawi. Little general cargo enters Madagascar without passing through 1.2.3. Regional Port Capacity and Demand Toamasina. There is obviously little, if any, rivalry An imbalance of port capacity within a region between ports in such circumstances. In other will influence the level of rivalry between ports. situations, many ports may be able to provide Excess capacity will cause rival ports to aggres- access to a common hinterland, creating intense sively compete for market share. Sometimes this rivalry for market share. Numerous ports on the can lead to destructive pricing. For example, the U.S. East, Gulf, and West Coasts compete for rapid growth in load center capacity in the traffic to and from the Midwest. Likewise, a Eastern Mediterranean has produced intense number of large ports in Northern Europe and competition between hubs, and as a result ports the Mediterranean compete for the European such as Limassol and Damietta have been forced hinterland. In Asia, Hong Kong, Shekou, to aggressively compete to retain customers by Yantian, Fuzhou, and other ports compete for pricing services so low that they may not be access to the Southern China market and numer- covering costs. Likewise, the inability within a ous ports in Northern Asia are available to serv- region to generate sufficient traffic will increase ice the Japanese and Korean markets. rivalry for available business. The small hinterland of ports in the Caribbean constrains the 1.2.2. Ability to Service Transshipment Trade market available to each port, creating the need While rivalry for hinterland market access can to compete for all types of cargo rather than sometimes be limited, rivalry for transshipment specialize in types of traffic for which the port business is intense, even for ports that have might have comparative advantage. established leading positions as load centers. 1.2.4. Ability to Create Competition within Singapore established its role as the world’s the Port largest transshipment center as a result of an advantageous location on the Asia–Europe trade The ability to segment operations in the port to route and proximity to regional origin and desti- create competition among service providers will nation centers in Southeast Asia. Algeciras, often determine whether rivalry can exist within Malta Freeport and Gioia Tauro established the port itself. Sometimes it is difficult or their positions in the Mediterranean transship- impossible to divide facilities in a way that ment market as a result of their location on the enables more than one contractor to provide Asia–Europe trade route and proximity to the certain types of services within the port, partic- Southern Europe and Northern Africa markets. ularly container terminal handling services, Colombo and Dubai have established themselves giving the contractor monopoly status. Much as regional hubs for traffic to and from the Gulf depends on the geographical layout of the port,

24 The Evolution of Ports in a Competitive World the available traffic, and the minimum capacity the plan to invest more than $2 billion in a new additions (taking into account the lumpiness of deepwater container terminal and a new rail- port investments). way connection to Germany to maintain position in the future market.

In Beirut, a 20-year concession for handling MODULE 2 containers in the port has been given to one 1.2.6. Ability to Absorb Losses contractor, as the layout of the port was The ability to absorb losses and cross-subsidize considered to preclude more than one container operations within the port impacts the balance terminal operator. In other situations, such as and intensity of rivalry. Global terminal opera- Jeddah, it was possible to segment container tors with strong financial balance sheets and terminal facilities in a way that enabled the port multiple operations worldwide may be willing to award long-term container handling conces- to absorb losses in a particular region, at least sions to two contractors, each operating in a for a limited period of time, to eliminate com- separate location within the port. Even more petition. Ports with multifaceted operations may competition has been created among service be able and willing to cross-subsidize services to providers in Hong Kong, where three container lower charges on port activities where there is terminal operators compete with each other and greater rivalry for business. Likewise, port a variety of other service providers also compete authorities involved in non–seaport-related for business within the port. In Buenos Aires, activities, such as the Port of New York and the geographical layout of the port and avail- New Jersey, may be able and willing to cross- able traffic volumes ultimately enable not more subsidize port-related services through higher than four terminal operators to compete. charges on non–port-related services. 1.2.5. Stakes at Risk 1.2.7. Ability to Control Operations Rivalry will be influenced by the stakes at risk Rivalry is also impacted by the ability of port in preserving the market share of regional traf- authorities and port service providers to control fic. The greater the stakes, the more intense the the efficiency of port services. There are situa- rivalry to preserve market share. This takes on tions where entities operating in the port are particular significance in modern container outside the control of the port manager or service ports, considering the investment required to provider, effectively limiting the ability of the establish a new container terminal can easily port to compete with other ports for market exceed $100 million. Whoever assumes the risk share. In particular, procedures and require- for this investment will clearly have a big finan- ments imposed by customs frequently constrain cial stake in ensuring that the new terminal cap- the port’s ability to compete for market share. tures and preserves market share. APM In Jeddah, for example, clearance procedures Terminals, with sister company Maersk Line, have been the primary culprit, limiting the has invested heavily in a new container terminal port’s ability to grow as a load center for the in Salalah and clearly has a stake in ensuring Red Sea and Middle East markets. In the West that the facility is efficiently used as their African Port of Cotonou, customs processes regional transshipment hub (see Box 3). Stakes became such a hindrance that long dwell times at risk also stem from the importance of the for containers were suffocating the port. port to the local economy. The Port of Rotterdam, for example, is a major contributor 1.2.8. Limits on Rivalry within Ports to the local economy and preserving market share in regional traffic flows is of vital impor- Limits that ports set on the number of eligible tance to the local and regional government. service providers impact the degree of rivalry. This has resulted in an intense rivalry with Many port authorities have policies limiting the other Northern European ports and underpins number of stevedores, tug companies, and so

25 The Evolution of Ports in a Competitive World

Box 3: Load Centers Competing for the Gulf Market everal major ports are positioning to be Jeddah entry and exit points for containers mov- This port now largely services the Saudi market Sing to and from the Gulf. It is producing and only 22 percent of the containers through a fierce competition for load center status. The the port are for transshipment. However, the outcome of this competition could significantly proposed rail land bridge to Dammam could change the way ocean carriers service the enable the port to function as a load center for Arabian Peninsula market. the Gulf market. The investment in infrastruc- Dubai ture is substantial and major hurdles are in the The port has established itself as a world-class way, particularly establishing a process for transshipment hub serving as a load center for allowing transit containers to move freely across the country without regard to contents.

MODULE 2 markets in the Gulf. Dubai handled about 6.3 million TEU in 2004, about a quarter of which But if the rail investment is realized and the was transshipment traffic within the Gulf, with hurdles resolved, Jeddah could be a major Saudi Arabia, Kuwait, and Iran as the major des- contender for traffic to and from the Gulf. In tinations. The port authority clearly plans to retain 2005, a tender for a build-operate-transfer its role in current transshipment markets, as well (BOT) concession of the railway line was being as position as the load center for containers to solicited, which could bring the railway project and from Iraq once trade resumes. As part of its closer to fruition. strategy to control market position, the port has Beirut been acquiring management contracts for other Then there is the new container terminal in ports and terminals in the region (next to interna- Beirut that started operations in the beginning tional projects), effectively gaining control over of 2005 with a capacity of 700,000 TEU. This regional logistics networks. terminal has the potential to become the major Salalah load center for containers moving between the The new transshipment hub on the Gulf is clearly Gulf and Europe/North America. Cross-border designed as a load center for the region. The issues are hurdles that must be resolved. But major advantage is its proximity to the the use of Beirut as a load center will avoid Europe–Asia trade route. Main line ships have to passage through the Suez Canal and save make only a small deviation from their main navi- 3,400 miles of sea voyage to the western Gulf. gation course, allowing a quick pit stop to pick The line haul route could be served using up and drop containers for the Gulf, East African, two fewer ships in the weekly string, the and India–Pakistan markets. Six years after its economics of which could be very attractive start in 1998, it handled 2.2 million TEU, mainly at to owners. the cost of Dubai and Colombo. Source: Author.

forth that can operate in the port. Sometimes 1.2.9. Government Willingness to Subsidize these limits are set by entry criteria that effec- Operations tively limit the number of competitors. In some situations, these limits are not due to port poli- Rivalry between ports is sometimes influenced by cy, but result from historical precedent limiting the availability of public funds to offset losses, competition. Such a situation is difficult to blurring the role of commercial forces. change. Japanese ports, for example, are largely Governments sometimes subsidize ports on the controlled by a number of small- and medium- basis that they are vehicles for economic growth. sized stevedoring companies that have existed European ports have for many years been willing for many decades. Entry of new stevedores has to subsidize port access and quays to achieve larg- been difficult, if not impossible, and the er economic goals. At present, the European Japanese Minister of Transportation attributes Commission is taking steps to improve the situation this lack of rivalry to Japan’s ports inability to of port competition (see Box 4). The objective of compete with its Asian rivals. these subsidies is to create artificial forces that

26 The Evolution of Ports in a Competitive World

Box 4: Intraport Competition in the European Union ort competition is high on the agenda of in the formerly centrally planned states of the European Union (EU). One of the con- Eastern Europe, and the ports of the other clusions of the Meeting of the European countries. The impact of the directive therefore

P MODULE 2 Council in Lisbon March 28, 2000, was that will differ strongly too. At one end are the UK transport is among the areas where the private ports arguing that they already have Commission, the Council, and the member privatized everything and that the measures states were asked to speed up liberalization. On concerning authorization of port services are a February 13, 2001, the commission adopted a step back, increasing bureaucracy, and at the communication to the European Parliament and other end are the ports of some Mediterranean to the Council, “Reinforcing Quality Service in countries where liberalization is still in its initial Seaports: A Key for European Transport” (the stages. Ports Package). The cornerstone of this com- The proposal is leading to an extensive debate munication was a proposal for a directive of the both within the interinstitutional legislative process European Parliament and the Council on and also with and between stakeholders. After “Market Access to Port Services.” Of the 25 three years of discussion, however, the member countries, 21 have seaports through European Parliament in a plenary session which in 2002, 1.2 billion tons of cargo were rejected the proposal in 2005 something that traded with non-EU member countries with a seldom occurs in the European parliamentary total value of 773 billion. practice. In 2005, the European Commission It is envisaged that the cost of handling (EC) was anxiously studying compromises that these cargoes in ports can be reduced through would be acceptable for both the parliament liberalization of port services. The Directive on and the EC. Market Access to Port Services aims to Interport Competition in the European Union increase of intraport competition for cargo and The amount paid by different European sea- ship handling services. The directive includes ports for maritime access, coastal defense, measures for self-handling of cargo and pas- quays, port basins and jetties, and the degree senger operations and mandatory authoriza- at which such costs are recovered from the tions for all service providers. Self-handling ports users vary greatly. For many ports it is means that an undertaking, which normally not possible to obtain sufficient insight from could buy port services, provides for itself the official published sources, so it remains using its ship and land-based personnel and unclear to what extent countries are subsidiz- own equipment. Also a wider use of the pilot ing their ports. There are also different opin- exemption certificate is envisaged. ions about the nature of some costs; for exam- The proposals are drawing a great amount ple, the provision of maritime access should of opposition from stakeholders. Port labor be considered as a public good, so the related unions see their position weakened by the costs don’t need to be recovered from specific arrival of land-based personnel of the shipping users. companies. Pilots see their position weakened The EC therefore issued a Directive of by a greater use of pilot exemption certificates. Financial Transparency that should apply to all Many companies presently in monopoly situa- ports covered by its legislative proposal and tions will require an authorization for their which are subsequently subject to the State activities with a duration corresponding with Aid Guidelines (an exclusive EC competence) the economic lifetime of their investments. on the financing of port infrastructure. At pres- Generally they find these periods much too ent, the issue is highly relevant for the ongoing short, the compensatory measures with termi- container port expansion programs, such as the nation of contracts too poorly defined, and see Deurganck Dock of Antwerp in Belgium; only more bureaucracy coming. the Port 2000 Project of Le Havre in France; The public-private roles of the ports of EU the expansion projects of Bremerhaven, member states differ greatly for the Hanseatic Wilhelmshaven, and Hamburg in Germany; and ports of Northwest Europe with their landlord the second Maasvlakte project of Rotterdam in type model, the Mediterranean ports with the the Netherlands. great influence of the central governments, the United Kingdom’s (UK) private ports, the ports Source: Author.

27 The Evolution of Ports in a Competitive World

influence the chance of rivals’ success. There are Salalah siphoned a substantial part of the fast indications that government subsidies in the growing transshipment business of the Gulf Mediterranean may be affecting the ability of from ports such as Jeddah, the UAE ports, and transshipment centers to compete for business. Colombo. Since its start in 1998, the throughput increased to 2.2 million TEU in 2004. 1.3. Threat of New Competitors Based on this success, the investors have The second of five forces shaping port reform is ambitious plans for further development of the possibility of new port facilities or service container, general cargo, and bulk handling providers within the port. This would include facilities and also in free trade zone (FTZ) activ- creation of new regional load centers that ities. Similar plans started also for the port of change the way cargo to and from a country’s Aden. Another example includes the increase in MODULE 2 hinterland is distributed. The significance of this All Water Express Services between Asia and threat will vary from port to port depending on the U.S. East Coast via the Panama Canal. As a number of factors. congestion in the U.S. West Coast ports increases with the strong growth in the Pacific Rim 1.3.1. Capital Expenditure for New Port trades, shippers are adjusting supply chains to Facilities account for the longer transit time, but realizing the benefits of less delays and lower total costs. The capital cost required to build a new port The result is creating pressure to develop facility frequently provides a barrier to new alternative gateways to the U.S. hinterland competitors. Large up-front expenditures are market that may open opportunities for neigh- often required for dredging, quay construction, boring Canada and Mexico. There are also access roads, and port superstructure. These instances where a new port can provide access start-up costs provide an entrance barrier that to a hinterland via overland transit, providing can often deter all but the most aggressive play- competition to a port more locally sited. The ers. But there are instances where new entrants new Port of Ain Sukhna in Egypt at the north- will take the risk of major investments in new western end of the Red Sea became operational ports when they see an opportunity for market in 2002, and became, with a throughput positioning. An example of new entrants taking volume of 238,000 TEU in 2004, a strong com- a large risk occurred at the Port of Tanjung petitor to Egyptian ports in the Mediterranean. Pelepas on the southwest tip of Malaysia, where almost $745 million was invested to build a 1.3.3. Provisions in Operating Agreements dedicated container port. The developers saw Provisions in leases, concessions, and other agree- the opportunity to tap into the large and lucra- ments, particularly those involving investment by tive container market, which until then had the operator, will often provide some degree of been largely dominated by Singapore and to a protection from new competitors starting up smaller extent by Port Klang. Throughput business in the port. In other situations, however, increased from 0.4 million TEU (twenty-foot the port service provider can be threatened with equivalent unit) in 2000 to 4 million TEU in new entrants. Nowhere is this better evidenced 2004, and is expected to increase further. than in Northern Europe, with the success of the 1.3.2. New Distribution Patterns Dutch tug company Kotug in expanding its tug assist business in this region’s ports, which have Changes in distribution patterns can create new traditionally been the realm of long established port competitors. This is particularly the case in players. Since Kotug started its towage services in containerized trades, where a newly created the Port of Rotterdam in 1988, a price war was regional load center can siphon traffic from triggered with prices of towage services being traditional ports in the region. In the Gulf, for reduced about 25 percent. In 1996, Kotug example, the newly created load center in expanded its services to the Port of Hamburg,

28 The Evolution of Ports in a Competitive World and in 1999 to Bremerhaven. Concurrently, one almost impossible. Another form of switching of the players in Hamburg started operations in cost is the need to establish a service network in 1998 in the Port of Rotterdam. the new port, which could entail a considerable amount of learning and experience costs. Then 1.3.4. Natural Barriers there’s the switching cost incurred by the dis- MODULE 2 Natural barriers that constrain port capacity can ruption in service during the transition period. limit the threat of new port entrants, particularly Ports, and service providers within a port, can those requiring land or fixed facilities to operate often protect their market position by ensuring within the port. In many ports there simply isn’t that these switching costs are maximized. space for additional berthing, storage, and other 1.3.6. Cost Advantages and Customer fixed facilities, providing some insulation from the Loyalties entry of new competitors. However, these barriers can easily be overstated. In the long term, many of Cost advantages of existing service providers these barriers can be overcome by building in adja- and customer loyalties will affect the threat of cent locations or extending out into the sea. There new entrants. There may be economies of scale can also be new methods of operation introduced or experience that enable established players to that do not require presence in the port. For exam- retain the position of cost leaders if new entrants ple, an inland container depot could substitute for were to start up business in the port. This could storage and other operations now performed in the result from a variety of factors, including having port. The Italian port of La Spezia has a chronic the better location in the port, having sunk lack of space and has constructed the Intermodal investment in facilities and equipment, or Center of San Stefano Magra for this purpose. In employing experienced personnel. While Western Europe, intermodal container depots situ- customer loyalties can be ephemeral, quality of ated along inland waterways are playing an increas- service (for example, responsiveness to customer ing role to relieve congested ports and roads. needs, handling rates, clearance time, and so forth) can differentiate the service provider and 1.3.5. Magnitude of Switching Costs limit the threat of new entrants. Sometimes these Existence of switching costs will often deter- customer loyalties can result from the threat of mine the ability of new entrants to start up reprisal should the customer shift to another competing operations, either within a port or service provider or another port. between ports. Switching costs can come in sev- 1.4. Potential for Global Substitutes eral forms. They could be the capital expenditure required to switch from one port facility to The third force shaping the competitive land- another. In some cases, this can be a very small scape of port reform is the potential of port users cost, especially for carriers that have little fixed to shift to other global sources, impacting the investment in a facility. A pure transshipment level of activity in the port. This force takes on facility for containers, such as Kingston, greater importance as world trade is opened to Jamaica, can be particularly vulnerable to competition, sourcing of supply becomes increas- switching as the carriers using the facility may ingly global, and vertical specialization becomes incur little switching cost in shifting to a com- an increasingly important factor in global logis- peting facility. In other cases, this cost can be tics chains. Several factors will determine the substantial. Carriers can have a considerable importance of this force on specific ports. amount of equipment positioned in a port that 1.4.1. Other Global Sources for Products would need to be shifted to another port if they Moving through the Port were to switch operations. Also, some carriers have heavily invested in port and terminal infra- The extent to which there are other global structure. In instances where major bulk han- sources available to customers now shipping dling facilities have been created, switching is through the port will determine the ability to

29 The Evolution of Ports in a Competitive World

source elsewhere. Various types of fruits and environment. It may also entail walking away vegetables provide good examples of substitute from a high sunk cost. Reebok, for example, global sources. Bananas, for example, can be has established a large final assembly and distri- sourced from West Africa, Central and South bution center in the Port of Rotterdam to serv- America, the Caribbean, or Asia. Manufacture ice the European market. While this value- of clothing is also globally footloose, with many adding activity could be shifted to another loca- potential source locations. The efficiency of tion, there is a sizable sunk cost associated with port facilities in each of the export locations the existing facility (see Box 5). will impact the success of the product in the 1.4.4. Demand Elasticity of Exports and export market, which ultimately affects the level Imports of activity moving through the port. MODULE 2 1.4.2. Substitute Products for Exports and Another factor determining the potential for Imports global substitutes is the elasticity of demand for the country’s exports and imports. The greater Foreign buyers may be able to substitute other the elasticity, the greater the possibility that products for the product they are now shipping buyers can do without the product. Doing with- through the port. For example, a power plant out the product is a form of substitution by the utilizing imported coal as feed may be able to buyer that will impact the volume of traffic for switch to oil or gas as feed if the economics shift that product in the port. in favor of the latter. Port costs to handle coal are one of the factors that impact the economics 1.4.5. Importance of Port Costs in Total of utilizing coal as feed, and exports of coal Delivered Price through the port could certainly be affected if Cutting through all of the above is the issue of how the foreign buyer shifts to gas or oil as feed. significant port-related costs are as a percentage of 1.4.3. Magnitude of Switching Costs for total delivered price. Many shippers consider port Substitution costs to be among the more controllable expenditures in the logistics chain. In general, the higher There may be significant cost in switching to the percentage that port costs are of total delivered other sources, products, or assembly sites that price, the more impact port costs will have on will impact the ability of port users to substitute buyer behavior. For high value commodities, such globally. The greater this cost, the greater the as electronics, port costs can be less than 1 percent port’s bargaining power. Ability to shift to other of the delivered market value. For low value com- global sources can be limited by the port users’ modities, such as bagged rice, port costs can be reliance on value-adding services in or near the more than 15 percent of the delivered market port, involving integration of imported interme- value. Shippers of electronics may be less influ- diate goods with domestic produce for final sale enced by port costs in selecting ports than shippers to the domestic or export market. These value- of rice. However, small cost penalties may not be adding services can be costly to replicate else- acceptable even when port costs are a small where and affect the ability to shift to other percentage of the total delivered price. These global sources. For example, the large free zone penalties may represent the difference between in Jebel Ali enables tenants to import and profit and loss in the marketplace and influence the assemble intermediate products into final selection of the port, depending on whether the products, utilizing a large pool of inexpensive port user has the option to ship through another expatriate labor for the assembly process. While port, not buy the product, or find another market. many of the value-adding activities performed in Jebel Ali can be performed elsewhere, the Maritime transport costs have an important share alternatives may involve significantly higher in the landed price of bulk commodities such as labor cost and a less friendly government coal, cement, and crude oil. An increase of the

30 The Evolution of Ports in a Competitive World

Box 5: Reebok Logistics Center in the Maasvlakte Distripark alue-adding activities have been created in locations, Reebok decided to locate the logis- many ports to enhance trade and generate tics center in the Netherlands. The site chosen employment for the local area. The key is in the Distripark 3 in Maasvlakte, at the sea

V MODULE 2 ingredients are efficient port operation, availability edge of the port property. In November 1998, of good transport services, and attractive prices the facility began receiving product. for land, labor, and energy. The Reebok state-of- Why the Port of Rotterdam Was Selected the-art logistics center in Rotterdam illustrates Reebok had a variety of reasons for choosing how one port helped create a value-adding this site. It is close to the new deepwater service that generates employment for 300 container terminal in the Port of Rotterdam, a personnel and contributes $6 million in direct facility that is generally regarded as one of the income to the local community. most advanced and capable terminals in Reebok Product Lines and Logistics Europe. The location is on the coast, which Reebok has two product lines, footwear and provides easy access to short sea transport to apparel. In 1998, footwear accounted for 57 the UK market. There is a good supply of percent of international sales, apparel 43 warehousing labor in the Rotterdam area, percent. Reebok products are actively marketed despite the fact that the general labor market in 170 countries and territories. The United is tight. Most people in the Netherlands under- Kingdom (UK) is the largest market for Reebok stand English, which was considered impor- products in Europe, representing 30 percent of tant by Reebok. Customs in the Netherlands total European sales. Spain is another big is considered to be efficient and business market for Reebok products. Almost all friendly. While not an advantage, labor costs footwear is supplied from plants in the Far and regulations concerning labor practices East and is transported in containers. Most were considered to be similar to those of other apparel is supplied from plants in southern countries in Europe. But most importantly, Europe, and moved by truck and container space was available and the port wanted to from plants in Portugal, Greece, and Turkey. have a launching customer in the new Restructuring of Logistics Activities Distripark. So the port, in combination with the municipal government, proactively pursued In 1995, as part of a global restructuring of Reebok and provided strong incentives to logistics activities, Reebok decided that ware- locate the facility in Maasvlakte. Based on a housing and distribution activities in Europe six-year operating lease with a five-year should be consolidated. Instead of having renewal option and substantial residual value warehousing facilities in each market, a bulk guarantees by Reebok, the port funded con- logistics facility would be established in main- struction of the state-of-the-art 700,000 square land Europe to supply pick-and-pack ware- foot logistics facility. The port also created the houses in the UK and Spain, as well as directly necessary infrastructure to connect the facility supply other markets in Europe. Except for to the adjacent container terminal, facilitated some very large accounts (which are serviced creation of a bus service fitted to the plant direct) and apparel for Southern Europe (which shift system, and provided a contact person to is warehoused in Spain), all product flow to the deal with problems and issues. Reebok European market would pass through this describes its relationship as “a partnership logistics center. France, Belgium, and the with the port.” Netherlands were considered as potential locations. Following assessment of each of these Source: Author.

available draft enables the deployment of larger (see Box 6). As a result, shipments of coal and ships, the realization of economies of ship size, crude oil presently carried in consignments of and a better access to world markets. The region- about 60,000 tons can be shipped in consign- al government of the state of Zulia in Venezuela ments two to three times bigger, reducing ship- has plans to deepen the Port of Maracaibo ping costs up to $3 per ton for exports of coal to by shifting to a location nearer to the sea Western Europe.

31 The Evolution of Ports in a Competitive World

small or midsize port where there are options Box 6: Enlarging Venezuelan Export Markets for using other facilities. of Coal and Crude Oil The entrance channel of the Port of In the Caribbean, large cruise lines such as Maracaibo has a draft limitation ranging from Carnival, Royal Caribbean, and P&O have great 37–39 feet. This limits the size of the con- bargaining power with the cruise ports that they signments carried by tankers and dry bulk serve. These three companies control more than carriers leaving the port. In practice, vessels of more than 100,000 dwt (dead weight ton- 50 percent of industry capacity and their deci- nage) are calling in partly loaded condition, sions on which ports to call can have major with consignments of about 60,000 tons. impact on a local economy. Some years ago, Plans are being considered to enable the Carnival decided to reduce cruise ship visits to port to accommodate ships with a draft of MODULE 2 Grenada as a protest to the imposition of cruise up to 54 feet. This will lead to a reduction in shipping costs of up to $3 per ton for taxes by the government, an action that seriously exports to West Europe. As a result, affected the economy of the small nation. Venezuelan coal and crude oil can be shipped cheaper to its present customers, 1.5.2. Impact of Changing Business particularly those in North America and Relationships Western Europe. Business realignments and agreements among port users can result in powerful players that 1.5. Bargaining Power of Port Users port managers and port service providers must contend with in contract negotiations. These The bargaining power and control over port can take the form of conferences, slot sharing management exercised by carriers, shippers, and arrangements, strategic alliances, mergers, and tenants in varying degrees are also significant others. The result in each case can be greater forces shaping the competitive landscape of port concentration of port business among a smaller reform. Bargaining power of port users is deter- number of port users. When representatives of mined by a number of factors, which are out- the Grand Alliance (comprising P&O, lined below. Nedlloyd, NYK, OOCL, and MISC) sit down 1.5.1. Concentration of Port User Power with a port to negotiate future contract terms, the port is dealing with a formidable alliance of The larger percentage of traffic in the port carriers that previously had been individual controlled by an individual user, the more bar- customers. Maersk’s acquisition of Royal P&O gaining power that user has in negotiations Nedlloyd in 2005 gave Maersk control of 18 with port management and service providers. percent of the total world container vessel In some situations, the port user can be so capacity, which is not excessive in itself. The powerful that the port literally cannot afford market share, however, varies per trade route to lose its business. Even the largest ports must and is around 22 percent on the Europe–Far contend with extremely powerful carriers that East, 14 percent on the transpacific, and 19 have the option to take their business else- percent on the transatlantic trade routes. On where. A major container carrier leveraged its some North–South trade routes the market size and market share to get concessions from shares are higher, such as 26 percent on the the Port of New York and New Jersey as a Europe–India route and 28 percent on the condition of using the port as a load center on Europe–East Coast South America trade routes. the U.S. East Coast. The port did not want to On the Europe–South Africa and lose a carrier that commanded 20 percent of Europe–Australia–New Zealand trade routes, the port’s container volume. Given this control however, the market shares became considerably over a large port, consider the bargaining higher and resulted in mandatory downsizing in power that the carrier has in dealing with a these trades.

32 The Evolution of Ports in a Competitive World

1.5.3. Presence of Large Value-Adding whether there are alternative facilities available Tenants to the port user. The more opportunity there is to use other facilities, the less bargaining power Bargaining power will be influenced by the exis- the facility owner has over the user. Nowhere is tence of large value-adding tenants that the port this better illustrated than in Northern Europe, MODULE 2 wants to attract and retain. A major port tenant where a number of large container handling employing a large number of personnel and sub- ports are available for entry and exit in the stantially contributing to the local economy is in European market. Carriers can react to tariff a position to extract concessions that would not increases, efficiency issues, or problems by shift- necessarily be available to smaller players. The ing or threatening to shift to other ports. Some Port Authority in Portland, Oregon, has targeted years ago, the Grand Alliance decided to tem- auto imports as a strategic business sector that it porarily shift one of its five Europe–Asia services wants to retain and grow. Three car manufactur- from Rotterdam to Antwerp on the basis that it ers (Hyundai, Honda, and Toyota) now lease was experiencing delays in Rotterdam. This several terminals from the port authority to decision shifted, on an annual basis, some process and accessorize imported cars. Keeping 125,000 TEU from Rotterdam to Antwerp, these three auto manufacturers in the port is a until the delays in Rotterdam were corrected. In high priority objective, and the port authority the mid Mediterranean, Malta Freeport and provides favorable terms to these large users Gioia Tauro are equally situated to provide that may not be available to smaller tenants. transshipment service to carriers. Each port 1.5.4. Importance of Port to the Economy must consider the potential actions of the others when negotiating with current or prospective The more important the port to the national customers because customers have the ability to economy, the more pressure there will be on port take their business to the other port. managers to attract and retain valuable customers. Some ports can be extremely valuable 1.5.6. Facility Investments by Port Users players in the national economy and the loss of A carrier, shipper, or tenant who has a major major customers could have a big ripple effect on investment in facilities in the port, or has struc- employment and local income (see Box 7). For tured its operations in a way that prevents easy example, the Port of Rotterdam is a key element transfer of operations to another facility, faces in the Dutch economy and development projects switching costs that limit bargaining power. For undertaken by the port over the past decade have example, a joint venture of Saudi and U.S. created more than 45,000 man-years in tempo- interests began operating a rice processing plant rary employment and 17,500 man-years in per- in the port of Jeddah in October 1995. It is the manent employment in the Netherlands. largest rice handling facility of its type in the Middle East and the investment in the facility Current and prospective port users can employ creates an exit barrier should the operator the importance of the port to the local economy become dissatisfied with the service received as a bargaining chip in negotiations over tariffs, from the port. Another example is the container service, or facilities. The larger the contribution load center in Salalah, where Maersk Line is a of the port user to the local economy, the major investor in the terminal along with the greater the user’s bargaining power with the government of Oman. It’s difficult to pack up port. and leave this facility if there is unhappiness 1.5.5. Ability to Replicate Port Services with port policies. At the same time, sunk costs in facilities do not preclude leaving when things Port users will have strong bargaining power if get too bad. International Container Terminal the services provided by the port can be repli- Services, Inc. (ICTSI) of the Philippines decided cated elsewhere. Essentially this comes down to to pull out of the Port of Rosario in Brazil after

33 The Evolution of Ports in a Competitive World

Box 7: Suppliers to Container Terminal ince opening in 2000, the terminal in Tanjung Pelepas, Malaysia, created businesses for 710 com- Spanies that did not exist before the terminal went into operation. Suppliers to Tanjung Pelepas Container Terminal Types of services No. companies Types of services No. companies Warehousing 9 Bunkering and lubricant 11 Manufacturing 2 Port development contractors 15 Parts distribution hub 1 Duty-free shop 1

MODULE 2 Vehicle storage 1 Insurance services 1 Haulage/trucking 28 Pest control 1 Container maintenance 1 Health clinic 1 Forwarding agent 12 Cleaning services 3 Freight forwarding 28 Landscaping 1 Logistics 32 Canteen operators 5 Lashing contractors 2 Convenience Store 5 Prime mover contractor 2 Fixed assets supplier 2 Waste collection 2 Sundry suppliers 532 Ship Chandelling 7

Terminals in Bremerhaven, Germany and Salalah, Oman have more than 350 and 400 suppliers respectively. Source: APM Terminals International B.V.

having invested $27 million in a failed effort to These companies have operations in more than operate the container terminal. Europe one region in the world and handled an estimated Container Terminals (ECT) left Trieste after a 206 million TEU in 2004. It is expected that one-and-a-half-year effort to operate the Molo the market share of these companies will VII container terminal. Both contractors decided increase to 55–60 percent by 2010. These large that future losses would be greater than the cost players can tilt the scale in negotiations with of pulling out. State-owned, Singapore-based port authorities. The extent of service provider operator, PSA International (PSA), met difficul- bargaining power is determined by a number of ties with its Aden terminal in 2002, and was, issues. according to the contract, bought out by 1.6.1. Experience and Capabilities of YemenInvest. Service Providers

1.6. Bargaining Power of Service Experience and the unique capabilities that the Providers service provider brings to the port are a factor The final force shaping the competitive land- determining its bargaining position. The greater scape of port reform is the bargaining power of these capabilities, the more power the service port service providers. A variety of operators provider has in dealing with the port. A contrac- and groups often have the ability to exercise tor that has operated in a port for many years, control over the port by threatening to curtail has established a cadre of very experienced or cancel services. At present, more than half personnel, and has accumulated a large inventory the world’s container terminal capacity is man- of equipment needed to perform the job would aged by a small number of companies, approxi- more likely be able to extract favorable terms mately 15, defined as global terminal operators. from the port than a start-up company.

34 The Evolution of Ports in a Competitive World

Likewise, a contractor with unique skills, such types of activities have considerable bargaining as handling hazardous cargo or chemicals, is in power in dealing with port management. a good bargaining position. Large global termi- 1.6.4. Ability to Absorb Downtime nal operators are also in a good bargaining position because they are often perceived as The ability of service providers compared to MODULE 2 bringing experience and unique capabilities port management to absorb downtime also based on their operations elsewhere, loyalties of affects the balance of bargaining power. Service a customer base, networking possibilities, and providers with deep pockets may be willing to access to financing. The contract for Dubai take a loss of revenue for a substantial period Ports World (DPW) to manage the Port of to get what they want from the port. Djibouti was largely based on the perception Meanwhile, the port can be under substantial that DPW could transfer experience in port government and commercial pressure to resolve operations in Dubai and increase regional mar- the conflict and get the port back into opera- ket access to Djibouti. tion. Strikes in the Israeli ports of Ashdod, Haifa, and Eilat in 2005 created a backup of ves- 1.6.2. Participation in Facility Financing sels in the ports and generated calls from many A service provider that participates in the sides to reach a resolution as soon as possible. In financing of an activity is clearly in a better addition, the management lock-outs in October bargaining position than one who does not. 2002 during the labor contract negotiations Many port services that are privately operated (Pacific Maritime Association versus the as concessions involve some degree of financing by International Longshore and Warehouse Union) the operator and, in many cases, the contractor caused havoc in the U.S. West Coast ports, offering the best financing terms is in position taking months to process the backlog of vessels. to get the concession. The developer of the new 1.6.5. Interrelationships between Providers container terminal in Aden chose PSA and Port Users Corporation as the operator partially because PSA was willing to participate in financing the The existence of interrelationships between $200+ million infrastructure development. service providers and port users can influence the power structure in the port. These interrela- 1.6.3. Choke Points in the Port tionships can affect decisions regarding port operations, leases, berthing rights, and other Existence of choke points in the port that facili- issues. Uniglory, for example, is the feeder ship tate slowdowns or stoppages of port operations subsidiary of Evergreen, which in turn is one of provides a power that is often employed to the major line haul container carriers. A port extract concessions from port management. that wants to attract line haul calls by Sometimes the choke point can be an activity in Evergreen could be willing to extend berthing the port, without which the port cannot function terms to Uniglory that are more favorable than effectively. Tug service is an example; if tugs are would be given to a feeder ship operator who is not available for ship assist, the port may contin- independent. Uniglory can exploit this relation- ue to function, but not necessarily at the normal ship to strengthen its bargaining position in level of efficiency. Sometimes the choke points negotiating terminal concessions. can be personnel in the port; a labor stoppage in cargo handling or other strategic services can 1.6.6. Rights and Obligations Conveyed by shut port operations down. The choke point can Contractual Agreements also be trucking to and from the port, warehousing operations, or other services where a slow- Lease agreements and other contracts to use down for whatever reason can quickly stall oper- port facilities include provisions that convey ations in the port. Service providers in these legal rights and obligations to the port service

35 The Evolution of Ports in a Competitive World

provider. These contract terms will set bound- do business. Changes in distribution patterns and aries on the port service provider and port in in the structure of the maritime geography will future negotiations. The rights can be extensive, increasingly create a hierarchy of ports and giving the provider exclusive rights to operate some historical port-related activities will be in the port for 20 plus years with little if any shifted to inland sites. Environmental, safety, control by port management. Or they can be and security concerns will force ports to impose very limited, giving the port the right to exercise regulations and provide facilities that may have a great deal of control over the performance of no commercial return on investment. the service provider, including provisions in the contract specifying a minimum investment pro- 2.1. Globalization of Production gram that must be fulfilled by the contractor. As The world economies are becoming increasingly MODULE 2 the contract between the port and service interrelated as a result of increasing trade and provider will set the boundaries for future bar- the growing trend toward globalization of pro- gaining, the need for a well-planned, careful duction. Over the past half century, most coun- negotiation to develop the contract can’t be tries have seen an increase in exports as a share overemphasized. of gross domestic product (GDP) and there has been an increase in vertical specialization of 1.7. The Bottom Line world trade. In addition, sourcing of raw mate- Ports no longer operate in an insulated environ- rials and finished products has become increas- ment. They face the same competitive forces ingly globalized, and producers in various, often that companies in other industries experience. distant areas of the world are increasingly There is rivalry among existing competitors, the forced to compete with one another for the continuing threat of new entrants, potential for same markets. The basic forces that have trig- global substitutes, and the presence of powerful gered the greater interrelation and interdepend- customers and powerful suppliers. Dealing with ency of the world economies remain active. these forces is a continuing challenge for the Thus, there is no reason to think that these port manager. It requires that the port manager trends will not continue. be keenly aware of port user requirements, 2.1.1. Vertical Specialization know their constraints in the global market, and have a strategy for making the port a part- The increasing vertical specialization of world ner in business development. trade has had significant impact on the global 2. PORT DYNAMICS IN THE logistics system of many manufacturers. It has 21st CENTURY added links to global supply chains and increased the transport intensity of production The 21st century will see radical changes in the processes. Firms have been increasingly concen- business base underlying port operations. trating on exploiting their core competencies Increasingly, intense global competition will and subcontracting out a number of noncore force changes in the way all players in the inter- manufacturing and assembly activities to con- national logistics chain, including ports, contractors. Tasks traditionally performed at the duct business in the future. Innovative systems start or the end of the production line are and new technology will radically change increasingly moving away from the main plant requirements for port infrastructure and to be performed by manufacturing subcontrac- increase the degree of specialization, raising the tors or distribution centers. Preassembly and financial stakes of port investments and the sequencing of parts for on-line production need for a highly specialized workforce. chains are activities increasingly outsourced to Realignments and consolidations among port specialist logistics providers. Customization of users and port service providers will continue, products, which can range from labeling or creating a fluid base of players with whom ports repackaging of goods to reconfiguration of

36 The Evolution of Ports in a Competitive World items, is one of the fastest growing areas of Africa. Textile manufacturers can source in logistics outsourcing. China, Southeast Asia, the Indian subcontinent, Africa, Eastern Europe, and a wide variety of 2.1.2. Focused Manufacturing other locations. The sourcing decision ultimately

Manufacturers have been concentrating produc- is determined by total delivered cost and quality, MODULE 2 tion capacity in fewer locations, replacing the which in turn can be greatly dependent on the traditional system of nationally based produc- logistics cost to acquire primary and intermediate tion with “focused manufacturing.” Instead of a products and deliver the finished products to factory manufacturing a broad range of prod- market. ucts for a local market, the entire production of 2.1.5. Impact of Globalization on Ports a particular product for a continent or, in some cases the world market, is focused at a single While ports have always been important nodes location. While this has enabled companies to in the logistics system, globalization of produc- maximize economies of scale in the production tion has sharpened the need for ports to be operation, it has often made their logistical sys- value adders, not value subtractors, in the sup- tem more transport-intensive and transport- ply chain, and has given ports a unique oppor- dependent. tunity to become value-adding entities. A port is 2.1.3. Expanded Logistics Reach the interface between intercontinental transport and a place in the hinterland being considered Companies have steadily expanded the geo- for production, assembly, or final distribution. graphical scale, or “logistics reach” of their Port capability and efficiency can greatly influ- sourcing and distribution operations. Extension ence the decision for locating a plant or distri- of this reach on a global scale has been one of bution center, and often determine whether a the dominant trends in international business local producer can compete globally or region- and logistics over the past 30 years. The emer- ally with other producers. The challenge is for gence of a new generation of high-value manu- ports to relate to the needs of their customers factured products, particularly in the electronics and assist them in improving their competitive industry, and a general reduction in the density positions by providing low-cost, efficient port of consumer products (that is, lesser but better services. known brands) has contributed to an increase in logistics reach. Hewlett-Packard, for exam- 2.2. Changing Technology ple, estimates that the various parts in a com- Major technology changes are taking place in the puter workstation in a New York office were ocean shipping sector that affect requirements for moved a total of 96,000 kilometers from their port infrastructure and services. The most obvi- points of production in places such as ous is the increasing containerization of global Singapore, Japan, France, and the Western trade, a trend that is widely expected to continue United States. into the future. Containerization of seaborne 2.1.4. Increased Sourcing Alternatives trade is some 50 years old, and deep-sea containerization some 40 years old. Yet it has dra- Producers in one area of the world are increas- matically changed requirements for cargo han- ingly competing with producers in other areas dling and port facilities, raised the financial for the same international markets. This is true stakes of investing in these facilities, and radically across the spectrum of primary and intermedi- affected manpower and labor skills required to ate products. Examples of sourcing alternatives handle cargo, creating serious labor redundancy are virtually endless. Wholesalers of fruit and issues and retraining needs in many ports. In juice in Europe can source from Latin America, addition, the ocean transport industry is employ- Southeast Asia, Australasia, Eastern ing increasingly sophisticated information tech- Mediterranean, Southeast United States, and nology (IT) to manage logistics; and ports, if they

37 The Evolution of Ports in a Competitive World

Box 8: Evolution of Containerized Shipping ontainer shipping got its start in April 289.5 meters length and 32.3 meters beam. 1956 when the tanker Ideal X owned by This generation included a containership CSeaLand (then known as Pan Atlantic design that moved the technology goalpost Steamship) made its initial voyage between on service speed. In 1972–73, SeaLand took New York and Houston carrying 58 trailers on delivery of eight 33-knot, panamax-size con- deck. The trailers were detached from their tainerships capable of carrying 1,900 TEU. To chassis and lifted aboard the ship with a dock- make this speed, the ships had 120,000 bhp side gantry crane. This initial voyage was rap- (brake horsepower) installed power. They idly followed by plans to convert six dry cargo turned out to be an economic failure when ships to full containerships fitted with onboard fuel prices went skyward as a result of the cranes. The first of these began operating in Organization of Petroleum Exporting MODULE 2 October 1957, and had capacity to carry 226 Countries (OPEC) action in the mid 1970s. To 35-foot containers, equivalent to about 480 date, the speed of these SeaLand ships has TEU. By 1963, the company was employing not been exceeded. The late 1970s and early converted tankers between the U.S. East and 1980s saw further increase in containership West Coasts that were able to carry 476 size, with capacity moving into the containers (about 830 TEU). Meanwhile in 1,500–3,000 TEU range, including a number 1960, Matson began containerized service of panamax-designed ships. However, the between the West Coast and Hawaii, utilizing abrupt rise in fuel cost brought about a slow- cargo ships able to carry 436 24-foot containers er generation of containerships during this on deck (about 520 TEU). There was also an period. The design emphasis was on achiev- unsuccessful attempt by Grace Line in 1960 to ing fuel efficiency, and service speed general- introduce container service between the ly fell into the 20–24 knot range and drafts United States and Central and South America. deepened to 10.5 meters. International service using containerized During the second half of the 1980s, the vessels began in 1966 with the introduction of capacity of panamax containerships grew to SeaLand’s weekly container service between more than 4,000 TEU through design improve- the U.S. East Coast and Europe. ments. Included among the panamax ships First Purpose-Built Containerships built during this period were 12 4,400 TEU Ships built prior to 1969 were converted break- “econoships” designed by U.S. lines to oper- bulk ships or tankers. They generally had ate on a round-the-world service. These were capacities in the 750–1,000 TEU range, a draft relatively slow (19 knots) ships with a small of about 9 meters, service speeds of 18–21 power plant designed to maximize fuel effi- knots, and were fitted with shipboard cranes to ciency. While these ships were too slow for the handle containers. In 1969, the first ship specif- intended service, they initiated the concept of ically designed for containership service was a round-the-world service that Evergreen and built. This began a new generation of larger and other carriers followed later. faster containerships with capacities in the Postpanamax Ships Enter Service 1,000–1,500 TEU range and service speeds of Even more important during the second half of 20–23 knots, and some ships could achieve the 1990s was the introduction of the first speeds up to 27 knots. These ships were postpanamax ships by American President designed to use quay cranes rather than ship- Lines (APL), which ordered five ships at 273 board cranes. Removing the cranes both meters long, 39 meters wide, with 4,400 TEU increased the cargo handling productivity and capacity for use in transpacific service. These allowed more containers to be stowed on deck. were the first containerships unable to transit Containerships Reach Panamax Dimensions the Panama Canal and paved the way for Ships built in the early 1970s had capacities increasingly larger postpanamax ships over the in the 1,000–2,500 TEU range, a draft up to next decades. According to APL, the principal 10 meters, and service speeds of 22–26 advantage of the postpanamax ship is virtually knots. Built during this period were the first unlimited container capacity. Other advantages panamax-size containerships, with dimen- include the fact that a large panamax ship sions just enough to pass through the locks must carry as much as 12,500 tons of water of the Panama Canal, which limits ships to ballast, whereas an equivalent size, but wider,

38 The Evolution of Ports in a Competitive World

Box 8: Evolution of Containerized Shipping (Continued ) postpanamax ship requires little or no ballast of ships with a capacity of more than 6,000 and consumes less fuel. Also, for the same TEU, designed for a service speed of 25 knots TEU capacity, the postpanamax ship is 5 per- at maximum draft of 13.5 meters. In addition, cent cheaper to build because length is the through design changes, the capacity of pana- MODULE 2 most expensive dimension. max-sized containerships increased to 4,800 In the 1990s, postpanamax containerships TEU. In the late 1990s, Hapag-Lloyd ordered were ordered by most of the major line haul seven 4,800-TEU containerships with a service carriers, including Maersk, OOCL, Hanjin, speed of 25 knots and draft of 13.5 meters, Evergreen, Hyundai, COSCO, NYK, MOL, and yet designed within the size limits of the NOL. The most notable orders were those of Panama Canal. Maersk and P&O, who took delivery of a string Source: Ecorys (2005).

are to remain competitive, must be key players in then existing orderbook, the fleet will increase to future IT logistics networks. 4,252 units with a capacity of 10.7 million TEU in 2008. With a resulting rate of 10.7 percent 2.2.1. Containerization of World Trade more than the period 1998–2008, the growth is higher than the 9.9 percent as experienced over More than 60 percent of the world general the previous decade (see Box 10 and 11). cargo trade moved by sea is carried in containers. On trades between highly industrialized The growth was accompanied with a large countries the percentage approaches more than increase in the size of ships. The share of ships 90 percent (of the containerizable cargo). This in excess of 5,000 TEU increased from 1 percent is a remarkable market penetration for a tech- in 1996 to 30 percent in 2006. The share of nology that dates only from the mid 1950s, postpanamax vessels (ships with a beam larger when the first converted ship carrying 58 con- than 32.2 meters) will have increased over the tainers made its initial voyage between New same period from 15.4 percent to 47.1 percent. York and Houston. Since then there has been a continual increase in both number and average In September 2005, the total fleet on order size of containerships (see Box 8 and 9). reached 4.3 million TEU. Maersk Line tops the list with a share in the total of 11 percent in In the beginning of 2005, the world fleet of terms of TEU and 8 percent in terms of number cellular containerships consisted of 3,362 units of vessels. The 10 largest operators together have with a capacity of 8.3 million TEU. Given the a share of 48 percent and 31 percent respectively.

Box 9: Development of Container Vessel Sizes as a Percentage of the Global Fleet 50

40 <2000 TEU

30 2000–3999 TEU

20 4000–4999 TEU percentage >5000 TEU 10

0 1991 1996 2001 2006 Source: Author.

39 The Evolution of Ports in a Competitive World

Box 10: Ships on Order as of September 2005

Company Rank On Order TEU On Order Ships % of Total

Maersk Line 1 463.961 91 8 Mediterranean Shipping Co. SA 2 293.824 39 3 P&O Nedlloyd Ltd. 3 179.483 29 2 CMA CGM SA 4 356.350 66 6 Evergreen Marine Croporation (Taiwan) Ltd. 5 36.616 6 1

MODULE 2 APL Ltd. 6 111.106 30 3 China Shipping Container Lines Co. Ltd. 7 209.413 34 3 COSCO Container Lines Ltd. 8 223.285 27 2 Hanjin Shipping Co. Ltd. 9 74.365 11 1 NYK Line 10 137.300 23 2 World Fleet 4,348,664 1,161 100 Source: Containerisation International.

Box 11: Evolution of Cellular Fleet

12000 12000 Number of vessels Number of 1000 TEUs 10000 10000

8000 8000

6000 6000

4000 4000

2000 2000

0 0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Note: Figures are given at 1 January each year. Figures for 2006–2008 are derived from orderbook of 1st 2005, assuming that no ships are deleted. Source: BRS Alphaliner.

2.2.2. Future Containership Designs was expected some years ago. The largest ships are most effective on the Europe–Far East trade There are no technical reasons preventing con- route for which seven to nine ships are needed tainerships from getting larger, so economic and to operate a weekly schedule. Investment in a strategic considerations will be the source of service deploying 10,000-TEU ships would any barrier. There is a continuing increase in therefore require a capacity addition of 80,000 size of ships being ordered, but owners appear TEU; this is a large capacity addition. The to be reluctant to take large steps. The 10,000 increase in the size of the total market and the TEU mark has not yet been clearly passed, as increase in the size of the global operators show

40 The Evolution of Ports in a Competitive World that there are parties that have a market allowing them to deploy bigger ships effectively. Box 12: Future Containerships Require Increasingly Larger Cranes 2.2.3. Impact on Port Operations anamax—A typical panamax container-

ship is about 290 meters long and has MODULE 2 The contrast between container and earlier P13 meters draft. The ship is limited in breakbulk operations is startling. Most signifi- width to 32.2 meters to allow passage cantly, it has greatly reduced the ship’s time in through the Panama Canal locks. This width port and at berth. Containerization has dramati- limitation constrains the number of rows to 13 cally reduced personnel requirements for cargo containers. Up to 4,800 TEU can be carried in these vessels. The outreach of the crane handling, raised berth productivity, and increased must be capable of spanning 13 rows of the capital intensity of port operations. Prior to containers. containerization, about 200 men, working simul- Postpanamax—These ships are too wide to taneously in four gangs, were typically required transit the Panama Canal. The first postpana- to load and unload a large general cargo ship, a max ships delivered in the late 1980s carried process that could take a week to 10 days in 4,400 TEU. More recent ships entering service port. Containerships require only 50 to 60 men for Maersk and P&O were designed to carry 6,000–7,000 TEU. The vessels are almost 43 to load and unload cargo. Assuming a four meters wide and are capable of handling 16 to gantry crane operation, a containership requires 17 rows of containers on deck. Draft is 13.5 to some 30 workers directly allocated to the vessel. 14 meters. The container crane must be capa- This figure, moreover, depends on the type of ter- ble of spanning 17 rows of containers. Since minal operation that is used, for example, more the containers are stacked up to six high on for straddle carrier operation, less for rubber-tire deck, and an increasing percentage of containers are so-called High Cubes (9 feet, 6 gantry (RTG). A typical general cargo berth can inches high), the air draught of container handle roughly 130,000 to 150,000 tons per year gantry cranes had to increase considerably as of cargo throughput. A modern container berth, well. equipped with four ship-to-shore gantry cranes, Recent designs are able to carry more than will handle 400,000 container moves annually 9,000 TEU, and it is widely expected that (typically 600,000 million TEU). Assuming three- orders for 10,000-TEU vessels will be placed quarters of the containers are full and the aver- in the near future. The width of these vessels will be 44–46 meters and the draft will range age full load is 10 tons per TEU, the throughput from 14–15 meters. They will accommodate of this berth is some 4 million tons annually. The 18 to maybe 23 rows of containers on deck. largest postpanamax container crane with some The crane required to handle the containers 57 meters outreach will cost about $8 million. on this vessel will be a massive structure Four to five of these cranes are needed to effi- capable of spanning 18 to 23 rows and higher stacks. ciently handle the largest postpanamax containerships (see Box 12). Overall, the infrastructure Future Designs improvements and superstructure (cranes, strad- Gustav de Monie launched his concept of the mega containerships. The concept design is a dle carriers or RTGs, tractors, and trailers, and containership able to handle 15,000 TEU. The so forth) needed for a modern two-berth contain- massive vessels would be between 380–450 er terminal will easily cost $150 million. In con- meters long, 70–78 meters wide, and have a trast, a typical 3–6 ton quay crane used for gen- draft of about 14 meters. Nico Wijnolst eral cargo handling in the 1950s would have launched his design of the Malacca-Max cost, at today’s prices, about $1 million. design: 18,000 TEU, 400 meters long, 60 meters wide, and a draft of 21 meters (maxi- 2.2.4. Need for Container Port Productivity mum draft to pass the Strait of Malacca). To Improvements handle the containers, it will likely be necessary to use a different type of container crane A study concludes that “the economics of con- and special berthing basin for the vessel. tainership operation are critically dependent on Source: Author.

41 The Evolution of Ports in a Competitive World

port productivity . . . (and) continued general and improves planning and coordination of worldwide improvements in port productivity berths, handling equipment, and storage facilities will so fundamentally alter the container ship- (see Box 16). Ports unable or unwilling to keep ping cost environment that, in the absence of pace with information technology will be left any technological constraint, ship size optimums behind in the competitive ocean transport market. for all routes will continue to increase as they 2.2.6. Port Requirements for Large Cruise have done in the past” (see Box 13 and 14). A Ships typical container terminal today has a static capacity of 40–200 TEU per hectare (depending The cruise industry is producing requirements on the yard stacking system in use), crane pro- for more ports and enhanced facilities in existing ductivity of 25–30 gross moves per gantry-crane ports to accommodate the growing number and MODULE 2 hour, average container dwell time of five to six size of cruise ships. During the decade before the days, and truck turnaround time of one hour. attack of September 11, 2001, the industry had But future terminal requirements will be consid- tremendous growth. Particularly significant was erably more demanding. To accommodate the the growth in number of mega cruise ships, that mega containerships coming into service, new is those more than 70,000 and up to 150,000 terminals will require a static capacity density gross tons that carry 2,000–3,000 passengers or of 400–800 TEU per hectare, crane productivity more. Since 2004, the market has recovered, of 200 moves per ship-hour at berth, maximum new ships are being ordered and the share of three days average dwell time, and truck turn- mega cruise ships is increasing again. around of less than 30 minutes. Water depth at the future terminal will need to be at least 15 to With the growth in numbers of ships, the cruise 16 meters and increasingly larger cranes will be lines need more ports to vary their itinerary. In required to accommodate ships with a deck selecting a cruise port, cruise ship operators stack of up to 23 rows across. look at:

2.2.5. Growing Role of Information 1) Location of the port and cruising distance Technology relative to other ports on a particular Equally important in the future is the need for itinerary. ports to expand the use of IT to support port 2) “Marquee” value and activities available user requirements, particularly relating to con- for passengers. tainerized traffic, although not exclusively. IT is 3) Visitor safety and comfort. increasingly employed throughout the ocean transport sector and has revolutionized the way 4) Existence of head taxes. intermodal traffic is handled. IT systems elec- 5) Physical capabilities of the port to accept tronically link port administration, terminal cruise ships (see Box 17). operators, truckers, customs, freight forwarders, carriers, ship agents, and other members of the Ports wanting to be cruise destinations must port community (see Box 15). The technology develop a strategy jointly with tourism officials provides port users with real time data on the to maintain tourism product quality and maxi- status of cargo, paperwork, and availability of mize visitor spending. For ports able to satisfy port facilities, and enables ships and terminals to cruise operator needs, the operator may be will- be part of an integrated office infrastructure. IT ing to establish long-term agreements to bring its reduces time for delivering cargo; provides more ships to the port on a regular basis for periods of accurate transfer and recording of information; up to 25 years. Such an agreement could be the reduces manpower for port operation paper- basis for arranging financing by a developer to work; offers advance information on ship, barge, acquire the physical facilities and services in the truck, wagon, container, and cargo movements; port needed to accommodate cruise ships. The

42 The Evolution of Ports in a Competitive World

Box 13: Impact on Port Productivity of Unit Voyage Cost of Large Containerships study of economies of scale in large containerships gives an indication of the unit cost benefits that can be obtained by the use of increasingly larger containerships—and the benefits that can be achieved by increased cargo handling productivity that reduces port time. The study prepared A MODULE 2 by Cullinane and Khanna and published in the Journal 1,200 of Transport Economics and Policy models the impact of using containerships with 1,000 nominal capacity to 8,000 Europe–Far East -- 11,500 miles TEU, assuming current 800 cargo handling rates and rates that would be 100 per- Transpacific -- 8,000 miles cent higher. 600 Declining Unit Cost with Transatlantic -- 4,000 miles Larger Ships 400 Box Figure 13.1 is from the

Cullinane and Khanna study voyage costs per TEU in $ 200 and shows the relationship between voyage cost per TEU, ship capacity, and 0 route distance on three 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 major line haul routes. Unit Capacity in TEU cost declines as ship Total voyage cost per TEU as a Function of Ship Capacity and Route Distance capacity increases. In deriv- (assuming current cargo handling productivity) ing these unit costs, the authors assume that port Source: K. Cullinane and M. Khanna, “Economies of Scale in Large Containerships,” Journal of Transport Vol. 33, p. 201. time for various size ships reflects current cargo handling productivity, which in turn is a function of the 300 Cost per TEU at Current Cost per TEU Assuming number of cranes assigned Port Productivity

0 Port Productivity Doubles to a ship and the handling 7 250 2 0 5

rate per crane. Based on a 2 2 4 2 questionnaire by the 7 2 8 2 1

authors, current practice is 200 2 1 1 0 0 2 to typically employ one to 2 2 0 8 8 4 1 1 two cranes on ships under 7 1 9

150 5 1 1,000 TEU capacity, three to 8 4 four cranes on ships 1 1 2 4 3 1 1 3,000–4,000 TEU capacity, 1 1

100 1 0 0 1 and five cranes on ships of 1 7 9 8

6,000 TEU capacity. Crane Voyage Cost per TEU in $ productivity under current 50 practices is assumed to average about 22 moves 0 per hour. On this basis, five TA TP E-ATA TP E-A TA TP E-A cranes working a 6,000 TEU containership can load and 4,000 TEU Ship 6,000 TEU Ship 8,000 TEU Ship Impact of Increasing Port Productivity on Voyage Cost Per TEU discharge 2,000 20-foot boxes and 2,000 40-foot Source: K. Cullinane and M. Khanna, “Economies of Scale in Large Containerships,” boxes at a rate of 110 Journal of Transport Vol. 33, p. 202. moves per hour, and the ship can be fully discharged and loaded in 72 hours. (Box continues on the following page.)

43 The Evolution of Ports in a Competitive World

maneuverability, possibly eliminating the need Box 13: Impact on Port Productivity of Unit for tug assist services for berthing. While pod- Voyage Cost of Large Containerships ded drive to date has largely been limited to (Contined) cruise ship and ferry propulsion, there are indi- Increasing Port Productivity cations that use of the technology may spread to The authors then examine the sensitivity of other types of ships, particularly where maneu- reducing port time through increased cargo verability is especially important (see Box 18). handling rates. They show that a cargo handling rate double that of the current rate will Another new technology, self-unloading bulk significantly reduce the unit cost, as the ship will be able to carry more containers in a given carriers, is popular on the U.S. Great Lakes, and time period. For example, doubling the cargo their use is spreading to other trades. These bulk

MODULE 2 handling rate will reduce the unit cost of a carriers have the capability to discharge without 6,000 TEU ship from $114 to $91 per TEU on the use of shore-based equipment, reducing the a transatlantic voyage. The unit cost of a simi- need for special facilities to unload bulk cargo. lar ship on a transpacific voyage would drop from $182 to $159 per TEU, and on a Europe–Far East voyage from $242 to $218. 2.3. Shifting Bargaining Power Bargaining power results from the relative strength of the parties involved in a negotiation. The stronger the bargaining power, the more Box 14: Ceres Paragon Terminal in likely the party will get the greater gain in a Amsterdam, the Netherlands transaction. In the port sector, the major parties he Ceres Paragon Terminal in to a negotiation are port users and port service Amsterdam is the first container terminal providers. Current events are reshaping the rela- T in the world capable of loading and tive strength of each of these parties; on the one unloading containers from both sides of the hand, consolidation occurring among ocean ship, and has a capacity to handle some carriers is producing increasingly stronger, more 600,000 containers annually. In 2002, the port formidable customers that port authorities, ter- became operational and remained quiet (106 million investment). minal operators, and other port service It proved difficult to start a new terminal providers must contend with in pricing and located behind a lock, lacking tested multi- service negotiations. On the other hand, a rela- modal hinterland connections with rail and tively small number of companies have been inland waterway. In 2005, things appeared to acquiring terminals in ports in all areas of the change; NYK bought a 50 percent share of the world, creating terminal operators with global terminal and was planning to have two strings coverage that have the financial depth and of the Grand Alliance Europe–Far East trade route calling at the terminal. negotiating strength to withstand demands of terminal users. Adding to this situation is the Source: Author. growing role of global logistics service providers who have considerable strength in dealing with key issue here remains what guarantees a port both shipping companies and terminal opera- has if the cruise operator stops port calls before tors. Finally, there is the unmistakable trend of the end of the agreed-on period. carriers wanting to own and manage their own port and inland terminals. These changes are 2.2.7. Other Technology Affecting Port creating a shifting playing field for negotiations Services among port users and port service providers.

Introducing podded drive propulsion systems 2.3.1. Consolidation among Ocean Carriers can potentially reduce requirements for harbor tug services in port. These high power Over the past decade there has been substan- azimuthing systems significantly improve ship tial consolidation in the ocean shipping sector

44 The Evolution of Ports in a Competitive World

Box 15: Port User Information Network

Control • Terminal access • Port entry & exit

• Equipment usage reports MODULE 2 • Equipment location • Vessel quality assurance Planning Scheduling • Capital projects pipeline • Ship arrivals • Facility maintenance • Berth occupancy • Project status/variance • Tug & pilot requirements reports • Water & utilities • Bunkering service

Engineering • M&R requirements • Equipment records Cargo Bookings • Carrier inquiry • Booking confirmation PORT USER • Bill of lading INFORMATION • Advance manifest & loading list NETWORK • Customs documentation Security • Entry approval • Crew health certification • Perimeter control • Ship records • Area access authorization

Safety Intermodal • Electronic delivery orders • Channel & harbor operations • Equipment availability • Hazardous cargo handling • Cargo tracing • Pollution monitoring • Invoicing for pickup/delivery • Fire monitoring & response • Aids to navigation monitoring

Administration Information • Invoicing for port services • Traffic statistics • Electronic transfer of payments • Port tariff • Employee records • Notices to port users • Direct salary deposit • Port regulations • Financial reports • Points of contact

Source: Author.

(see Box 19). While this has been occurring in joint purchase of containers. The current activi- all sectors of the industry, it is most apparent ty in mergers and acquisitions is a third step in in container shipping where it is estimated that this pattern of cooperation. It simply takes the in 2005, 25 carriers out of more than 400 now alliance concept to its ultimate stage—full own- control more than 80 percent of container fleet ership and control under one corporate capacity. This sector has witnessed a signifi- umbrella. cant number of major mergers and acquisitions over the past 10 years, a trend that The three largest container carriers illustrate the appears to have room to run. patterns of growth in the container shipping sector. Maersk Line, the largest player in con- The consolidation movement in the container tainer shipping with more than 500 ships and shipping sector began with slot sharing 1.5 million TEU capacity at mid 2005 with the arrangements, where carriers purchased slots in completion of the Royal P&O Nedlloyd acquisi- other carriers’ ships to provide service flexibili- tion, illustrates a progression from global alliance ty and more extensive geographical coverage. to single corporate ownership. Until 1990, both This expanded into multitrade alliances among Maersk and SeaLand operated as separate enti- carriers that focused on achieving efficiencies ties, each a major player in its own right. In and better service by sharing vessels, utilizing 1991, they formed a global alliance to improve common terminals, joint feeder service, and service and generate operating efficiencies.

45 The Evolution of Ports in a Competitive World

Box 16: Felixstowe Cargo Processing System (FCPS) he Port of Felixstowe handled container • Customs examination and sealing throughput of more than 2.5 million TEU requirements. Tin 2003 and has installed a sophisticated • Port health, customs preventive and other information technology system to electronically government departments’ activities. link members of the port community. The sys- • Requests to out-turn in sheds and warehouses. tem, managed by Maritime Cargo Processing, covers more than 70 percent of containers • Shed and warehouse out-turn reports and passing through British ports, supporting 630 amendments. corporate organizations with more than 2,500 • Customs declarations for exports. users in more than 18 geographical locations • Ship planning notifications and amendments. within the United Kingdom. It is an interactive

MODULE 2 • Hazardous goods reporting. Microsoft-based system and over the past year handled 32.5 million transactions and Port operator benefits include: 22.5 million electronic data interchange (EDI) • Information for preplanning physical operations. messages. • Single gateway via FCPS to port users’ systems. The system electronically provides: • Automatic writing off of manifest and cus- • Manifests and associated amendments. toms entries. • Customs release notes. • Paperless releasing of import cargo. • Bonded removal documents. • Paperless notification of customs status. • Ship’s out-turn and discharge reports and • Paperless transshipment notification and amendments. approval. • Local transshipment documentation. • Paperless export load lists. • Lines’ commercial release. • Enhanced facilities for late runners. • Acceptance of rent and storage charges. • EDI Dangerous Goods notifications. • Delivery instructions to transport operators • EDI status messages to customers. (road and rail). • Local messaging facility. • Export delivery advice. • Full audit facilities. • Export arrivals. According to the system operator, plans call • Export loadlist. for expanding FCPS to a global Internet-based • Loading reports. real time system within five years. • Export customs declarations. Source: Author.

Continuing the progression, in mid 1999 with a total capacity of 5,300,000 TEU, and Maersk purchased the ocean transport assets of acquired most of its capacity through internal SeaLand for $800 million. expansion (although the company did acquire Lloyd Triestino). The combined Maersk Line company is almost than twice the size of its nearest competitor, A report by Drewry Shipping Consultants Ltd. Mediterranean Shipping Company (MSC), a (2006) includes a comprehensive analysis of the Geneva-based company that traces its origins to capacities, roles, and market shares of the global 1970, and more than three times the size of terminal operators. A group of more than 20 Evergreen, a Taiwan-based company that traces companies is analyzed, including global steve- its origins to 1968. MSC has more than 290 dores, global carriers primarily involved in liner ships with a capacity of close to 900,000 TEU, shipping operations, and global hybrids (busi- and showed a spectacular growth through ness units under global carriers). In 2005, these acquisition of second-hand, new, and chartered companies together controlled 178 million TEU tonnage rather than through acquisition or or 44.5 percent of the world’s estimated con- merger. Evergreen has more than 190 ships tainer port throughput of approximately 400

46 The Evolution of Ports in a Competitive World

Box 17: Physical Requirements to Accept Cruise Ships he handling of large cruise ships with • Protected passageway between ship and large numbers of passengers in a very terminal capable of embarking all passen- short turnaround time is a huge logistics gers within 2–3 hours, disembarking all pas- T MODULE 2 problem. The newer cruise ships entering the sengers within 1–2 hours, and ability to stay market today are vessels with capacities of connected to the cruise ship over the full 2,000–3,500 passengers. Cruise ships spend tidal range. an average of 7–9 hours in port, during which • Staging area for three to five 40-foot con- passengers debark and embark and various tainers; adequate bus and taxi queues to services are provided to the vessel. The com- support passenger embarkation and bination of large ships and demand for quick debarkation; facilities to collect and dispose turnaround places significant strain on port of waste; potable water; and other services facilities and services. According to Gee & to support the ship in port. Jenson, a designer of cruise facilities, to Cruise ships are a $300–$500 million capital accept modern cruise ships a port must be investment. Their successful operation is highly able to provide: dependent on maintaining a tight schedule with • A minimum 500-foot entrance channel width; no disruptions. A standard in the industry is 34-foot navigational depth; 32-foot berth depth; that cruise ships can never be denied or have 500-foot service apron length; 50-foot apron access delayed to and from a berth. This is a width; 50–100-ton design load range for bol- very real challenge that ports wanting to be lards, cleats, and dolphins; and 1,300–1,500- cruise ship destinations must be able to meet. foot minimum turning basin diameter. Source: Author.

Box 18: Podded Electric Drive Impact on Requirements for Ship Assist in Port odded electric drive technology uses a Generally, the results indicate that the tech- sealed “pod” encapsulating an electric nology has greatest possibility on ships where Pmotor directly coupled to a propeller. maneuverability is particularly important, space Electricity from the ship’s power plant to the and weight savings have substantial value, or fully submerged watertight pod is provided via current propulsion systems interfere with effi- cable. The pod is steerable and provides side cient layout. as well as fore and aft thrust. Use of the pod Because the ship is more maneuverable, tug eliminates the requirement for a rudder, shaft, assist in harbors may not be necessary, which and stern thruster and frees up space inside could affect future requirements for harbor tug the ship that would be otherwise occupied by services. In addition, the sideways thrust of a conventional propulsion engine. podded drive could affect the underwater Currently, the technology is largely limited structure of piers during vessel docking and to cruise ship and large ferry propulsion. undocking, and accepting vessels with this However, a survey of shipowners and ship- propulsion device may require some beefing up builders indicated that podded electric drive of the berth. has potential use in a variety of ship types. Source: Author. million TEU (see Box 20 and 21). The remainder is, 28 percent of the world’s port throughput. is practically equally divided over state-owned When considering the top 10 operators, these and private operators. figures become 168 million TEU and 36 percent respectively. The top 10 global The league table is led by Hutchison Port terminal operators are discussed in more detail Holdings (HPH) controlling 33.2 million TEU, below. 8.3 percent of the world’s port throughput capacity. In 2005, the five largest operators, Hutchison Port Holdings launched its global HPH, PSA, APM Terminals, P&O Ports and expansion in 1991, using the experience and DP World, controlled 112.7 million TEU, that capabilities it developed operating container

47 The Evolution of Ports in a Competitive World

Box 19: Top 10 Container Carriers as of June 2006

Rank Carrier Current TEU % of Global Current Operating Vessels Under Capacity Fleet Vessels Construction/Contract 1 Maersk Line 1,566,352 14.9 519 102 2 Mediterranean Shipping Co SA 892,548 8.5 297 24 3 Evergreen Marine Corp (Taiwan) Ltd 530,172 5.0 193 24 4 CMA CGM SA 486,453 4.6 189 56 5 Hapag-Lloyd Container Linie GmbH 437,954 4.2 136 10 6 Cosco Container Lines Ltd 369,531 3.5 128 20 7 China Shipping Container Lines Co Ltd 328,245 3.1 95 19 8 APL Ltd 325,919 3.1 104 27 9 NYK Line 315,865 3.0 117 25 10 Hanjin Shipping Co Ltd 313,698 3.0 78 17

MODULE 2 Other 4,980,735 47.2 Total Global Fleet 10,547,472 8,024 1,108

Share of Global Fleet Maersk Line (by TEU capacity) Mediterranean Shipping Co SA 14.9% Evergreen Marine Corp (Taiwan) Ltd CMA CGM SA

8.5% Hapag-Lloyd Container Linie GmbH Cosco Container Lines Ltd 47.2% 5.0% China Shipping Container Lines Co Ltd APL Ltd 4.6% NYK Line 4.2% 3.5% Hanjin Shipping Co Ltd 3.1% 3.0% 3.1% Other 3.0%

Source: Author.

terminals in Hong Kong. Early in 2004, it transshipment hubs such as Tanjung Pelepas, operated container terminals in more than 30 Algeciras, and Salalah, which accounted for ports, with a reported throughput of 33.2 35 percent of its total throughput in 2003. million TEU in 2005 (see Box 22). The company, however, has shown a commitment toward serving the common user PSA Corporation embarked on a similar market, and Maersk Line’s share of the major effort to enlarge its global presence in company’s total volume has declined from container terminal operations in the mid 75 percent in 2002 to less than 70 percent 1990s, drawing on its experience in Singapore. in 2004. APM Terminals has a strong presence The company reported a throughput of on all U.S. coasts, a heritage from the 28.7 million TEU in 2003 and 32.4 million SeaLand acquisition. In 2005, its throughput TEU in 2005, of which more than 10 million was 24.1 million TEU, a share of 6.0 of were realized at its terminal operations global throughput. Projections show a outside Singapore. These terminals were also strong growth of nearly 12 percent per annum the main driver for PSA’s growth, as its home on average in capacity for the rest of the terminal continues to feel the strong competi- decade. tive pressure from the cheaper Malaysian ports. P&O Ports’ throughput amounted to 13.1 million TEU in 2005, pushing the United Kingdom-based APM Terminals is still strongly linked to company’s global share from to 3.3 percent. This Maersk Line, especially in the provision of growth was realized by a combination of new

48 The Evolution of Ports in a Competitive World

Box 20: Worldwide Container Traffic

World Port Throughput Transshipment Container Traffic

Mil TEU Annual Growth Mil TEU Share (%) Mil TEU Growth (%) MODULE 2

1990 879 16 18.2% 287 1995 1,451 10.5% 323 22.3% 46 9.9% 2000 2,356 10.2% 622 26.4% 683 8.2% 2003 317 10.4% 865 27.3% 909 10.0%

Regional Share of Transshipment Container Traffic

1990 (%) 1995 (%) 2000 (%) 2003 (%)

North America 6.5 7.3 7.5 7.5 West Europe 27.2 28.9 North Europe 21.3 24.7 22.7 23.8 South Europe 25.5 28.5 34.5 36.5 Far East 19.0 24.2 25.1 25.6 South East Asia 40.3 44.8 47.6 47.0 Middle East 27.3 33.0 41.4 43.8 Latin America 22.7 26.2 Caribbean/Central America 6.9 16.0 32.9 40.1 South America 0.0 2.4 9.9 9.9 Oceania 1.9 2.4 2.9 3.7 South Asia 23.1 21.9 21.6 20.7 Africa 8.4 26.4 22.7 21.9 Eastern Europe 0.0 0.0 0.0 0.0 World 18.5 22.3 26.4 27.3 Source: Various Drewry Shipping Consultants Reports. Source: Author.

Box 21: Global Terminal Operators 2005 Throughput League Table

Ranking Operator Million TEU (%) Share

1 Hutchison Port Holdings (HPH) 33.2 8.3 2 PSA - Singapore Port Authority 32.4 8.1 3 APM Terminals 24.1 6.0 4 P&O Ports 21.9 3.3 5 DP World 13.3 2.5 6 Evergreen 11.5 1.7 7 Eurogate 11.4 1.6 8 Cosco 8.1 1.5 9 SSA Marine 6.7 1.4 10 HHLA 5.7 1.3 Source: Drewry Shipping Consultants, Annual Review of Global Terminal Operators, 2006

49 The Evolution of Ports in a Competitive World

Box 22: Key Milestones of Hutchison Port Holdings in the 1990s

1998 acquires Thamesport 16 containerport 1996 and Harwich concession int’l port to operate 1999 terminals in Acquires 35% Cristobal and interest in Balboa ECT 12 1994 1997 acquires JV to develop midstream container holdings terminal in in HK 1995 Jakarta JV for MODULE 2 8 1992 Freeport JVs for 2 river container container port terminal in China 1993 4 JVs for container 1991 terminals in acquires Yantian and port of Shanghai

HPH Combined Throughput (million TEU) HPH Combined Throughput Felixstowe 0 1991 1992 1993 1994 1995 1996 1997 1998 1999

Source: Hutchison Port Holdings Web site.

developments that became operational and strategy originally aimed at operating terminals in autonomous growth at existing facilities. support of its liner operations, but increasingly the company is looking to attract third-party business. Dubai Ports World (DPW) is a relatively new player in the international global terminal race, Eurogate, originating from Bremen, has the nar- but has quite an aggressive growth and acquisition rowest geographic spread of the top 10 contain- strategy. In 2005, its combined throughput was er terminal operators because it is only active in 9.9 million TEU compared to 6.5 million TEU for Europe, mainly in Germany and Italy. Its 2003. Much of this throughput was realized at its throughput in 2005 was 6.3 million TEU with home base terminals in Jebel Ali and Port Rashid. its global share decreasing slightly as interna- From its successes at its home base, DPA (Dubai tional operators expand their portfolios. The com- Port Authority), through its international vehicle pany is looking for growth from intermodal trans- DPW (formerly Dubai Ports International), started port and feeder traffic, the latter mainly through its expansion in and around the Middle East with increased transshipment at its German hub ports terminals in Jeddah and Djibouti. It then had and investment in terminal development in some successes in India (Visakhapatnam, Cochin, Russia. and Gangavaram), and in December 2004 took over CSX World Terminals (CSXWT), causing its China Ocean Shipping Company (COSCO) total capacity to rise to 14.6 million TEU. DPW operates its terminals through COSCO Pacific subsequently purchased P&O Ports in 2006 in a and COSCO Container Lines Company, both bidding war with PSA. The combined volumes of wholly owned subsidiaries of COSCO. The DPW and P&O Ports puts DPA/DPW in hot pur- company’s shown enormous growth between suit of the top three global terminal operators. 2002 and 2004. In 2005, there were even higher increases, up to 5.9 million TEU, mainly caused Evergreen’s terminal throughput was up 6.6 mil- by the strong growth in the Chinese market, lion TEU in 2005. The Taiwanese company’s and to a lesser extent also by the COSCO’s

50 The Evolution of Ports in a Competitive World willingness to enter into partnerships with other key Northern European ports to ensure long- major global operators. term access to scarce capacity.

SSA Marine, based in Seattle, USA, traditionally 2.3.2. Emergence of Global Logistics

has a strong presence on the U.S. East and West Service Providers MODULE 2 Coasts. It also has established a number of successful overseas operations, mainly in Contributing to the realignment in bargaining Central and South America, and more recently power is the emergence of companies that offer sought to invest in South East Asia. Its through- full service logistics solutions to major shippers. put in 2005 was 5.4 million TEU. These logistics service providers have substantial strength in dealing with shipping compa- Mediterranean Shipping Company (MSC) has also nies, terminal operators, and other port service significantly increased its presence in the terminal suppliers, adding to the growing complexity in operation market with a strategy mainly focused achieving a balance in port service negotiations. on securing capacity for the carrier in home mar- They make decisions that affect all parties kets and transshipment facilities to support the involved in the supply chain, including port carrier’s network. MSC’s terminal holdings are service providers. Logistics service providers usually on a joint venture basis where the compa- manage the combined logistics requirements of ny is often partnering with local or regional opera- the many large shippers they represent, giving tors and taking an equal or minority ownership. them considerable strength in dealing with ship- With global container volumes still on the rise, ping companies, terminal operators, and others partly due to the boost in Chinese volumes, vir- in the logistics channel. In response to market tually all global port operators show impressive demand, some substantial players have targeted growth rates. Moreover, many of them realized a this activity, including Federal Express, which great deal of their expansion by developing new recently announced that it would enter the terminals in China, and there is more capacity global logistics market for ocean freight. being planned to become available in the coming These developments are changing the way port years. Global terminal operators that spawned services are bought and sold. Alliances and con- from stevedores (as opposed to those owned by solidation among carriers result in the carriers major container carriers) saw throughput at their having more business volume on the negotiating homeports becoming increasingly less important table, placing ports and terminal operators in an as their overseas activities grew. increasingly awkward position when it comes to The top 25 of global terminal operators negotiating strength. In some situations, the remains relatively volatile, with more consoli- stakes are so high that the port or terminal can dation through merger and acquisition yet to hardly afford to lose the carrier’s business. This be expected. The larger players are in a race to can often result in the port having to make con- develop new capacity and buy existing capaci- cessions to retain the traffic. For example, the ty, where the smaller players are prey. APM Grand Alliance notified the Port of Rotterdam Terminals is expected to close in on PSA during that for operational reasons it was temporarily the coming years. DPA/DPW, with its recent switching one of its five Europe–Asia services to acquisition of CSXWT and P&O Ports, is now the rival Port of Antwerp. This service represent- also knocking at the entrance of the top three ed 125,000 TEU per year to the port. It may with a very aggressive expansion strategy. only be coincidental, but a month after the COSCO showed quite an impressive growth, announcement, the Rotterdam Municipal largely due to the Chinese market. Outside the Council decided not to increase harbor dues for top 10, MSC has steamed up the ranks moving the year 2000, citing growing competition it to 14th place in 2005. This growth has mainly between ports in general and tariff developments been achieved by forming partnerships at its in directly competing ports in particular.

51 The Evolution of Ports in a Competitive World

At the same time, the emergence of global termi- frequent feeder services with an appropriate nal operators can result in pricing schemes that geographical coverage, and attractive cargo may not always favor the small volume or region- handling charges. Most carriers believe 15 al carrier. These global terminal operators may meters depth is adequate to accept the largest offer incentives to high volume customers and containerships in service in the foreseeable there is at least the possibility that the terminal future, although some carriers have recently operator could cross-subsidize international oper- specified 16 meters depth for entrance channels. ations as necessary to compete for a major carri- Containership draft has not been increasing in er’s business. Another possibility is that a truly proportion to the growth of TEU capacity, with global terminal operator could offer a package most of the capacity growth in postpanamax deal to a carrier that would provide a lower price ships the result of increasing the beam of the

MODULE 2 or give concessions if the carrier uses only its ter- ship. A depth of 15 meters should accommo- minals wherever available in the world. date all but the largest containerships now in service. It is nevertheless possible that potential 2.4. Changing Distribution Patterns hub ports will need depths in excess of 16 As containerization has spread in ocean ship- meters in the likely event that container vessels ping, distribution patterns have increasingly in excess of 10,000 TEU are ordered in future. evolved into a hub and spoke network. A transshipment hub should have terminal facil- Facilities for devanning, clearing, staging, and ities that enable quick ship turnarounds. This storing containers are increasingly shifting includes adequate numbers of cranes, sufficient inland, thereby becoming more decentralized. container handling and storage areas, and a These developments are creating a hierarchy of first-rate computer system to run the entire ter- ports and changing traditional port operations. minal. As discussed in an earlier section, con- Ocean carriers have been increasingly using tainer cranes capable of spanning at least 18 regional hubs for transshipment of containers. rows and 6 tiers of containers on deck will be This is a worldwide trend that is accelerating as required to handle the 8,000+ TEU ships now larger containerships come into service and the in service. There is already a demand from car- advantages of hub and spoke operations riers to install ship-to-shore container cranes become more apparent. The hub and spoke with a capability of handling 22, and even 23, concept is intended to maximize use of large rows of containers across. Capability should be containerships while providing market coverage provided to berth one or more feeder ships in to a maximum number of ports. This is accom- front of or behind the mother ship along the plished via a network of regional and subre- same quay—requiring quay lengths of typically gional hubs with onward service to outlying 1,000 meters for a terminal designed to receive locations. Large line haul ships provide service two main line vessels and their feeder vessels, between regional hubs. Progressively smaller and container yard depth behind the quay ships are used to pick up and distribute contain- should be not less than 400–500 meters, and ers within the region (see Box 23). preferably deeper. The latter factor much depends on the container dwell time, the select- 2.4.1. Becoming a Hub ed stacking and retrieval system, and the stacking rules, among many others. The most important attribute carriers look for is the strategic location of the hub relative to Container handling productivity is of obvious the primary origins and final destinations of importance to a carrier in selecting the trans- container traffic. Beyond location, other attrib- shipment hub. Carriers measure productivity in utes include the ability to safely accept large terms of how long it takes to turn around the ships, extent of terminal facilities, efficiency of ship, that is, enter port, discharge containers, container handling operations, availability of load containers, and leave the port. Much of

52 The Evolution of Ports in a Competitive World

Box 23: Hub and Spoke Container Distribution lobal distribution of containers is Future Role of Multiporting increasingly accomplished via a network Hub and spoke operations have a clear advan- of regional and local hubs with onward G tage if they include hub ports located close to MODULE 2 service to outlying locations. Using a transship- the main navigation course of main liners, if ment hub, a carrier can service marginal mar- these ports can accommodate main liners effec- kets that do not justify a direct call with large tively, and if the ports that have to be feedered line haul ships, interchange containers between do not have these advantages. If they have a liner strings at strategic crossing points, and hinterland with captive cargoes, this will further realize economies from improved port asset strengthen their position. Examples of hub ports utilization. All of these advantages ultimately with clear location advantages are Kingston and result in greater profit to the ocean carrier. the Panamanian ports in the Caribbean, Hierarchy of Ports to Maximize System Marsaxlokk and Gioia Tauro in the Efficiency Mediterranean, Salalah and Colombo in the Gulf The hub and spoke network involves a hierar- area, and Tanjung Pelepas in Southeast Asia. If chy of ports, some of which serve as regional the hub ports have, on top of the location or local hubs connected by feeder loops to advantage, a strong home base of captive outlying ports. Large line haul ships, often with cargo, their position can be enormous. 4,000+ TEU capacity, provide service between Examples are, for instance, the ports of Hong regional hubs and progressively smaller ships Kong, Singapore, and Rotterdam. A strong (or barges) are used to pick up and distribute home base to some extent may even compen- containers within the region. sate for location disadvantages. See for instance the ports of the United Arab Emirates, such as Very Large Containerships Drive Need for Jebel Ali, where ships on the Europe–Far East Regional Hubs route have to make a deviation of some 1,300 Line haul ships of 6,000+ TEU are now com- nautical miles against 163 nautical miles for mon, 8,000+ TEU ships have already been Salalah, 34 for Colombo, and 7 for Aden. introduced on major routes, 9,000+ TEU ships In practice, the distinction between hub and are being built, and 10,000+ TEU ships are spoke and multiporting operations is a gradual under consideration. The bigger the ship, the one, where some main lines make more calls more time required in port for loading and dis- than the other, so that they apply more multi- charge. Assuming a handling rate of 165 TEU porting and have to feeder less cargo than the per hour, each capacity increment of 1,000 other. As main lines cannot call at all ports in a TEU requires an additional half day in port to region, they practically always have to transship load and discharge containers on the round cargoes to and from other ports. As to future trip voyage. To offset this additional port time, developments, one can state in general that: the operator has the choice of increasing the service speed of the ship, adding another ship 1. The further increase in ship size, say to to the service string, offering less frequent 12,000 TEU and larger, will lead to more service, or reducing the number of port calls. transshipment. The large containerships are now being 2. The increase in container trade will lead to designed with service speeds of 24–26 knots; more routes or strings per trade route and higher speeds for the largest size ships are thereby to more direct port-to-port connec- economically impractical. The capital cost of tions and thereby to less transshipment. an additional containership is $80–120 million, 3. The increase in trade per port will lead to which makes adding a ship to the string an port development, which will increase the expensive proposition. Customers now expect ability to accommodate larger ships and the same day of the week sailing, ruling out possibility for calls by main line ships, and reduced service frequency. This leaves mini- lead to less transshipment. mizing the number of port calls as the viable 4. The increase in trade per maritime region will option, which then creates the need for region- make the region more attractive for end-to- al hubs and feeder loops. Essentially, the oper- end routes, increase the number calls by ator offsets the additional time to load and main lines, and lead to less transshipment. unload containers by reducing the number of Examples of such regions are the ports the ship enters and leaves. Mediterranean and the Gulf areas,

53 The Evolution of Ports in a Competitive World

reducing transportation time (and possibly Box 23: Hub and Spoke Container freight rates) to and from overseas markets. Distribution (Continued) Reduced transport time directly affects the com- which in the past were only served by passing petitiveness of exporters and the cost of routes calling at a few way ports. For these imports, in turn creating jobs and income regions, end-to-end routes are on the rise, throughout the economy. Many developing leading to a reduction in transshipment. countries have created free trade zones in It may be clear that it is difficult to predict the increase of transshipment. The data in Box 20 combination with the hub port as engines for seem to suggest that for most parts of the economic growth. Jebel Ali illustrates how a world some saturation has been reached. If hub port in conjunction with an associated free no further increases in ship size are to be trade zone can create significant economic

MODULE 2 expected, one may even expect a decrease in activity. The port, which began operating in relative terms for some regions. 1979, now has 72 berths and is serviced by Source: Author. more than 100 shipping lines. About 1,125 companies from 72 countries have been attracted to start up operations in the free trade zone. this is dependent on the availability of adequate facilities and suitable systems and the absence 2.4.3. Hub Problems of administrative barriers. However, the capability to provide trained personnel on a 7-day- Hubs compete in a highly competitive market week, 24-hour-per-day basis to operate cranes, segment where customers have options to use position containers, and handle documentation other facilities and pricing. An issue confronting has a major influence over the productivity of the developer of a transshipment hub is how to the terminal. And ultimately, productivity deter- prevent “hub hopping,” a situation where the mines the cost of using the hub. number of competing hub facilities is growing rapidly and carriers have the ability to take their It is essential to have adequate feeder services to business elsewhere (see Box 24). In such a situa- and from the transshipment hub. This in turn tion, a carrier that represents a significant por- requires a flow of traffic that will make it tion of the terminal’s business can assert consid- attractive for common carriers to serve the hub. erable pressure on the terminal owner or port to In effect, there is a chicken and egg situation. increase the service level offered and at the same For the hub to be attractive to line haul carri- time reduce charges and make concessions by ers, there must be an established network of threatening to vacate the hub. The owner of the common feeder service that can be used to pick facility would be faced with the dilemma of a up and distribute containers. For feeder service $100–$200 million investment lying idle if the companies to call regularly at the hub, there customer departs. This pressure could force the must be at least one, and preferably several, handling rates below the full cost of providing major line haul carriers whose containers need the transshipment facility. A long-term commit- to be picked up and distributed. ment from a carrier to use the facility before 2.4.2. Benefits of Hub Status making major investment would be one way to minimize the possibility of hub hopping, The most obvious benefit is the income generat- although this does not constitute a solid guaran- ed from operations of a transshipment hub tee. Another and possibly better way to retain because of the double handling of containers. hub traffic is to involve one or several carriers in Consequently, container throughput in hub the equity structure of the new facility. ports can be greatly boosted, particularly when expressed in TEUs. More importantly, trans- Another consideration is that there are fewer shipment hubs provide local importers and terminal services on which to impose charges on exporters direct access to line haul service, transshipment traffic than on local traffic and, in

54 The Evolution of Ports in a Competitive World

Box 24: Hub Options on the Asia–Europe Route ore than two dozen transshipment hubs disadvantage to the new transshipment hubs lie along the line haul route between in Oman and Yemen. Asia and Europe, about half are east of M Indian Ocean and the Red Sea: Centrally MODULE 2 Suez. This large number of hubs provides plenty located along the East–West line haul route are of opportunity for “hub hopping.” Colombo, Jeddah, Salalah, and Aden. Calls Northern Europe: Major container terminal can be made at any of these ports with virtually facilities in Northern Europe are located in no diversion from the line haul route. Colombo Rotterdam, Hamburg, Felixstowe, Antwerp, and is a major transshipment hub for Southern India Le Havre. All five ports are involved in both and handled 2 million TEU in 2004. Jeddah is transshipment and local container traffic. principally an import and export channel for Rotterdam is the largest port in Europe, handling Saudi Arabia, but about 10 percent of traffic about 8.2 million TEU in 2004, and boasting through Jeddah has traditionally been trans- regular connections with more than 1,000 ports shipped to other points in the Red Sea. Both worldwide. Hamburg, the second largest port, Salalah and Aden are new facilities that have handles about two-thirds of the number of begun operating within the past two years. containers that Rotterdam handles. Antwerp These new hubs had a combined throughput of and Felixstowe are smaller in throughput. about 2.2 million TEU in 2004 and plans call for Mediterranean: There are a number of significant future growth in transshipment traf- transshipment hubs in the Mediterranean and fic, much of which will be attracted from the several more under development. Algeciras UAE ports Colombo and Jeddah. serves as a transshipment hub for the Western Asia: At the eastern end of the route are Mediterranean, West Africa, and Northern Hong Kong, Singapore, Shanghai, Shenzhen, Europe; it handled about 2.9 million TEU in Busan, Kaoshung, and Yokohama. Hong Kong 2004. Gioia Tauro, Marsaxlokk, and Cagliari lays claim to having the world’s largest overall are transshipment hubs in the mid container volume (22.4 million TEU in 2005), Mediterranean and Damietta, Limassol, the majority of which originates in or is des- Piraeus, and Port Said (East and West) serve tined for China. Singapore, which has the as hubs in the Eastern Mediterranean. Other world’s second largest container volume (22.3 transshipment hubs are being built or planned, million TEU in 2005), is the major transship- including new container terminals in Tangier, ment hub for Southeast Asia and the Indian Sines, and Ashod. Ocean, which competes with Pelepas, Gulf: UAE ports in Dubai, Khor Fakkan, and Malaysia (4.1 million TEU in 2005). Busan is a Fujairah have developed a strong presence in transshipment hub for containers into and out container transshipment. These three ports of Northern China (11.8 million TEU in 2008), handled about 8 million TEU in 2004, most of and Kaohsiung is a transshipment center for which was transshipment traffic. Containers Central Asia. Japanese ports such as passing through Dubai mainly originate or Yokohama, Kobe, Tokyo, and Nagoya are terminate in the Gulf. Containers through Khor major centers for container activity, but the Fakkan and Fujairah are mostly transshipped majority of containers are distributed inland by to and from Pakistan, Western India, the Gulf, rail or highway. A variety of other ports such as and East Africa. A three-day diversion from the Manila, Port Klang, and Vung Tau function as East–West line haul route is required to call at local hubs for their respective areas. ports in the UAE, which has placed them at a Source: Author. general, the larger the percentage that transship- Service for import and export traffic can thereby ment traffic is to total volume, the smaller the be improved. A port highly specialized in trans- additional revenue potential of the terminal. In shipment business is at a distinct disadvantage addition, ports with a mixture of local and competing with ports that have a mix of local transshipment traffic frequently set transship- and transshipment business, where revenue from ment charges low to attract mother ships to the the former is frequently used to cross-subsidize port to improve throughput levels, achieve the latter. This is only acceptable because trans- economies of scale, and lower handling cost. shipment generates additional economic value.

55 The Evolution of Ports in a Competitive World

2.4.4. Inland Container Terminals Shifting But environmental concerns relating to ships Activities from the Port in port go beyond the issue of oily water discharge. They involve the entire range of To maximize intermodal efficiency and free up environmental issues from water pollution, air valuable real estate in the port area, inland con- pollution, aesthetics, noise, transfer of foreign tainer terminals are increasingly displacing activi- marine species and more. Ports will need to find ty traditionally performed in the port. While there suitable solutions for disposing of dredged are many advantages to inland container termi- materials and implement regulations and oper- nals, from a port’s viewpoint there can be serious ating procedures for terminals and anchorages drawbacks as they divert economic activity away to address these types of issues (see Box 26). from the local area and open the possibility of competition from other ports (see Box 25). 2.5.2. Recent Environmental Article MODULE 2

2.5. Environmental and Safety LA-Long Beach Cuts Emissions Concerns JoC Online Wednesday, August 24, 2005 Given the growing concerns about protecting the environment, ports are now faced with the need to A program that calls for ships to reduce their implement regulations that will affect the freedom speed to 12 knots or less within a 20-mile of port users and must make a significant invest- radius of the ports of Los Angeles and Long ment in environmental and safety facilities as well. Beach saved 100 tons of harmful emissions in These investments will have limited commercial the first quarter of the year. value and often produce only indirect social pay- The Vessel Speed Reduction Program translates back. How to implement these regulations and into an average daily savings of 1.1 tons of finance related facilities is an important issue. nitrogen oxide (NOx), according to Port of Los 2.5.1. Growing Environmental Concerns Angeles. “We are very pleased with the amount of NOx Eliminating oily ballast water discharge from being eliminated with the Vessel Speed Reduction ships is a major environmental concern. This Program,” said Port Interim Executive Director issue is well recognized internationally and provi- Bruce E. Seaton. “But we can do better. We want sion of adequate reception facilities in port is the compliance zone increased to 40 nautical required under the International Maritime miles, which is the influence area used by the Organisation (IMO) International Convention for Southern California Air Quality Management the Prevention of Pollution from Ships (MAR- District to determine basin emissions.” POL) Convention 1973/78. Regulation 10/7 and 12 of the pollution convention require each state LA-Long Beach implemented the voluntary to ensure that sufficient oily ballast water recep- antipollution program in 2001 as a measure tion facilities are available at oil-loading termi- contributing to the ozone reduction goals in the nals, ports with ship repair facilities, and in those 2003 State Implementation Plan for Marine ports in which ships have oily residues to dis- Vessel Emissions Control Strategies. Currently, charge to shore. To meet these requirements, nearly 70 percent of shipping lines calling at the states need to offer reception facilities for tank ports participate in the voluntary program. washings (slops), contaminated ballast water, oily water from engine room bilges, and for residues Reported by Stephanie Nall, Pacific Shipper, in from fuel oil purification, particularly heavy fuel Seattle oil. Providing such a reception facility entails a 2.5.3. Issue of Substandard Ships significant capital expense that produces little, if any, financial return. How to pay for this facility Despite the fact that many ships have valid is a major issue confronting port authorities. certificates issued by their flag states and

56 The Evolution of Ports in a Competitive World

Box 25: Duisburg Inland Container Terminals he first inland container terminals (ICTs) Within Europe, the Rhine plays a central appeared along the Rhine during the late role in this context. The Rhine area presently 1960s. The Rhine, which is the main consists of some 35 barge terminals for T MODULE 2 inland waterway connection in Western Europe, handling boxes. Most of these ICTs offer has the largest container traffic in Europe and is trimodal facilities because direct access to for a significant part navigable with containers rail transport and container stuffing and strip- stacked up to five high. The Port of Duisburg, ping facilities improve their competitiveness. which is situated along the Rhine, is the largest An important issue in this context is the key inland port of Europe. It serves as a main role ICTs play in the emerging door-to-door inland hub for all larger ports from Antwerp to services of a large number of container Hamburg. The larger volume, however, goes barge operators desirous of extending their through the Port of Rotterdam. Main terminal logistics services. facilities in Duisburg at this moment are the From a seaport’s point of view, ICTs attract DeCeTe (Duisburg Container Terminal) terminals economic activity away from the port area. and the Rhein-Ruhr Terminal. Currently Europe Other ports might profit by competing to be Container Terminals (ECT) is building a trimodal the point of entry and exit for the ICTs. Smaller terminal in Duisburg. ports may benefit from the tendency of emerg- As do most of the European river container ing ICTs by effectively competing with the larg- terminals, Duisburg offers trimodal facilities, er ports. This may lead to a certain degree of including direct access to rail transport and deconcentration. container stuffing and stripping facilities on the In the recent past, container transport by terminal. Rail plays a very important role, espe- inland waterway has increased strongly and cially in the further distribution of cargo from several new ports have been established at Duisburg to destinations deeper inland in even less than 50 kilometers from the main Germany and Eastern and Southeastern Europe. ports of Rotterdam and Antwerp. In 2004, the Currently Duisburg offers a wide range of terminal of Duisburg had a container through- intermodal services. These include: put of 610,000 TEU, making it the biggest • Services to and from most of the barge ter- inland port, followed by Wörth and minals along the Rhine, including those in Germersheim with about 300,000 TEU each, the Port of Rotterdam. and Strasbourg in France with 156,000 TEU. • Services to and from the ports of Hamburg, The impact of inland terminal network Bremen, Rotterdam, and Antwerp by rail. development on the concentration pattern and competitive advantages of seaport areas • Services to several destinations in Germany remains uncertain. The actual tendency (con- by rail (for example, Germersheim, centration or deconcentration) will primarily be Donauwörth, Nürnberg, Augsburg, and determined by the success of the port authori- München). ties and port companies in developing strong • Services to several destinations in Eastern functional ties with the nodes in the hinterland and Southeastern Europe by rail (for exam- network. Also, the ability to attract and retain ple, Northern Italy, Switzerland, Austria, some of the mega carriers that are active in Hungary, the Czech Republic, the Slovak door-to-door transport logistics will be an Republic, Poland, and Russia). important factor. A final important factor is the The presence of an ICT at Duisburg is charac- extent to which the load centers are able to teristic of a partial shift of the collection and benefit from public-private involvement in deci- distribution function away from the seaports. In sion making on and the financing of port infra- addition, these terminals help to relieve the structure projects and cross-border hinterland seaport areas of potential congestion as they network connections. will function as satellites for these seaports. Source: Author.

classification societies, a number of ships do ing and working conditions recognized in inter- not comply with international standards for national conventions. Political and social pres- safety, pollution prevention, and shipboard liv- sures have been placed on governments to

57 The Evolution of Ports in a Competitive World

Box 26: How a Major Transshipment Terminal and Pretty Bay Beach Coexist alta Freeport illustrates how a contain- To create the beach, about 20,000 m3 of er terminal can live in harmony with its sand dredged from the turning basin was Mneighbors. The terminal is one of the pumped to shore and sprayed. This saved 10 largest transshipment facilities in the percent in the contract dredging costs, as Mediterranean, receiving more than 1,700 ship the alternative was to transport the sand five calls annually. It is situated in the southeast kilometers outside the harbor to a disposal corner of the island, in Marsaxlokk Bay. This site. More importantly, the new beach has area is one of the tourist spots in Malta, and attracted economic development in the maintaining the integrity of the environment neighboring village of Birzebbuga. New was a great concern to the terminal developer. holiday flats have sprung up, a new In the 1990s, a decision was made to dredge restaurant has opened and there has been a MODULE 2 the bay to accommodate deep draft ships call- general increase in tourist activity. The ing at the terminal. This entailed removal of deeper beach also allowed the coastal road about 250,000 cubic meters (m3) of silt from the to be widened, reducing congestion in the bay to deepen the channel, turning basin, and peak tourist periods. water depth along the quays. Six valleys drain Recognizing its role as a good neighbor, into Marsaxlokk Bay and vibrocore testing the terminal has instituted strict standards on revealed that a few bottom layers contained dis- ships calling at the terminal. The first sign of crete sand that could be used to create a beach. unsanitary discharge from any ship at the These layers were located in the middle of the terminal will cause immediate stoppage of bay where the turning basin was to be created. cargo handling on the offending ship, fol- It was decided that some of the dredged materi- lowed by investigation of the cause of the al could be used to improve and expand the incident. Contributing to harmony of beach beach called Pretty Bay near the terminal site and terminal is the natural flushing that that had eroded due to wave action on the occurs in the bay, which is self-cleansing as retaining wall of the coastal road. Expanding the a result of circulation and has remained beach would prevent waves from hitting the consistent even after the terminal and break- retaining wall, minimizing further erosion, and water developments. provide a considerably larger beach area. Source: Author.

implement policies to reduce the amount of norms (possibly illustrated by the “Erika” substandard shipping in their waters. At an disaster). international level, the Paris Memorandum of Understanding (MOU) on Port State Control, While enforcement of policies to eliminate sub- which came into effect in 1982 and includes 18 standard ships has a commendable objective, the signatory countries, requires each maritime enforcement practice can affect the competitive authority to inspect a total of 25 percent of the position of individual ports. For example, if a individual foreign merchant ships entering the situation exists where the strictness or accuracy port state during a year. If ships do not meet a of inspections varies among port states, substan- set of standard criteria, port states may detain dard ships may alter their routes and choose the ships until proper measures are taken by more accessible ports of call in a same range. the shipowner. The Paris MOU has led to more Ports with lax inspection procedures would than 18,681 inspections of ships in member therefore have an unfair competitive advantage. states in 2001 which resulted in 1,699 deten- One approach to offset this negative competitive tions. In 2000, the number of inspections was impact is to focus on rewarding good behavior, only 11,358 with a detention rate of 1,764. rather than penalizing bad behavior. An example Since inception the number of detentions have of an innovative approach that rewards good decreased, suggesting either a positive impact behavior is the Green Award, initiated by the of the measures or less rigorous inspection Port of Rotterdam (see Box 27).

58 The Evolution of Ports in a Competitive World

minal operators, and other port service Box 27: The Green Award Initiative providers. But these changes also present oppor- he Green Award initiated by the Port of tunities for new ways of doing business and Rotterdam has the objective of stimulat- open the door to entry of new players through- ing good behavior rather than punishing T out the range of port activities. In short, it’s a MODULE 2 bad behavior, by offering discounts on port tariffs for extra clean and extra safe ships. Ships brand new era for everyone involved in the port and crews meeting standards above the sector and the opportunities, as well as the chal- required minimum can apply for a Green Award lenges, are substantial. certificate provided by the Bureau Green Award. Certified ships and crews can apply for 3.1. Transferring Port Operations tariff reductions by port service providers, to the Private Sector including the major ports in the Netherlands, Portugal, South Africa, Spain, and Sullom Voe The traditional closed fraternity of entrenched in the United Kingdom, as well as providers of players with widespread involvement of public towage and pilot services. The reductions entities in the ownership and ports operation is amount to up to 7.5 percent of port fees. no longer acceptable. Port authorities world- Source: Author. wide are under increasing pressure to turn over operations in the port to the private sector. They are being forced by competitive pressures 2.6. Impact of Changing Dynamics to step into a landlord and regulatory role, on Ports focusing on administrative activities that public Developments taking place in international logis- entities do best. tics, shipping technology, industry consolidation, 3.1.1. The Need for Change and environmental regulations are driving major changes in the way ports will operate in the 21st Traditional ways of doing business in ports are century. As the world economies become more being challenged worldwide by demands for intertwined, ports are being increasingly cast as gains in port efficiency, increased customer partners in assisting customers to compete for responsiveness, and lower costs to move cargo business share in the global market. Technology through the port. It has been widely demon- in the shipping sector, particularly relating to con- strated that use of private sector companies tainerization and information exchange, is chang- throughout the range of port operations pro- ing at a rapid rate, creating the need for major vides an opportunity to eliminate traditional, financial commitments to stay ahead of the tech- bureaucratic operating procedures and controls nology wave. Mergers and acquisitions in the and modernize facilities and equipment through shipping sector, along with the growth of a rela- new financing channels. It is also widely accept- tively small number of global terminal operators, ed that service providers with operating and are creating a small number of powerful players administrative experience in other ports can that change the way port services are bought and transfer this experience and bring to a port best sold. Distribution patterns are increasingly evolv- practices and appropriate modern technologies ing into hub and spoke networks, creating win- employed elsewhere. But even more important, ners and losers among ports that achieve hub sta- by passing the reins of port operations from the tus. All through this is the increasing concern public to the private sector, port reform offers about the environment and safety, which affects the ability to shift the financial burden of port the way ports deal with their customer bases. expansion and development to the beneficiaries 3. CHALLENGES AND of the expenditures. OPPORTUNITIES 3.1.2. Impact of Privatizing Operations Changes taking place in the port sector present There are numerous success stories where port difficult challenges to port administrators, ter- authorities have transferred to the private

59 The Evolution of Ports in a Competitive World

sector operations previously performed by 3.1.3. Lessons Learned from Past public employees. A classic example is Buenos Privatizations Aires, where the award of terminal concessions to four competing companies in 1994 A major lesson learned in port privatizations is has brought down handling charges signifi- the need for transparency and open competition cantly through improved labor productivity. through a structured international tendering In another example, after transferring major process. Many examples can be given of attempt- port facilities to the private sector between ed port privatizations that have bogged down 1995 and 1998, Panama attracted more than due to legal challenges to the selection of the $380 million in investments for modernization company to be awarded a concession contract. and expansion. When management of the Montevideo is a prominent example of how

MODULE 2 Kipevu container terminal in Mombasa was things can go wrong in a privatization process. transferred to a commercial terminal operator, Attempts at privatizing services in the port had outdated equipment was temporarily replaced, failed four times due to court challenges before a bureaucratic procedures streamlined, and pro- successful round was completed. At a later stage, ductivity of the terminal improved. In the big the government announced plans to auction off picture, 220 privatizations from 1992 to 2004 the terminal on the stock market. have generated private investments exceeding Conflicts and legal challenges can be minimized $21 billion to rehabilitate terminals and by clearly presenting the bidding rules and selec- renew superstructure in the ports that were tion process in the bid documents. Criteria to be privatized. used for selecting the successful bidder should be stated and a pro forma contract provided with This is not to say that port privatizations have the bid documents so that everyone is competing been without problems. There have been a num- for the same contract. The role of the port ber of cases of privatizations involving ports that administration after the privatization and any have not worked out. In Indonesia, the Koja con- limits on the contractor’s ability to operate tainer terminal under private management ran should be stated in the bid package. Bidders into difficulties and the public port company should be requested to provide a business plan took back the facilities. The City of Rostock that will become part of the final contract. In (Germany) demanded return of the terminal it the plan, bidders should state how they will contracted to a private group for operation, cit- address labor issues that may arise as a result of ing lack of compliance with the original contract. any downsizing of port operating personnel or Following a dispute with the Port Authority of changes in work practice rules. They should be Trieste (Italy), the commercial terminal operator asked to give references of how these issues were (Europe Combined Terminals, ECT) selected to dealt with at other ports in which they operate. operate the container terminal in the port under The bidders should be requested to state quan- a 30-year contract withdrew from the contract tifiable targets for productivity gains and market after 18 months. The terminal operator awarded development. This business plan should be the concession to operate the container terminal accorded significant weighting in the selection in the Port of Rosario (Brazil) is reported to have process. Incentives and penalties should be pro- lost more than $40 million under the contract as vided in the contract should there be a signifi- a result of work disputes and has cancelled the cant deviation from targets in the business plan. contract. And unfortunately, the success story in Kipevu (Kenya) was reversed when the commer- It is important to develop beforehand a well-rea- cial terminal operator terminated its contract soned plan for transitioning to private operation with the port as a result of breakdown of equip- and have a clear understanding of how the port ment that the government failed to refurbish or will function after the various port services are pri- replace. vatized. A number of important questions should

60 The Evolution of Ports in a Competitive World be addressed: What changes in laws and regulations are needed to allow the private sector opera- Box 28: Estimated Available Market in the tion in the port? How much management and Port Sector operational autonomy will be granted to the pri- Estimated Annual vate operators? What will be the role of the port Revenues MODULE 2 authority in regulating the rates and practices of (billions of $) private operators in the port? Who will be Container Terminal Operations 30 to 40 responsible for common area maintenance and Tug Assist Services 4 to 5 upgrades, and how will the cost of these activities Maintenance Dredging 4 to 5 be recovered from port users? Will the port con- Information Technology 2 to 3 tinue to have a marketing and planning function Environmental and after privatization, or will this be left to the indi- Ship Safety Services 1 to 2 vidual service providers? What resources will be required to carry out the functions that remain Other Port Services 4 to 5 with the port authority? What type of retraining Source: Author. program and severance package will be created to address the issue of redundant personnel? Private Participation in Infrastructure (PPI) 3.1.4. Contingency Plan database, 124 have been concessions or man- The best and tightest contract will still not ensure agement contracts involving existing terminal that there will be no problems in the operation operations. But there are many more opportuni- of port services under a private contractor. There ties. There are more than 2,800 ports world- should be a contingency plan for default by port wide, many of which still have publicly operat- service contractors to prevent work stoppage that ed terminals that are candidates for private could affect port operations. This plan should takeover involvement in management and oper- include defined penalties to compensate the port ations under concession agreements or manage- or government when resources made available by ment contracts. We roughly estimate that the the operator are inadequate. available revenue from container terminal operation is on the order of $38–40 billion annually. 3.2. Opportunities for the Private Sector 3.2.2. Towage Services The worldwide market for port services is esti- Port authorities often own and operate the harbor mated to generate available revenues of $50–55 tugs used for ship assistance. This activity is ripe billion annually. While these numbers are very for privatization and is relatively easy for the pri- rough, they indicate the size of the available vate sector to provide. It has, for instance, attract- market to companies active in the port sector. ed the attention of Smit Internationale of the This is a large available market that should be Netherlands, which has been actively pursuing of interest to a wide variety of global, regional, this market internationally and now operates tug and local port service providers (see Box 28). services in the Netherlands, Belgium, Germany, See Box 29, which illustrates the use of private Panama, Nigeria, Mexico, Argentina, República sector capital for expansion to cope with grow- Bolivariana de Venezuela, Gabon, Singapore, ing demand at the Port of Hong Kong, current- Malaysia, Indonesia, Netherlands Antilles, and ly the world’s largest port. The Bahamas. Other global, regional, or local tug operators are certainly also finding this market 3.2.1. Terminal Operations interesting, if they can break the existing public This area is the most advanced in terms of pri- or private monopolies. A rough estimate is that vate operation of port services. Of the 220 port the harbor tug service market represents available privatizations captured in the World Bank revenues of up to $3 billion annually.

61 The Evolution of Ports in a Competitive World

Box 29: The Port of Hong Kong—Why is it so Successful? y any standard, Hong Kong has estab- terminal, maintaining 61 harbor moorings, and lished an enviable presence in the world coordinating search and rescue in the South Bport sector. The port annually receives China Sea. The Marine Department performs about 42,000 seagoing vessels and 190,000 these functions as part of its responsibility to river trade vessels. In 1999, Hong Kong han- facilitate safe and expeditious movement of dled more than 16.1 million TEU, making it the ships, cargoes, and passengers within Hong largest port in the world in terms of container Kong waters. A Port and Maritime Board has throughput. To accommodate traffic through been established to set overall policy for the the port, there are eight major container termi- maritime sector in Hong Kong, but this board nals, with a ninth now under construction and does not generally become involved in over- two more planned. Looking outward, container sight of commercial operations in the port. MODULE 2 traffic is projected to grow to 24 million TEU in Overall, the government has a hands-off 2006 and 33 million TEU in 2016. The port has approach to port operations, relying on com- the ability to provide shippers with a full net- petition within the private sector to shape and work of competitive services and frequent sail- control activities. ings to all areas of the world. Hong Kong’s Expansion and improvement of facilities in cargo handling productivity ranks among the the port is entirely funded through the private world’s highest. One of the container terminals sector. While the government develops long- in Kwai Chung handles more than 1 million term strategic land use plans for the port, it TEU annually at a single berth—more than relies on the private sector to finance, build, twice the world standard. This terminal is own, and operate new facilities in response to capable of loading and discharging 1,200 market demand. For example, since 1972 the TEUs in 10 hours with three gantries that aver- private sector has built eight modern container age 40 moves per hour. The success of Hong terminals in the port and a ninth is now under Kong is based on a number of factors, includ- construction. In awarding such terminal con- ing the port’s location relative to major mar- tracts, the government earmarks an area of kets, a natural harbor and, perhaps more than water to be put out for tender, defines the anything else, a business-friendly environment responsibilities of the developer, and selects with heavy reliance on the private sector. the bidder who offers the highest price for the Reliance on the Private Sector development site. Once awarded, the contrac- Virtually all activities in the port are performed tor is responsible for making the entire invest- by the private sector. Three private firms oper- ment in infrastructure and superstructure on ate the eight container terminals in Kwai the site. The government’s role is limited to Chung container port. HIT, the largest of these providing the agreed water depth in the companies, controls four of the terminals and approach channel to the terminal. handles 60 percent of the containers passing Implications for Other Ports through Kwai Chung. The remaining traffic is A general reliance on the private sector to pro- shared among Modern Container Terminals vide the necessary port services and infra- and SeaLand Orient Terminals. Four private structure, with the government providing the operators provide mid-stream operations and minimum oversight needed to protect the pub- more than 100 private operators offer ware- lic interest, has obviously worked very well in housing services. Three firms provide tug Hong Kong. While other factors have con- service in the port, the largest of which is tributed to the success of the port, a business- Hong Kong Salvage and Towage. Seven com- friendly environment, reliance on market panies provide stevedoring services and six forces, and the government’s hands-off companies provide ship repair. Hong Kong approach to managing port services have Pilots Association Ltd., which is owned by the greatly contributed to Hong Kong’s leading member pilots, provides pilot service in the position as an international shipping center. port. This model is worth considering, particularly in The government’s operational function in ports that have sufficient traffic volume to the port is limited to collecting refuse, pre- enable competition among service providers to venting and cleaning up oil discharge, provid- thrive. ing vessel traffic services, managing a ferry Source: Author.

62 The Evolution of Ports in a Competitive World

3.2.3. Maintenance Dredging service contracts are joint ventures between the port authority and the IT provider, an arms This activity has traditionally been performed by length concession for IT services, or a concession commercial dredging contractors under contract based on in-kind service compensation.

to port authorities or by port authority personnel MODULE 2 using publicly owned dredgers. It is estimated 3.2.5. Environmental Facilities and Ship that maintenance dredging is a $4–5 billion Safety available annual market that can be completely This is an area ripe for innovative privatization turned over to the private sector. Port authorities concepts, as many of these functions can be per- that own and operate their own dredging equip- formed by the private sector. For example, a pri- ment could corporatize the dredging function vate company could be given the concession to and sell the business along with its assets to the operate a ballast water treatment plant in the private sector. But more innovative concepts for port, with revenues derived from receiving privatizing maintenance dredging might be con- charges and resale of recovered oil (see Box 30). sidered. For example, maintenance dredging A private company could install and operate the could be outsourced on a concession basis simi- vessel management system in the port under a lar to the concession awarded for channel dredg- concession agreement. The functions of port state ing and maintenance in the Rio Parana, where a control could be contracted under a management portion of the project revenues will come from agreement to a competent inspection company or direct charges by the concessionaire to future classification society, assuming the latter properly channel users and the port authority receives a apply the inspection rules. A company could be concession fee. A more radical concept could be contracted to maintain and operate aids to navi- a contract between a dredging company and a gation on a local or regional basis, such as now container shipping company or consortium of performed by the Middle East Navigation Aids companies to maintain specified water depths at Service (MENAS) in the Gulf area (see Box 31). the carrier’s terminals on a worldwide basis. Altogether, it is estimated that the available Much depends, however, on the volumes to be market from environmental and ship safety dredged and the timing of the dredging. activities is $1 to 2 billion annually.

3.2.4. Information Technology 3.2.6. Other Port Services

Increasingly sophisticated IT is spreading Warehousing and storage, container freight sta- throughout the port sector as users demand more tion operation, port security, pilotage, and timely information to support their logistics sys- equipment maintenance are all activities that can tems. This is producing a variety of opportunities be operated by the private sector. It is estimated to design, install, and operate IT systems in ports that worldwide these activities represent an throughout the world. IT services can be totally available market of some $4–5 billion annually. outsourced by port authorities and terminal operators and the market is estimated to represent See Box 32, which can be used as a general $2–3 billion in annual available revenues. Among checklist when planning a terminal privatization options that can be considered for structuring IT or reform process.

Box 30: Ballast Water Treatment Plant in the Port of Portland n the late 1970s, the Port of Portland of a water treatment facility to receive oily bal- (Oregon) made a major investment in a ship last tanker wash water. The plant is available Irepair facility designed primarily to accom- to ships loading or discharging cargo in the modate large tankers operating in the Alaskan port, as well as ships entering the shipyard for trade. Included in the project was construction repair.

63 The Evolution of Ports in a Competitive World

Box 30: Ballast Water Treatment Plant in the Port of Portland (Continued) The Plant the facility from a charge against the ship for The complete system includes eight connec- receiving ballast water ($4–5 per barrel) and tion stations, receiving lines, holding tanks, a sale of recovered oil on the open market. heating plant, decant tanks, separators, Recovered oil is sold to remarketers for processed water storage, oil storage, and a blending and resale for use as boiler fuel. The water quality testing laboratory. Storage capa- selling price of the oil has typically been bility is provided for 157,000 barrels of slops, $1.50–2.00 per barrel, but prices as high as 11,500 barrels of recyclable oil, and 30,000 $20 per barrel have been realized in periods barrels of disposable water. Ballast water can of extreme demand. Up to 400,000 barrels of be received from a ship at the rate of 3,000 recovered oil have been generated by the barrels per hour. Most of the recovery process plant in a year. MODULE 2 is achieved through tank settling over time. Potential to Employ Elsewhere Received ballast is typically kept in the tank for This type of plant could be considered for 30 days and skimmed each day. After 30 days, use in other ports, but there are factors that the tank is heated with internal steam coils to affect the attractiveness of the concept. finish the separation process. Recovered oil is Supplying steam to the plant is the principal sold and disposable water is either pumped operating cost and it would greatly help the through the city sewer system or directly into economics to have access to a cheap the river depending on the water quality. The source of steam. It is important to have port sets standards for acceptability of waste- proximity to a market that can use the water. recovered oil, which is not suitable for all Economics of the Facility applications. The facility cost $5.2 million to construct in Source: Author. the late 1970s. Revenues are generated by

Box 31: Middle East Navigation Aids Service he Middle East Navigation Aids Service numbers of containerships calling at Dubai (MENAS), a registered nonprofit organiza- and Jebel Ali. Ttion based in London, maintains the light- In addition to fixed navigation aids, MENAS houses, light buoys, racons (maritime radar broadcasts navigational information to ship- beacons) and other navigation aids in the Gulf ping in the Gulf area as NAVTEX (primary that are outside port limits. More than 500 means for transmitting coastal urgent marine navigation aids are installed and maintained in safety information to ships worldwide) warn- this area. MENAS extends from Kuwait down ings. These are also copied to Muscat Radio the side of the Gulf to Didamar Island in the in Oman, which retransmits them as NAVTEX Strait of Hormuz, and then south to Masirah warnings, and to the Area IX office, where Island and Channel in the western Gulf off the they are included in the Area IX weekly coast of Oman. Notices to Mariners. Permanent changes to MENAS operates the lighthouse tender and channels and pipelines and other alterations buoy lifting vessel Relume to provide the are then notified to mariners via a printed maintenance services required for the lights MENAS Notice to Mariners, distributed free of and buoys in the Gulf, and receives its income charge to vessels by all shipping agents in the from charges (light dues) levied on vessels Gulf area. The MENAS warnings are with- entering the Gulf. These charges, at £l.70 per drawn after the British Admiralty publishes its 100 net registered tonnage (NRT) for each visit Notices to Mariners covering the same a vessel makes, have remained constant for changes. 10 years. Income has risen from the increas- Source: Author. ing numbers of vessels entering the Gulf in recent years, particularly from the higher

64 The Evolution of Ports in a Competitive World

Box 32: Checklist for Negotiating a Terminal Privatization 1. The Proposed Transaction government responsible for terminal disrup- • What are the government’s primary and sections, missed performance targets, unexpected operating costs, or other event?

ondary objectives in privatizing the terminal: MODULE 2 generating proceeds to the government from • Is there any possibility that the government the transaction, increasing efficiency of port could directly incur losses under the agreement? services, attracting foreign investment to 4. Performance Targets improve port infrastructure, rationalizing the • What throughput does the proposed con- public labor force, reducing the govern- tractor project for the terminal over the next ment’s fiscal burden, or some other goal? 10 years from local traffic, transit traffic, and • What area and specific activities in the port transshipment traffic? are to be privatized in the transaction—and • How does the proposed contractor plan to what is not included in the transaction? reach these throughput projections? • What modality is best suited to the transac- • Does the proposal state targets for increas- tion—outright sale of assets and land, long- ing minimum productivity standards (for term lease of the facility under concession example, minimum average crane moves per arrangement, management agreement to hour) in the terminal? operate the facility, or a different model? • How does the proposed contractor plan to • How will the negotiations with the proposed reach these minimum productivity targets? contractor be conducted and who will be assigned to the government’s negotiating • Is there a provision for penalties and incen- team to complete the transaction? tives in the proposal for meeting the planned throughput and productivity targets? • Who will prepare the term sheet to be presented to the proposed contractor and what • What assumptions has the proposed con- schedule will be set for completing the tractor made, or conditions has it set, for the transaction? role of the port authority and government in achieving these targets? 2. Structure of Payment to the Government 5. Operational Issues • How is the compensation to be structured— is there an initial cash payment to the gov- • What services are to be provided by the port ernment, or is the proposed compensation authority to the terminal after takeover by to the government based on some form of the proposed contractor, and how will these rent, revenue sharing, royalty, or other services be paid for? deferred payment arrangement? • Who will be responsible for maintaining the • Is a portion of the initial payment for the ter- civil structures and water depth alongside minal rights noncash compensation based on the quay? providing equipment and services? If so, how • Will the proposed contractor provide new does the contractor propose to establish the management and senior operating person- fair value of the equipment and services? nel? If so, who will they be and what will be • What is the discounted present value of the their qualifications? initial payment and flow of deferred pay- • How many personnel does the proposed ments from the proposed contract? contractor plan to employ in the terminal? • How does this discounted present value • Will existing personnel in the terminal have compare with the discounted present value priority for future job positions in the terminal of the projected profits or surpluses of the after takeover by the proposed contractor? terminal as currently operated? • Will the proposed contractor use the salary 3. Risk Being Assumed by the Government level and structure currently in effect for per- • In the event of losses being incurred by the sonnel employed in the container terminal? contractor under the proposed agreement, If not, what will be the changes? will in any circumstances the government be • What interaction does the proposed con- liable for these losses? tractor foresee with other service providers • Under what circumstances can the pro- operating in the port, and how does it plan posed contractor hold the port authority or to cooperate with the other providers?

65 The Evolution of Ports in a Competitive World

Box 32: Checklist for Negotiating a Terminal Privatization (Continued) • Under a concession or management agree- • Will the proposed contractor provide a bank ment, will the port authority have full and guarantee as security from the time the gov- unfettered rights at all times to enter and ernment accepts its proposal until the hand- inspect the terminal after transfer to the over is complete? contractor? • What performance guarantee will the con- • Will the proposed contractor carry all-risk and tractor provide as security for complying liability insurance on the container terminal? If with the obligations taken on in the pro- so, what specific risks will be covered, what posed contract? will be the limits on liability coverage, and will 8. Hand-Over of the Terminal insurance cover the actual cost of equipment • What is the proposed timing of the hand- replacement? MODULE 2 over of the terminal to the proposed con- 6. Terminal Handling Charges tractor? • What structure and level of terminal handling • What specific steps will be taken by the charges does the proposed contractor plan contractor to plan for and implement the to impose on containers and other cargo hand-over? through the terminal? • Will the proposed contractor have transition • How much profit is built into these charges? personnel in the terminal for a time period • Are these charges competitive with other preceding the hand-over to organize the ports in the region? process, and how will these personnel inter- • What role will the government have in act with the current staff? reviewing and approving any changes in the • What is the role of the port authority in the structure or level of container handling hand-over process? charges? • What responsibilities will the port authority • If the contract provides for revenue sharing, and government continue to have after the what portion of terminal handling revenue is transaction? to be paid to the government? 9. Terminal Development • What process is to be employed to ensure • What commitments are being made by the that the government receives all of the com- proposed contractor to improve and expand pensation it is due? the terminal? 7. Potential Contractual Conflicts • What type of training program will be provided • What is the provision for dispute resolution, by the proposed contractor for terminal per- that is, the process, venue, applicable rules, sonnel? and laws? • Will the proposed contractor install a first- • What language will be paramount in event of rate computerized information system, and any ambiguity in the contract? in what other ports is this system now used? • Will the proposed contractor agree to be • When will this system be installed? subject to all prevailing local laws? • Will provision be made to connect this com- • Are there provisions for terminating the con- puter system to the current or future com- tract with the proposed contractor should puter system operated by the port authority, terminal throughput or productivity targets and to what extent will the port authority not be met? If so, what is the process for have access to data in the terminal system? terminating the contract? • What role does the proposed contractor • Is the terminology in the force majeure envisage for the port in competing for trans- provision acceptable to the government? shipment business with other ports in the If not, what changes are required to make region, and are there any potential conflicts it acceptable? of interest as a result of the proposed con- • What provisions has the proposed contractor tractor operating terminals in one or several included in the proposal concerning its obliga- of these other ports? tion for payment of taxes to the government? Source: Author.

66 The Evolution of Ports in a Competitive World

REFERENCES Drewry Shipping Consultants. 2005. Annual Review of Global Container Terminal Operators-2005.

Hummels, D., D. Rapoport, and K. Yi. 1998. MODULE 2 “Vertical Specialization and the Changing Nature of World Trade.” FRBNY Economic Policy Review June: 92.

Cullinane and Khanna. Journal of Transport Economics and Policy.

PORT REFORM TOOLKIT SECOND EDITION

MODULE 3 ALTERNATIVE PORT MANAGEMENT STRUCTURES AND OWNERSHIP MODELS

MODULE 3 The World Bank encourages dissemination of its work and will normally grant permission promptly.

ISBN-10: 0-8213-6607-6 ISBN-13: 978-0-8213-6607-3 eISBN: 0-8213-6608-4 eISBN-13: 978-0-8213-6608-0 DOI: 10.1596/978-0-8213-6607-3 MODULE THREE CONTENTS 1. Objectives and Overview 69 2. Evolution of Port Institutional Frameworks 70 3. Port Functions, Services, and Administration Models 73 MODULE 3 3.1. Interaction with Port Cities 76 3.2. Role of a Port Authority 77 3.3. Role of Port Operators 78 3.4. Roles of a Transport Ministry 78 3.5. Port Functions 80 3.6. Port Administration Models 81 3.6.1. Service Ports 82 3.6.2. Tool Ports 82 3.6.3. Landlord Ports 83 3.6.4. Fully Privatized Ports 83 3.7. Globalization of Terminal Operations 84 3.8. Port Management and Competition 87 3.9. Port Sector Regulator 89 3.10. Value-Added Services 89 4. Port Finance Overview 92 4.1. Financing Port Projects 93 4.2. Financing Ports: From a Lender’s Point of View 97 4.3. Public-Private Partnerships 98 5. Port Reform Modalities 99 5.1. Strategies and Reform Options 100 5.1.1. Modernization of Port Administration 101 5.1.2. Liberalization 101 5.1.3. Commercialization 102 5.1.4. Corporatization of Terminals 104 5.1.5. Corporatization of a Port Authority 106 5.1.6. Privatization 107 6. Reform Tools 109 6.1. Contracting Out and Use of Management Contracts 109 6.2. Concession Arrangements 110 6.2.1. Leasehold Agreements 112 6.2.2. Concession Agreements 114 6.2.2.1. Master Concession 116 6.2.2.2. BOT Arrangements 117 6.3. Comprehensive Privatization 120 6.4. Ports as Transport Chain Facilitators 123 7. Marine Services and Port Reform 124 7.1. Harbormaster’s Function 125 7.2. Pilotage 126 7.3. Tugboat Operations 126 7.4. Mooring Services 127 7.5. Vessel Traffic Services and Aids to Navigation 127 7.6. Other Marine Services 128 References 130 MODULE 3 o 5 igpr rae S oprto 124 113 118 111 119 122 95 127 99 129 92 110 94 96 108 104 Box 27:Prevailing ServiceProviders underDifferent PortManagementModels 91 86 Box 26:TheCreation of aNationalPilotageMonopolyintheNetherlands 90 85 Box 25:Singapore Creates PSACorporation Box 24:ImpetusbehindFullPrivatizationintheUnitedKingdom Box 23:SanMartin-RosarioWaterway Concession Box 22:BOTSchemesandPortDevelopment Box 21:ComparisonofLeaseSystems Box 20:SpectrumofPortReformTools 88 73 Box 19:TheExperienceoftheHanseaticLandlord Ports 87 74 71 Box 18:ThePortofAqaba:CorporatizationandPrivatization Box 17:Creation ofCommercialized PortAuthoritiesinChina 84 Box 16:ReasonsforPursuingPortReform Box 15:MultipleTerminal OwnershipinSriLanka 75 Box 14:CategoriesofPortAssets Box 13:European RulesonPortSubsidies Box 12:PotentialforVAL andVAF Box 11:OverviewofValue-Added ServicesinPorts Box 10:ElementsInfluencingInterportCompetition Box 9:PortfoliooftheLargest Terminal OperatorsasofJune2005 Box 8:GlobalTerminal Operators2005Throughput LeagueTable Box 7:Top 10CarriersasofJune2006 Box 6:BasicPortManagementModels Box 5:Strengths andWeaknesses ofPortManagementModels Box 4:Value-Added DevelopmentEfforts inthePortofRotterdam Box 3:ExamplesofPortEconomicMultiplierEffects Box 2:InstitutionalFormatsofGreenfield Ports Box 1:“WhiteElephants”inPortDevelopment BOXES MODULE 3 y Julian of the World Bank Transport Division. Transport Bank World y Julian of the . g .or .ppiaf The Public-Private Infrastructure Advisory Facility (PPIAF) Infrastructure Advisory Facility Public-Private The the quality improve countries facility assistance aimed at helping developing PPIAF is a multi-donor technical sector involvement. private of their infrastructure through on the facility see the information more For site:Web www The Netherlands Consultant Trust Fund Trust Netherlands Consultant The Ministry Affairs French of Foreign The Bank World The (USA) MaritimeInternational Associates TEMPO),Mainport known Consultancy as (formerly Holding Rotterdam Municipal Port Rotterdam Management (The Netherlands) (The Maritime Group Rotterdam The Netherlands) Holland and Knight LLP (USA) ISTED (France) (USA) Nathan Associates (Chile) Latin America and the Caribbean for Commission Nations Economic United (USA) Consulting PA The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technical the financing thanks to and elaborated was prepared Toolkit Reform of the Port Edition First The organizations. following of the contributions We wish to give special thanks to Christiaan van Krimpen, Christiaan van to special thanks give wish to We John Koppies, of the Rotterdam Veldman and Simme Maritime Group, of ITF,and this work. to formerly Marges Kees their contributions for Marios Meletiou of the ILO Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure Trust and Infrastructure Transport Netherlands The from a grant through provided was also assistance Financial Transport, Ministry (Netherlands Fund of Works, of the the enhancement Management) for Public Water and content,Toolkit’s contracted. Maritime (RMG) were Group the Rotterdam of which consultants for Acknowledgments from of a grant assistance with the financial has been produced Toolkit Reform of the Port Second Edition This TRISP,a partnership the U.K.between Bank,World Department and the Development International for learning for and sharing of knowledge of transport in the fields infrastructure services. and rural The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel, Toolkit Reform and publishing of the Port preparation The Ronald Kopicki,“Bert” Cornelis Kruk, and Bradle welcome. are Comments Help Desk. Transport Bank World the Please send them to Fax: 1.202.522.3223. Internet:[email protected]

MODULE

3 MODULE 3 Alternative Port Management Structures and Ownership Models SECOND EDITION

1. OBJECTIVES AND OVERVIEW his module, the third of eight comprising the World Bank’s Port Reform Toolkit, lays out an array of alternative port management Tand control structures, and explains for each structure the respective roles most likely to be filled by the public and private sectors. It provides a framework for all of the modules by defining the characteristics of specific management structures and the tasks and responsibilities to be performed by private and public sector entities. In particular, it identifies the problems facing port managers when adapting their organizations to the challenges of today’s global market place. The solutions and “tools” suggested in this module are adapted as much as possible to the port manager’s specific situations. Examples have been included illustrating approaches that have been successful, as well as those that have been less than fully successful. This module also notes how ports have adjusted organizational and administrative arrangements due to the strategic shifts and competitive pressures affecting the maritime sector. These developments are described in more detail in Module 2.

Module 3 is organized into seven sections, and the ment. The section also describes a number of following sections are summarized briefly below. public interest issues affecting port planning, port operations, and infrastructure development. Evolution of Port Institutional Frameworks provides basic terms of reference and a conceptual Port Functions, Services, and Administration framework for defining the respective roles of Models defines a number of typical manage- the public and private sectors in port management structures that ports use around the globe.

69 Alternative Port Management Structures and Ownership Models

This section spells out the kinds of tasks that the trend toward several successful port public ports undertake and defines for each of management models is strong. the alternative management structures ways in which discrete elements of these tasks are Reform Tools analyzes the various concession assigned to various parties. arrangements or tools available to port managers. The role of the public sector in financing Port Finance Overview focuses on the impor- port development is eroding and the private sec- tant subject of port funding, a topic that is dealt tor has assumed more responsibility, not only in with at greater length in Modules 5 and 8. port finance but also in port operations. This Here, the private sector plays an increasingly causes a gradual shift in the balance of power important role in providing funds for infrastruc- between the public sector and the private sector.

MODULE 3 ture development, in addition to paying for It is not clear how far this shift will go, but it is superstructure, equipment, and systems. This evident that the balance is likely to be shifted has not only a profound impact on management from port to port and from country to country. structures, but also on long-term public participation in port development. The analysis assesses Marine Services and Port Reform analyzes various aspects of public versus private traditional marine services in the context of investments in infrastructure, including which port reform. Such services include activities that components of infrastructure are paid for by the are carried out by both the public and private government or by the port authority, which sector. Marine services ensure the safe and expe- investments should be made by the terminal ditious flow of vessel traffic in port approaches operator, and how governments with limited and harbors and a safe stay at berth or at funds can harness private funding for port-related anchor. In every port, the harbormaster (or port investments. This section also analyzes the role captain) is responsible for nautical safety and global terminal operators—both shipping lines often also for the protection of the environ- and stevedoring companies—play in today’s ment. Other services such as vessel traffic maritime sector and assesses their impact on management, pilotage, and dangerous goods port management and finance. control are described as well. Finally, the section describes several possible reform approaches that Port Reform Modalities presents an overview of can be applied to marine services. various port reform options and describes the strengths and weaknesses of each. There are Upon completing this module, the reader should many ways to change the institutional structure have attained a better understanding of the of a port. Traditional methods of operating and various types of port management and owner- management structures have been abandoned, ship alternatives, their respective strengths and with ports increasingly operating as commercial weaknesses, and of which alternatives might entities in the global marketplace. The process best fit a port’s particular circumstances. of structural change can be a painful one, with 2. EVOLUTION OF PORT the potential for making costly mistakes. INSTITUTIONAL FRAMEWORKS However, increasingly the international port community agrees on the structural role and Private sector investment and involvement in function of port authorities. The global market ports emerged as a significant issue in the has had a unifying influence on emerging 1980s. By this time, many ports had become institutional structures. The increasing influence bottlenecks to the efficient distribution chains of international finance institutions (IFIs) on of which they are an essential component. port development also facilitates the introduction Three main problems, illustrated by port of efficient models and structures all over the congestion and consequent chronic service world. Although there is still a large diversity of failures, contributed to the gradual deterioration port management and organizational structures, of service quality during this period.

70 Alternative Port Management Structures and Ownership Models

The first problem was restrictive labor practices. expected demand failed to materialize (see Box 1). Increasingly after World War II, antiquated As a result of systemic failures in managing port work practices and methods for matching avail- development, governments have learned to rely able labor with occasional work—practices that increasingly on private investors to reduce ports’ developed during a previous era characterized by reliance on state budgets and to spread invest- MODULE 3 breakbulk cargo handling—needed to be trans- ment risks through joint undertakings. formed and renegotiated to adjust to modern bulk handling methods, unitized handling, and containerization. All of these developments resulted in a rapid modernization of port Box 1: “White Elephants” in Port handling equipment. At the start of this process, Development labor unions often refused to accept reductions in the labor force and ignored the need to uring its early years, the container terminal of the Port of Damietta in the Arab upgrade skills. Later, however, unions realized DRepublic of Egypt was often cited as a that port reform was a necessity. Enlightened white elephant in port development. In the labor leaders accepted moderate reforms. As 1970s, the terminal was constructed and fully Module 7 describes in greater detail, it is no equipped to handle anticipated container trans- longer realistic for dock workers and their trade shipment requirements in the Eastern Mediterranean. Yet, for various reasons, the ter- unions to oppose institutional reform and the minal was without any business for years. Only technological advances that frequently precede when the shipping company Scan-Dutch decid- and accompany it. ed to change its Eastern Mediterranean port of call from Cyprus to Damietta did throughput The second reason why many ports failed to start to increase sharply. Today, more than 25 respond adequately to the increased demands years later, Damietta is one of the leading trans- imposed on them was centralized government shipment container ports in the region. control in the port sector. Particularly between During the 1960s, major West European 1960 and 1980, central planning (in the port ports such as Rotterdam, Antwerp, and Marseilles developed large industrial sites near sector as well as in other sectors) prevailed not their port facilities. These sites became only as a norm in socialist economies, but also centers for refineries and petrochemical indus- in many western and developing countries tries. In view of the apparent success of ports where national port authorities were often becoming industrial centers, the Dutch promoted by international development banks. government created three regional ports to Slow-paced and rigidly hierarchical planning, support the ailing economies of their respective regions. Two of these ports, Flushing and control, and command structures often accom- Terneuzen, developed fairly well. They are panied central planning. Only in the 1980s did located along the River Scheldt in the vicinity the dismantling of communist systems and the of their large neighbors, Antwerp and increasing introduction of market-oriented Rotterdam. The third port was built along the policies on a worldwide basis open the way for River Eems near Germany, in the northern province of Groningen. Despite modern port decentralized port management and for reduced facilities and large government subsidies, the government intervention in port affairs. Port of Eemshaven never became a success; it was too isolated and lacked an industrial The third reason for a lack of port service quality hinterland. It struggled on for years to gradually was the inability or unwillingness of many gov- develop a few niche markets. The case of ernments to invest in expensive port infrastruc- Eemshaven shows that the creation of a new ture or the “misinvestment” in infrastructure port does not guarantee success when there (providing facilities that were badly matched with is no natural hinterland generating significant cargo flows and when the port does not the needs of foreign trade and shipping). During attract large scale transshipment traffic. this period, a number of beautifully constructed Source: Author. port complexes became “white elephants” when

71 Alternative Port Management Structures and Ownership Models

During this period, fundamental questions arose • Increased efficiency in operations. about the appropriate division of responsibili- • Improved allocation of limited public funds. ties between the public and private sectors. “Boundary line” issues came into sharp focus At the same time, various types of port termi- during the 1980s and 1990s. Policy makers nals have become highly specialized in the cargo became increasingly aware of the need for handling services they provide and manifest coordination among various branches of fewer of the characteristics of a public good. government and for consultation with diverse New greenfield container terminals have been port interests. They realized clearly that port built with private capital, and other container development had collateral consequences and terminals have been redeveloped and recapital- effects on public interests in land use, environ- ized through some form of private sector partic-

MODULE 3 mental impact, job creation, and economic ipation. Box 2 presents two of the institutional stimulation for economically blighted areas. formats used in recent years to develop green- Moreover, among some leaders, first in the field terminals. United Kingdom and then gradually in other Increasingly, ports are being integrated into glob- parts of the world, it became increasingly clear al logistics chains, and the public benefits they that large-scale government involvement in port provide are taking on regional and global attrib- operations was self-defeating and destructive of utes. The value of services provided by regional private initiative. They came to realize that the ports increasingly transcends the interests of local role of government in a market economy should users, and benefits businesses and communities focus on the provision of public goods (goods located beyond regional and national borders. and services that the private sector has no ade- This global diffusion of benefits poses some quate incentive to provide and, consequently, interesting challenges with respect to the need for are undersupplied without some form of large-scale investments in the sector. At the same government intervention). time, as discussed in Module 2, private port service providers themselves have become In many countries today, still another trend increasingly global in scope and scale. Even more has emerged: the private provision of public recently, a number of strategic alliances have services. Increasingly, governments have transformed both within the global shipping industry ferred public tasks to private contractors. and the port services industry. These alliances Outsourcing of key functions and roles has have profound implications for the ways ports had a major impact on redrawing traditional are financed, regulated, and operated. boundary lines in the port sector. Hence, in Confronted with these global shipping and port many ports today, the public sector mainly service powers, port authorities will increasingly acts as planner, facilitator, developer, and have challenges in defending public and local regulator while providing connectivity to the interests. Container terminal operators with hinterland, whereas the private sector acts as global coverage, sometimes in alliance with service provider, operator, and sometimes also major shipping lines, may be tempted to take developer. advantage of their dominant position to strengthen Experimentation in shifting the boundary line their network, thereby reducing the scope of that divides the public and private sectors competition mainly at the expense of public has resulted in a healthy pragmatism. Today, interests. Moreover, countervailing powers at an best practice is more concerned with international level that have not yet emerged are results than with ideology, and is intended to expected to do so soon due to the absence of suit- achieve: able national regulating structures. At port level, a strict organizational separation of the commercial • Increased service levels for infrastructure and regulating tasks of port management is users. required to safeguard public interests.

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inherently nondivisible and nonconsumable, Box 2: Institutional Formats of Greenfield such as public safety, security, and a healthy Ports environment on the one hand, and coastal Salalah, Oman protection works necessary to create port basins

n 1997, Salalah Port Services (SPS) was on the other hand. Private goods are both MODULE 3 awarded a 30-year concession to equip and consumable and divisible and their use entails a Ioperate the Port of Salalah in Oman. SPS is minimum of economic externalities. a joint venture with 30 percent foreign investment and 70 percent Omani government and public/private investment. The concession Most of the value of private goods can be cap- contract covers the container terminal, the tured in market transactions between private conventional port, and the free trade zone. parties. However, a substantial portion of the Investment in the port originally consisted value of public goods cannot be captured in of the following proportions: arms-length transactions. Consequently, private Omani government: 20 percent firms have little incentive to produce them. Government pension funds: 11 percent Public goods create positive externalities when Sea-Land Services: 15 percent they are used; the social benefits they generate Omani private investors: 19 percent are greater than the price that private parties Public offering: 20 percent can charge for them. Thus, some form of public Maersk/A.P. Moller: 15 percent. intervention is appropriate in their production to make certain that an adequate level of public The initial capitalization was $260 million. The government built the infrastructure. goods is maintained. Vallarpadam, India Ports represent a mix of public and private In August 2004, India’s Cabinet Committee on goods. They generate direct economic benefits Economic Affairs awarded Dubai Ports International (DPI) the contract to further (private goods) through their operations, as well develop the existing Rajiv Gandhi Container as additional indirect benefits (public goods) in Terminal in Cochin (Kuchi) and build a new the form of trade enhancement, second order terminal at or nearby Vallarpadam Island. increases in production volumes, and collateral The contract is on a BOT (build-operate- increases in trade-related services. These “eco- transfer) basis with total investment estimated nomic multiplier effects” have been used by at Rs 21.2 Bn ($460 million). When completed, many ports to justify direct public sector invest- Vallarpadam will be able to handle vessels up to 8,000 TEU with 2,150 meters of berth and a ment. It is in this dual production of both pub- throughput capacity of 3–4 million TEU. lic and private goods that complexities arise, DPI was announced as successful winner which makes defining roles for and boundaries of the public tender by submitting the highest between the public and private sectors challeng- bid to share 30 percent of gross revenues ing in the ports industry. This is particularly the with the Cochin Port Trust, which was subse- case in the fields of marine and port safety, port quently negotiated down to 25 percent. The security, and the protection of the marine envi- next highest bid was based on sharing 10 percent of revenues. ronment. Box 3 lists a number of areas where Vallapardam will primarily compete with ports generate economic multiplier effects. Colombo for share of regional transshipment traffic. Both through targeted development policies and Source: Author and others. the unplanned growth of interrelated industries, many ports have become the location for indus- 3. PORT FUNCTIONS, SERVICES, trial clusters. Industrial clusters are geographic AND ADMINISTRATION MODELS concentrations of private companies that may compete with one another or complement each Ports produce a combination of public and pri- other as customers and suppliers in specialized vate goods. Public goods include those that are areas of production and distribution. Industrial

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development is the Port of Colombo; a fashion Box 3: Examples of Port Economic Multiplier goods and apparel industry cluster has devel- Effects oped around Colombo, which focuses on reli- • Petro-chemical industry. able, short-transit container services to complete • Value-added services. just-in-time (JIT) purchase orders. This develop- • Repair and maintenance. ment was business-driven and not the direct • Packing and repacking. result of explicit public policy. The lesson • Labeling. demonstrated in Colombo is that quasi-public • Testing. goods in the form of efficient industrial net- • Telecommunications. works can be created and developed through • Banking. private initiatives. MODULE 3 • Customs. As a matter of strategic development policy, • Inland transport. many ports encourage the codevelopment of • Warehouse and distribution. various value-added services through franchis- • Ship chandlery. ing, licensing, and incentive leasing. Today, • Cleaning and laundry. ports seek to attract enterprises that extend Source: Author. their logistics chains or provide them with specialized capabilities to add value to cargoes that are stored and handled in the port. General clusters represent a kind of value chain, a web services that many ports attempt to develop of interrelated activities that are mutually sup- include chandlering, ship repair, container portive and continuously growing. Clustering of maintenance, marine appraisals, insurance related activities improves the competitive claims inspections, and banking. Box 4 advantage of cluster participants by increasing describes the efforts of one port to expand and their productivity, reducing transaction costs develop its ensemble of value-added services. among them, driving technological innovation, and stimulating the formation of new business Many governments are directly or indirectly spin-offs. involved in port development. They often use a “growth pole” argument to justify the direct Large ports offer particularly attractive loca- financing of basic port infrastructure. This tions for seed industries and distribution-inten- growth pole rationale derives from the belief sive enterprises. Several notable port-centered that investments in port assets have strong industrial clusters have developed over the last direct and indirect multiplier effects on the 50 years, for instance, those in Dubai, Colon, entire national economy and, further, that the Norfolk, Rotterdam, Yokohama, Antwerp, commitment of public resources is necessary to Hamburg, Marseilles, and Houston, to name encourage coinvestment by the commercial and but a few. From the 1950s, the larger European industrial sectors. These sectors are thus stimu- ports targeted refineries and chemical industries lated to make investments that they would not for colocation and codevelopment, with consid- make in the absence of public seed investment erable success. Thus, for example, a large clus- in port infrastructure. However, determining ter of five refineries and many chemical-process- causal links between public investment and spe- ing companies located in the Port of Rotterdam cific commercial activities and investments is as a direct result of public policies developed in difficult and at times speculative. Still, it is 1950s. A cluster of world-class, specialized important that governments envision and artic- marine services likewise established themselves ulate future development scenarios, maintain in the Port of Rotterdam as a result of the good frequent consultation with the private sector, hinterland connections and the gas and oil finds and implement public policies that are applied in the North Sea. Another example of cluster consistently and that enable the private sector

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boundary line is drawn between the public and Box 4: Value-Added Development Efforts in private sectors. At one end of this spectrum, full the Port of Rotterdam public control over planning, regulation, and Distriparks operations results in a “service port.” At the

istriparks are the Port of Rotterdam’s other end, the almost total absence of public MODULE 3 response to the growing demands on ownership, control, or regulatory oversight Dshippers and transport firms for just-in- results in a “fully privatized port.” time delivery at lower costs. Distriparks are advanced logistics parks with comprehensive facilities for distribution operations at a single In a clear trend, the alignment of public and location close to the cargo terminals and private interests in recent years has resulted in a multimodal transport facilities for transit diminishing role for governments in the port shipment. They employ the latest information industry. The total absence of public involve- and communications technology. ment in the port sector, however, still remains Distriparks provide space for warehousing an exception, limited primarily to specialized and forwarding facilities, including the storage ports and terminals. and handling of cargo and the stuffing and stripping of containers. They also offer a comprehensive range of value-added services. When governments attempt to increase national economic welfare through port development, In distriparks, companies can, either on their own or in partnership with local specialist they may choose to apply one of two distinct firms, process their goods according to normative frameworks: the market surrogate specific customer and country-of-destination framework or the public interest framework. In requirements. These value-added services seeking to increase economic welfare, govern- include packing and repacking, labeling and ments may attempt to remedy market imperfec- assembly, sorting, and invoicing. The distripark’s on-site customs service promptly tions and capture nonmarket externalities with- handles import and export documentation. in appropriately engineered and contested trans- To date, three distriparks have been estab- actions. Alternatively, they may pursue explicit lished within the Port of Rotterdam area. goals developed through public consultative Source: Port of Rotterdam processes designed to determine demand for public goods.

With respect to the market surrogate frame- to invest with confidence in projects that sup- work, the primary task of government is to port the stated public policy objectives. identify and eliminate market imperfections and On the other hand, port operations are busi- anticompetitive behavior or to regulate its unde- nesses in their own right and should be man- sired effects. For example, competition “for the aged to achieve optimal utilization of capital. market” can replace competition “in the mar- Investments in port assets are affected by risk, ket,” and competition “for the market” can be competition for land and capital, or other fac- engineered into contestable offers of rights in tors in the competitive business environment. ways that assure procompetitive outcomes. Subsidies and government-provided incentives It follows that one of the objectives of public distort the allocation of resources for port policy should be to create contestable market development and may result in over- or under- structures for port services and to manage com- investment. petitive behavior. This might be accomplished It is the delicate alignment of public and private through licensing, leasing, concessioning, or interests that determines the structure of port other methods designed to bring about an effi- management and port development policy. cient allocation of resources. The market surro- A full spectrum of institutional frameworks is gate view is followed in most countries with available, differing primarily in where the market-oriented economic policies.

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The need for some form of government inter- water-borne systems—is an essential port func- vention in markets for port services is related to tion, but it does not take place in isolation. A the unique economic characteristics of seaports, seaport node within a multimodal transport sys- some of which tend to make them natural tem is frequently associated with the develop- monopolies: ment of an urban center and generates substantial employment, industrial activity, and nation- • The provision of port services entails al and regional development. large fixed costs and low marginal costs. The marginal benefits associated with Many big cities trace their roots to the estab- using port services exceed the marginal lishment of a port. This does not mean, however, costs of providing these services. that the port will be extended at the place

MODULE 3 where it was originally founded. Antwerp and • A relatively large, minimum initial capacity Rotterdam are examples of ports that developed of basic infrastructure is required for relatively close to the cities’ central cores. Over technical reasons. time, however, they shifted operations away • The infrastructure is frequently indivisible from city centers. The underlying reason was and, as a result, increases in infrastruc- the increase in ship sizes (requiring deeper ture capacity can only be realized in drafts and longer berths). Another reason “quantum chunks.” contributing to the weakening of links between • Both initial construction and port expan- port and city centers is the rapid mechanization sion require large amounts of capital. As and specialization of port work and the accom- a result, the need to develop basic port panying increase in the operational scale and infrastructure (for example, sea locks, scope. These shifts led to increased storage breakwaters, quay walls, and main roads) space requirements and make ports very space- all at one time creates large capital oper- intensive. ating losses and foregone investment Another factor is the rapid industrialization of opportunities as a result of underused most developed country cities. The new indus- capacity during the earlier phases of a tries emerging after World War II required large project’s life cycle. areas of land, preferably close to deep water, • The life span of port infrastructure which often could not be found within the projects often exceeds the time horizon original port borders. Therefore, Maritime acceptable for private investors and Industrial Development Areas (MIDAs) were commercial banks. located at some distance from old city centers.

• Basic port infrastructure is immobile and Technological changes and consequential port has few alternative uses. relocation have left substantial areas available This set of characteristics is the main reason for for redevelopment for other purposes. Such financial involvement of governments in port areas are often located near city centers because construction and expansion projects. that is where the port (and city) began. Therefore, land values are potentially high, 3.1. Interaction with Port Cities although probably depressed prior to redevelopment because of the presence of decaying port Ports and the cities of which they are a part facilities. interact across many dimensions: economic, social, environmental, and cultural. Any port Three approaches commonly have been used for reform process should take into account the the development of surplus port land: linkages between city objectives and the port objectives. Transport integration—the smooth • Retaining it within the port authority for transfer of cargo and equipment from land to redevelopment as in the case of the Port

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of Barcelona. This implies a widening of nationally and internationally, rely on road, rail, the port’s function from that of a port and waterway links. Both the port authority into a property developer. Such change and the port city should use their influence to may require modifications to the statutes establish needed intermodal infrastructure and

of the public port authority, or of the agreements. In addition, the port authority and MODULE 3 trust port. The experience of Associated the port city should collaborate to efficiently British Ports shows that when the port is accommodate traffic flows and limit transport in private hands, it is capable of effective costs (including external costs). development of surplus lands. The Port Authority of New York and New Jersey 3.2. Role of a Port Authority is an example of a public port authority Ports usually have a governing body referred to with wide redevelopment powers. as the port authority, port management, or port • Transferring it to the local authority or administration. Port authority is used widely to municipality for redevelopment. In prac- indicate any of these three terms. tice this is not always effective because the The term port authority has been defined in vari- municipality might lack the resources to ous ways. In 1977, a commission of the European realize the full value of the land in ques- Union (EU) defined a port authority as a “State, tion. On the other hand, there are exam- Municipal, public, or private body, which is ples (such as Baltimore and Rotterdam) of largely responsible for the tasks of construction, successful regeneration by the municipality administration and sometimes the operation of of port lands near the city center. port facilities and, in certain circumstances, for • Creating a special development corpora- security.” This definition is sufficiently broad to tion for the specific purpose of redevelop- accommodate the various port management ing an old dock area. This is most appro- models existing within the EU and elsewhere. priate when the area is very extensive, Ports authorities may be established at all levels involves various municipalities, and of government: national, regional, provincial, or involves high redevelopment costs. An local. The most common form is a local port example of a separate corporation estab- authority, an authority administering only one lished for this purpose is the Puerto port area. However, national port authorities Madera Corporation in Argentina, which still exist in various countries such as Tanzania, is a joint venture by the City of Buenos Sri Lanka, Nigeria, and Aruba. Aires and the national government for the redevelopment of old city docks for mixed The United Nations Conference on Trade and commercial, residential, and recreational Development (UNCTAD) Handbook for Port use. Probably the biggest and best-known Planners in Developing Countries lists the statu- special purpose corporation (SPC) is the tory powers of a national port authority as fol- London Docklands Development lows (on the assumption that operational Corporation (LDDC), created to redevel- decisions will be taken locally): op the old docks of the Port of London. The LDDC was established by the govern- • Investment: Power to approve proposals ment and endowed with extensive plan- for port investments in amounts above a ning powers as a result of the inability of certain figure. The criterion for approval six riparian municipalities to agree on a would be that the proposal was broadly coherent and feasible plan for the docks’ in accordance with a national plan, redevelopment. which the authority would maintain. Finally, the interests of ports extend beyond local • Financial policy: Power to set common traffic and transport. Hinterland connections, financial objectives for ports (for example,

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required return on investment defined on balance between costs and revenues, a common basis), with a common policy especially when faced with innovations on what infrastructure will be funded by terminal operators, port users, rival centrally versus locally, and advising the ports, and hinterland operators. government on loan applications. • Generate internal cash flows needed to • Tariff policy: Power to regulate rates and replace and expand port infrastructure charges as required to protect the public and superstructure. interest. • Compete according to the rules of the • Labor policy: Power to set common market system, without excessive recruitment standards, a common wage distortions of competition.

MODULE 3 structure, and common qualifications for • Put limits on cross-subsidization, which promotion; and the power to approve may be rational from a marketing point common labor union procedures. of view (market penetration, traffic • Licensing: When appropriate, power to attraction), but which can undermine establish principles for licensing of port financial performance. employees or agents. • Avoid dissipation of the port authority’s • Information and research: Power to asset base to satisfy objectives of third collect, collate, analyze, and disseminate parties (for example, port users demand- statistical information on port activity for ing the use of land in the port area with- general use, and to sponsor research into out regard to the land’s most economic port matters as required. use or port and city administrations using port authority assets to pursue general • Legal: Power to act as legal advisor to city goals). local port authorities. Full cost recovery should be viewed as a Increasingly, central governments implement minimum port authority objective; once this seaport policies through the allocation of objective has been achieved, however, the port resources rather than through the exercise of authority can pursue other-than-financial wide-ranging regulatory powers. objectives considered desirable by the While central governments should pursue government or by itself. macroeconomic objectives through an active seaport policy, port authority objectives should 3.3. Role of Port Operators be more narrowly focused on port finances and Just as central governments and port authorities operations. play key roles in the port communities, so too do private port operators (such as stevedoring It is a widely accepted opinion among port firms, cargo handling companies, and terminal specialists that a port authority should have as operators). Port operators typically pursue a principal objective the full recovery of all conventional microeconomic objectives, such as port-related costs, including capital costs, plus profit maximization, growth, and additional an adequate return on capital. The full recovery market share. Only if port operators are free to of costs will help a port authority to: pursue such objectives can the benefits of a • Maintain internal cost discipline. market-oriented system be achieved. • Attract outside investment and establish 3.4. Roles of a Transport Ministry secure long-term cash flows. In a market-oriented economic system, the min- • Stimulate innovation in the various func- istry of transport typically performs a variety of tional areas to guarantee a long-term functions at a national level. With respect to

78 Alternative Port Management Structures and Ownership Models coastline and port issues, the main tasks • Auditing: These functions should be and responsibilities of the ministry can be performed independently from the summarized as follows: affected line organization and are usually included in a staff office. The

• Policy making: The ministry develops auditors should report directly to the MODULE 3 transport and port policies related to: minister. ~ Planning and development of a basic In many countries, transport directorates are maritime infrastructure, including coast- established as independent bodies within a line defenses (shore protection), port entrances, lighthouses and aids to naviga- ministry and perform an executive function. tion, and navigable sea routes and canals. They are usually responsible for one of the modes of transport, for example, the maritime ~ Planning and development of existing and ports directorate (maritime administration). and new port areas (location, function, The principal elements of a typical maritime or type of management). and ports directorate are: ~ Planning and development of port hinterland connections (roads, railways, • Ship inspections and register of shipping territorial waterways, and pipelines). (oversight of ship safety and manning conditions). • Legislation: The ministry drafts and imple- ments transport and port laws, national • Traffic safety and environment (safe regulations, and decrees. It is responsible movement of shipping and protection of for incorporating relevant elements of inter- the marine environment). national conventions (for example, the International Convention of Safety for Life • Maritime education and training (mar- at Sea [SOLAS], United Nations itime academies, merchant officers Convention on the Law of the Sea, the exams, and licensing of seafarers). International Convention for the Prevention • Ports (execution of national port policy). of Pollution from Ships [MARPOL]) into national legislation for signature members. • Hydrotechnical construction (construction of protective works, sea locks, port • International relations: Specialized entrances, and others). departments of the ministry represent the country in bilateral and multilateral port • Port state control on the basis of the and shipping forums. The ministry Paris and Tokyo memorandum of under- may also negotiate agreements with neigh- standing terms. boring countries relating to water-borne • Security compliance (International Ship or intermodal transit privileges. and Port Facility Security Code).

• Financial and economic affairs: A minis- • Investigation into and adjudication of any terial department is usually responsible maritime incident, such as fire on board a for planning and financing national proj- vessel, collision, stranding, piracy, or ects. In many countries, a ministry of similar event. transport also finances basic port infrastructure as well as roads, waterways, • Performance of regulatory and licensing and railways connecting ports with their functions in respect to structures, partly hinterland. It should be able to carry out or entirely founded on the seabed within financial and economic analyses and the territorial waters, in the exclusive assess the socioeconomic and financial economic zone of a country, or in any feasibility of projects in the context of navigable water or on any beach within national policies and priorities. the territory of a country.

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• Vessel traffic systems and aids to naviga- rules and regulations with respect to the behav- tion (construction and maintenance). ior of vessels in port, use of port areas, and other issues. Often, extensive police powers are • Search and rescue. also assigned to the port authority. 3.5. Port Functions The planning function of the port authority in Within the port system, one or more organiza- coordination with the municipality is a compli- tions fill the following roles: cated affair, especially for large ports located • Landlord for private entities offering a within or near a city. The port planner has to variety of services. consider: • Regulator of economic activity and oper- • The consistency of plans with the general MODULE 3 ations. terms of land use that have been set by the competent authority. • Regulator of marine safety, security, and environmental control. • The impact of port development proposals on the immediate surroundings (environ- • Planning for future operations and capital ment, traffic, facilities, and roads). investments. • The appropriateness of port development • Operator of nautical services and facili- proposals in the context of international, ties. national, and regional port competition. • Marketer and promoter of port services Actual port services and balancing of supply and economic development. and demand occur at the levels of the port • Cargo handler and storer. authority and individual port firms. Hence, the development of realistic investment projects for • Provider of ancillary activities. infrastructure and superstructure should be ini- In view of the strategic significance of land, tiated at these levels. Investment plans of indus- port property is rarely sold outright to private trial and commercial port operators or projects parties because of its direct and indirect effects for specific cargo handling, storage, and distri- on regional and often national economy and bution should be integrated at the level of the public welfare, its intrinsic value, and possible port authority to arrive at a strategic master scarcity. Therefore, a key role for many port plan for the port. The individual master plans authorities is that of the landlord with the may then be integrated into a national seaport responsibility to manage the real estate within policy, taking into account macroeconomic the port area. This management includes the considerations. Integration of individual master economic exploitation, the long-term develop- plans will help to avoid duplication of expen- ment, and the upkeep of basic port infrastruc- sive, technologically advanced facilities when ture, such as fairways, berths, access roads, and different ports in a national system strive to tunnels. attract the same customers as well as ensure the selection of the appropriate locations for specific Port authorities often have broad regulatory seaport facilities that will interconnect maritime powers relating to both shipping and port and land transport systems. operations. The authority is responsible for applying conventions, laws, rules, and regula- To conclude, central governments should estab- tions. Generally, as a public organ it is respon- lish a national port policy that supports national sible for observance of conventions and laws economic objectives and creates a reasonable regarding public safety and security, environ- framework for port development. The development, navigation, and health care. Port author- ment of plans for specific port projects, however, ities also issue port bylaws, comprising many should remain in the hands of port operators.

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Oversight of nautical operations should be within services, linesmen services, port information a port authority’s mandate and is often referred services, and liner and shipping agencies exist to as the harbormaster’s function. It generally within the port community. Large port authorities comprises all legal and operational tasks related usually do not provide these services, with the to the safety and efficiency of vessel management possible exception of pilotage and towage. In a MODULE 3 within the boundaries of the port area. The number of smaller ports, however, these are harbormaster’s office allocates berths and part of the port authority operations because of coordinates all services necessary to berth and the limited traffic base. unberth a vessel. These services include pilotage, towage, mooring and unmooring, and vessel traffic 3.6. Port Administration Models services (VTS). Often, the harbormaster is also A number of factors influence the way ports are charged with a leading role in management of organized, structured, and managed, including: shipping and port-related crises (for example, col- lisions, explosions, natural disasters, or discharge • The socioeconomic structure of a country of pollutants). In view of its general safety aspects, (market economy, open borders). the harbormaster’s function has a public character. • Historical developments (for example, former colonial structure). The cargo handling and storage function comprises all activities related to loading and dis- • Location of the port (urban area or in charging seagoing and inland vessels, including isolated regions). warehousing and intraport transport. A distinc- • Types of cargoes handled (liquid and dry tion typically is made between cargo handling bulk, general cargo, or containers). on board of the vessel (stevedoring) and cargo handling on shore (landside or quay handling). Four main categories of ports have emerged Terminal operators can fulfill both roles. over time, and they can be classified into four main models: the public service port, the tool There are typically two types of cargo handling port, the landlord port, and the fully privatized and terminal operating firms. The more com- port or private service port. mon structure for terminal operating firms is a company that owns and maintains all super- These models are distinguished by how they structures at the terminal (for example, paving, differ with respect for such characteristics as: offices, sheds, warehouses, and equipment). Other firms only use the superstructure or • Public, private, or mixed provision of equipment that is owned by the port. Such service. firms typically only employ stevedores or dock • Local, regional, or global orientation. workers and have virtually no physical assets. • Ownership of infrastructure (including The port marketing and promotion function is a port land). logical extension of the port planning function. • Ownership of superstructure and equip- Port marketing is aimed at promoting the ment (particularly ship-to-shore handling advantages of the entire port complex for both equipment, sheds, and warehouses). the port authority to attract new clients and for the port industry to generally promote its busi- • Status of dock labor and management. ness. This type of broad marketing is distinct Service and tool ports mainly focus on the real- from customer-oriented marketing that is aimed ization of public interests. Landlord ports have at attracting specific clients and cargoes for a mixed character and aim to strike a balance specific terminals or services. between public (port authority) and private A variety of ancillary functions such as pilotage, (port industry) interests. Fully privatized ports towage and ship chandlering, fire protection focus on private (shareholder) interests.

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3.6.1. Service Ports licensed by the port authority. The Port of Chittagong (Bangladesh) is a typical example of Service ports have a predominantly public char- the tool port. The Ports Autonomes in France acter. The number of service ports is declining. are also examples, in particular the container Many former service ports are in transition terminals, which are managed and operated toward a landlord port structure, such as along the principles of the tool port, although Colombo (Sri Lanka), Nhava Sheva (India), and for more recent terminals the private terminal Dar es Salaam (Tanzania). However some ports operators have made the investment in gantry in developing countries are still managed cranes. This arrangement has generated conflicts according to the service model. Under it, the between port authority staff and terminal opera- port authority offers the complete range of tors, which has impeded operational efficiency.

MODULE 3 services required for the functioning of the seaport system. The port owns, maintains, and The above-mentioned division of tasks within operates every available asset (fixed and the tool port system clearly identifies the essen- mobile), and cargo handling activities are tial problem with this type of port management executed by labor employed directly by the port model: split operational responsibilities. authority. Service ports are usually controlled Whereas the port authority owns and operates by (or even part of) the ministry of transport the cargo handling equipment, the private cargo (or communications) and the chairman (or handling firm usually signs the cargo handling director general) is a civil servant appointed by, contract with the shipowner or cargo owner. or directly reporting to, the minister concerned. The cargo handling firm however, is not able to fully control the cargo handling operations Among the main functions of a service port are itself. To prevent conflicts between cargo cargo handling activities. In some developing handling firms, some port authorities allow country ports, the cargo handling activities are operators to use their own equipment (at which executed by a separate public entity, often point it is no longer a true tool port). The tool referred to as the cargo handling company. Such port has a number of similarities to the service public companies usually report to the same port, both in terms of its public orientation and ministry as the port authority. To have public the way the port is financed. entities with different and sometimes conflicting interests reporting to the same ministry, and Under a tool port model, the port authority forced to cooperate in the same operational makes land and superstructures available to environment, constitutes a serious management cargo handling companies. In the past, these challenge. For this reason, the port authorities companies tended to be small, with few capital and cargo handling companies of Mombasa, assets. Their costs were almost entirely variable. Kenya, and Tema and Takoradi, Ghana, were The cost of underuse of port facilities was merged into one single entity. usually absorbed by the port authority, which 3.6.2. Tool Ports minimized risk for the cargo handling companies. Often, the provision of cargo handling In the tool port model, the port authority owns, services was atomized, companies were small develops, and maintains the port infrastructure with activity fragmented over many partici- as well as the superstructure, including cargo pants. The lack of capitalization of the cargo handling equipment such as quay cranes and handling companies constituted a significant forklift trucks. Port authority staff usually oper- obstacle to the development of strong compa- ates all equipment owned by the port authority. nies that could function efficiently in the port Other cargo handling on board vessels as well as and be able to compete internationally. on the apron and on the quay is usually carried out by private cargo handling firms contracted However, with the above in mind, a tool port by the shipping agents or other principals does have its advantages, particularly when it is

82 Alternative Port Management Structures and Ownership Models used as a means of transition to a landlord 3.6.4. Fully Privatized Ports port. Using the tool port model as a catalyst for transition can be an attractive option in cases Fully privatized ports (which often take the form where the confidence of the private sector is not of a private service port) are few in number, and fully established and the investment risk is con- can be found mainly in the United Kingdom (U.K.) MODULE 3 sidered high. A tool port may mitigate this by and New Zealand. Full privatization is considered reducing initial capital investment requirements. by many as an extreme form of port reform. It Another example could include a government suggests that the state no longer has any meaning- looking to expedite port reform initiatives, but ful involvement or public policy interest in the requires extensive amounts of time for legal port sector. In fully privatized ports, port land is statutes to be established. Laws and regulations privately owned, unlike the situation in other port for establishing a tool port may be less exten- management models. This requires the transfer of sive since no state assets are being transferred to ownership of such land from the public to the the private sector, and therefore make it an easier private sector. In addition, along with the sale of model to adopt in the first phase of reform. port land to private interests, some governments may simultaneously transfer the regulatory func- 3.6.3. Landlord Ports tions to private successor companies. In the absence of a port regulator in the U.K., for exam- As noted, the landlord port is characterized by ple, privatized ports are essentially self-regulating. its mixed public-private orientation. Under this The risk in this type of arrangement is that port model, the port authority acts as regulatory land can be sold or resold for nonport activities, body and as landlord, while port operations thereby making it impossible to reclaim for its (especially cargo handling) are carried out by original maritime use. Moreover, there is also the private companies. Examples of landlord ports possibility of land speculation, especially when are Rotterdam, Antwerp, New York, and since port land is in or near a major city. Furthermore, 1997, Singapore. Today, the landlord port is the sale of land to private ports may also sometimes dominant port model in larger and medium- raise a national security issue. sized ports. The U.K. decided to move to full privatization In the landlord port model, infrastructure is for three main reasons: leased to private operating companies or to industries such as refineries, tank terminals, and • To modernize institutions and installa- chemical plants. The lease to be paid to the port tions, both of which often dated back to authority is usually a fixed sum per square the early years of the industrial revolu- meter per year, typically indexed to some meas- tion, to make them more responsive to ure of inflation. The level of the lease amount is the needs and wishes of the users. related to the initial preparation and construc- • To achieve financial stability and financial tion costs (for example, land reclamation and targets, with an increasing proportion of quay wall construction). The private port the financing coming from private sources. operators provide and maintain their own • To achieve labor stability and a degree of superstructure including buildings (offices, rationalization, followed by a greater sheds, warehouses, container freight stations, degree of labor participation in the new workshops). They also purchase and install port enterprises. their own equipment on the terminal grounds as required by their business. In landlord ports, Box 5 summarizes the strong and weak points of dock labor is employed by private terminal the principal port management models. Box 6 operators, although in some ports part of the outlines the sectors (public or private) and their labor may be provided through a portwide various responsibilities under the four basic labor pool system. port management models.

83 Alternative Port Management Structures and Ownership Models

Box 5: Strengths and Weaknesses of Port Management Models Public Service Port Landlord Port Strength: Strengths: • Superstructure development and cargo han- • A single entity (the private sector) executes dling operations are the responsibility of the cargo handling operations and owns and same organization (unity of command). operates cargo handling equipment. The ter- Weaknesses: minal operators are more loyal to the port and more likely to make needed investments as a • There is no role or only a limited role for the consequence of their long-term contracts. private sector in cargo handling operations. • Private terminal handling companies gener- • There is less problem solving capability and ally are better able to cope with market flexibility in case of labor problems, since MODULE 3 requirements. the port administration also is the major employer of port labor. Weakness: • There is lack of internal competition, leading • Risk of overcapacity as a result of pressure to inefficiency. from various private operators. • Wasteful use of resources and underinvest- • Risk of misjudging the proper timing of ment as a result of government interfer- capacity additions. ence and dependence on government Fully Privatized Port budget. Strengths: • Operations are not user or market oriented. • Maximum flexibility with respect to invest- • Lack of innovation. ments and port operations. • No or limited access to public funds for • No direct government interference. basic infrastructure. • Ownership of port land enables market-ori- Tool Port ented port development and tariff policies. Strength: • In case of redevelopment, private operator • Investments in port infrastructure and probably realizes a high price for the sale of equipment (particularly ship/shore equip- port land. ment) are decided and provided by the • The often strategic location of port land may public sector, thus avoiding duplication of enable the private operator to broaden its facilities. scope of activities. Weaknesses: Weaknesses: • The port administration and private enter- • Government may need to create a port regu- prise jointly share the cargo handling services lator to control monopolistic behavior. (split operation), leading to conflicting • The government (national, regional, or local) situations. loses its ability to execute a long-term eco- • Private operators do not own major equip- nomic development policy with respect to ment, therefore they tend to function as the port business. labor pools and do not develop into firms • In case the necessity arises to redevelop the port with strong balance sheets. This causes area, government has to spend considerable instability and limits future expansion of their amounts of money to buy back the port land. companies. • There is a serious risk of speculation with • Risk of underinvestment. port land by private owners. • Lack of innovation. Source: A. Baird and P. Kent (2001).

3.7. Globalization of Terminal major shipping lines merged to invest in and take Operations control of a large number of terminals all over the world. This trend has far reaching consequences Port authorities are increasingly confronted with for the strategic position of port management in the globalization of terminal operations. During relation to some of their major clients. the 1990s, a number of terminal operators and

84 Alternative Port Management Structures and Ownership Models

Box 6: Basic Port Management Models

Type Infrastructure Superstructure Port labor Other functions MODULE 3 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 public Source: Author.

This trend toward globalization has affected well as the terminal operator industry, is moving mainly containerized operations. Today, a hand- toward greater consolidation and larger global ful of major carrier alliances and independent players and operators are emerging. terminal operators increasingly dominate the Competition between major carriers is intense. major global container trades. The global carriers The scale of investment in a new generation of have sought to secure their competitive positions container vessels represents a massive commit- by concluding long-term contracts for dedicated ment. To fill these vessels, the carriers try to container terminals in major, strategically located secure local control and coordination over ports. Their reasoning is that they believe they inland cargo haulage and feeder operations. In need to control all stages of the transport chain this way, they try to secure their market share to remain competitive. These efforts to establish and meet perceived service needs. Port handling integrated transport chains pose a challenge for charges are considered as being of secondary port authorities in their relations with the larger importance in achieving these goals. carriers. For example, how should a port respond if a large container operator demands to Relationships between ports and carriers fall operate a dedicated terminal and threatens to into four broad categories: leave the port when it does not get its way? • First are ports that face strong interport It should be emphasized that full control of the competition in the container handling transport and logistics chain by one consortium sector. Container lines may easily shift (a global monopolist) is not a desirable develop- operations to other ports if their financial ment. Because of regulatory measures by the and operational demands are not met. To United States and the EU, the complexity of the attract major container lines, the port transport and logistics chain, and the number of authority may offer them dedicated facili- players, a carrier’s ability to control of the full ties while other, smaller lines are accom- chain seems like an illusion. However, some modated at common user terminals. alliances may attain a significant degree of Without such dedicated facilities, major market dominance. Box 7 lists the fleets of the lines could move to other competing major container carriers, showing the number ports. Examples of this category are the of vessels operated, the capacity expressed Ports of Yokohama and Long Beach. in TEUs, and the number of vessels under • Second are ports that derive the bulk of construction. their business from a major container The container shipping market is still much line, and therefore, are dominated by this commoditized compared to other industries client. If the dominant line were to aban- (energy, rail, and the like) with global market don the port, 80–90 percent of the traffic shares of the largest carrier not exceeding 18–19 could be lost. Examples of such ports are percent (2005). However, the carrier industry, as Algeciras and Salalah.

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Box 7: Top 10 Carriers as of June 2006

Top Ten Container Carriers as of June 2006 Rank Carrier Current TEU % of Global Current Operating Vessels Under Capacity Fleet Vessels Construction/Contract 1 Maersk Line 1,566,352 14.9% 519 102 2 Mediterranean Shipping Co SA 892,548 8.5% 297 24 3 Evergreen Marine Corp (Taiwan) Ltd 530,172 5.0% 193 24 4 CMA CGM SA 486,453 4.6% 189 56 5 Hapag-Lloyd Container Linie GmbH 437,954 4.2% 136 10 6 Cosco Container Lines Ltd 369,531 3.5% 128 20 7 China Shipping Container Lines Co Ltd 328,245 3.1% 95 19 8 APL Ltd 325,919 3.1% 104 27 9 NYK Line 315,865 3.0% 117 25 MODULE 3 10 Hanjin Shipping Co Ltd 313,698 3.0% 78 17 Other 4,980,735 47.2% Total Global Fleet 10,547,472 8,024 1,108

Share of Global Fleet Maersk Line (by TEU capacity) Mediterranean Shipping Co SA 14.9% Evergreen Marine Corp (Taiwan) Ltd CMA CGM SA 8.5% Hapag-Lloyd Container Linie GmbH Cosco Container Lines Ltd 47.2% 5.0% China Shipping Container Lines Co Ltd APL Ltd 4.6% NYK Line 4.2% Hanjin Shipping Co Ltd 3.5% 3.0% 3.1% Other 3.0%3.1% Source: Author.

• Third are ports where, although no single However in Rotterdam, the large Europe shipping line may dominate the port’s Container Terminal (ECT) has been traffic volume, there is a possibility for acquired by Hutchison Port Holdings that line to pressure the port authority (HPH), which was obliged by the into accepting a dedicated terminal European Commission to sell ECT a 33 because of competition for transit traffic percent share in the Maersk Delta in the larger region. An example of this Terminal. Also at Maasvlakte type of port is Miami, which is a hub for (Rotterdam), P&O Nedlloyd started the the Caribbean and Central and South construction of its Euromax Terminal, America. Competitors include Kingston which is expected to be operational in (Jamaica) and Freeport (The Bahamas). 2008. Thus the Port of Rotterdam cur- As the competitive positions of these ports rently accommodates a mix of dedicated improve, carriers may increase pressure and common user terminals. In Antwerp, on Miami to grant dedicated terminals. developments are similar. • Fourth are major world ports such as The Port of Singapore did not meet the requests Shanghai, Hong Kong, Singapore, and of Maersk Line, which resulted in the carrier Rotterdam. Such ports have a very well- initiating the development of the nearby developed container sector. Initially, these Malaysian Port of Tanjung Pelepas with its ports resisted pressures from shipping affiliate A. P. Moller Terminals, which conducts lines to accept dedicated terminals. business under the name APM Terminals.

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However, in this particular case it should be themselves from the rest of the market over the noted that the container operations in last three to five years (see Box 8). These Singapore are carried out by PSA Corporation, companies operate a large number of terminals which itself is competing globally in the all over the world. Their main objective is not to container terminal market. control the transport chain, but to make a profit MODULE 3 by offering terminal services. However, when too The changes in terminal management are fast. many terminals within a region are controlled by Container lines may use a common user termi- one operator, the competent authority or nal with the advantage that they can switch eas- government agency may decide that special ily to a competing facility when the need arises, regulatory measures are needed to protect against which has competitive advantages. On the other the danger of a monopoly. This was the case in hand, major container carriers are increasingly Rotterdam when Hutchison Port Holdings interested in securing berth and throughput (Hutchison – HPH) bought 49 percent of the capacity, with the larger ones aiming at operat- shares of ECT. The European Commission decided ing their own dedicated terminals directly or to refuse permission for this transaction on the through affiliated global terminal operators. grounds that this would have allowed Hutchison Strategic alliances between global terminal oper- to establish a dominant market position in ators and major container lines are likely to Northwestern Europe since Hutchison already continue in the near future. owned Felixstowe, Thamesport, and Harwich.

With such consolidation and alliances increas- Box 9 lists the portfolio of the largest terminal ing in the industry, there is the growing concern operators as of June 2005. of dominant market shares or monopolies or oligopolies developing at both local and region- 3.8. Port Management and al levels. Governments should be aware of these Competition trends and the impacts. Competition within and between ports has a bear- Apart from the major container lines, a number ing on the management structure of the port and of global terminal operators have also emerged the relations between the port authority and the during the 1990s and the top 10 have distanced terminal operators and cargo handling companies.

Box 8: Global Terminal Operators 2005 Throughput League Table

Ranking Operator Million TEU % Share

1 Hutchison Port Holdings (HPH) 33.2 8.3 2 PSA - Singapore Port Authority 32.4 8.1 3 APM Terminals 24.1 6.0 4 P&O Ports 21.9 3.3 5 DP World 13.3 2.5 6 Evergreen 11.5 1.7 7 Eurogate 11.4 1.6 8 COSCO 8.1 1.5 9 SSA Marine 6.7 1.4 10 HHLA 5.7 1.3 Source: Drewry Shipping Consultants, Annual Review of Global Terminal Operators, 2006.

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Box 9: Portfolio of the Largest Terminal Operators as of June 2005 Hutchison Port Holdings: Constantza (Romania); Gioia Tauro (Italy); ong Kong (4 facilities), Jiangmen, Nanhai, Rotterdam (the Netherlands); Zeebruge Ningbo, Shanghai (2 facilities), Shantou, (Belgium); Abidjan (Côte d’Ivoire); Douala HXiamen, Yantian, Gaolan, Jiuzhou (China); (Cameroon); Onne (Nigeria); Port Said East Dar es Salaam (Tanzania); Damman (Saudi (Egypt); Tangier (Morocco); Aqaba (Jordan); Arabia); Buenos Aires (Argentina); Ensenada, Pipavav, Jawaharlal Nehru (India); Port Qasim Veracruz, Manzanillo, Lazaro Cardenas (Pakistan); Salalah (Oman); Kaoshiung (2 facili- (Mexico); Freeport (The Bahamas); Balboa, ties) (Taiwan, China); Kobe, Yokohama (Japan); Cristobal (Panama); Busan, Gwangyang (Rep. of Laem Chabang (Thailand); Dalian, Qindao, Korea); Jakarta (Indonesia); Karachi (Pakistan); Shanghai, Yantian, Tianjin, Xiamen (China); and Thilawa (Myanmar); Laem Chabang (Thailand); Tanjung Pelepas (Malaysia). MODULE 3 Port Klang (Malaysia); Duisburg (Germany); Dubai Ports World (DPW, including former Rotterdam, Venlo (the Netherlands); Harwich, P&O Ports portfolio): Felixstowe, Thamesport (United Kingdom); Adelaide (Australia); Yantian, Shanghai, Tianjin, Willebroek (Belgium); and Gdynia (Poland). Yantai, Yantian, Hong Kong (China) (3 facilities); PSA International: Caucedo (Dominican Republic); Germersheim Dialian (2 facilities), Fuzhou (2 facilities), (Germany); Constantza (Romania); Puerto Guangzhou (China); Antwerp (4 facilities), Cabello (Venezuela); Djibouti (Djibouti); Cochin, Zeebruge (Belgium); Voltri, Venice (Italy); Visakhapatnam (India); Jeddah (Saudi Arabia); Rotterdam (the Netherlands); Sines (Portugal); Vancouver (Canada); Houston, New Orleans, Tuticorin (India); Incheon (South Korea); Miami, Norfolk, Baltimore, Philadelphia, Singapore (6 facilities); Laem Chabang Newark (United States of America); Buenos (Thailand); Muara (Brunei); and Kitakyushu Aires (Argentina); Tilbury, Southampton (United (Japan). Kingdom); Antwerp (Belgium); Le Havre, Fos, Marseille (France); Maputo (Mozambique); APM Terminals: Mundra, Nhava Sheva, Chennai (India); Baltimore, Charleston, Houston, Jacksonville, Colombo (Sri Lanka); Vostochny (Russia); Los Angeles, Miami, New Orleans, Oakland, Quindao, Shekou (China); Laem Chabang Port Elizabeth, Port Everglades, Portsmouth, (Thailand); Surabaya (Indonesia); Manila Tacoma, Savannah (United States of America); (Philippines); Fremantle, Melbourne, Sydney, Buenos Aires (Argentina); Itajai (Brazil); Brisbane (Australia). Kingston (Jamaica); Aarhus (Denmark); Source: Company Web sites. Algeciras (Spain); Bremerhaven (Germany);

These changing relations are often cited as an Key factors affecting interport competition important reason for changing the port manage- include: ment structure. Many port authorities consider the creation of competitive conditions among port • Geographic location: A port that is operators the cornerstone of their port policy. strategically located close to well- established transport routes has competi- One can distinguish between interport competitive advantages. A strategic location typi- tion (competition between different ports) and cally possesses at least the following intraport competition (competition between characteristics: different enterprises within one port complex). To ~ Proximity to one or more major mar- reduce the risk of monopolies, port authorities itime routes. usually stimulate intraport competition. However, medium-sized and smaller ports, because of their ~ Natural deep water, good protection limited traffic, often accommodate only one port against waves and currents, large water- terminal operator. In such cases, port authorities front and landside expansion possibilities. often use their quasi-governmental powers to ~ Proximity to major production or con- regulate port charges and tariffs. sumption areas.

88 Alternative Port Management Structures and Ownership Models

~ Good hinterland connections (road, rail, owners are apt to use their monopoly market pipeline, and waterway) with high fre- positions to raise tariffs (in particular for captive quency service offering good connectivity. cargoes), which may justify regulation. The need • Legal framework: The well-balanced for such regulation may lead to the creation of national and local legal framework an independent port sector regulator. MODULE 3 applicable to port management greatly bol- The objectives of the port sector regulator are sters investor confidence. Many countries to ensure fair competition among competing have enacted specific port laws dealing operators in the port; to control monopolies with powers and responsibilities of the var- (including public ones) and mergers; and to ious actors in the sector. Moreover, land prevent anticompetitive practices. and competition laws are equally important, as well as an independent judiciary. A port sector regulator typically has legal powers • Financial resources: A port with sufficient to counter anticompetitive practices, such as: financial means of its own or the capacity • Use of a dominant position to prevent or to raise the funds required to develop and lessen competition. improve the port has a competitive advantage over ports with limited • Cross-subsidization by the provider of resources or no financial autonomy. monopoly services of contestable services, thereby threatening fair competition. • Institutional structure and socioeconomic climate: The management structure of the • Price fixing among competitors. port must be conducive to private sector • Use of other practices that are intended to investment. Related to this is the socioeco- restrict, distort, or prevent competition. nomic climate in the port; private investors prefer ports with a sufficient and Smaller ports are more vulnerable to anticom- well-trained labor force and good rela- petitive abuses because their traffic volumes tions between employees and employers. limit the number of container, bulk, and oil terminals. Generally, when a monopoly or • Efficiency and price: Various investigations merger situation does not operate against the indicate that port costs are an important, public interest, it may be permitted provided it although not decisive, factor in making is properly regulated. Examples of regulation in choices, especially for cargo owners or their such cases could include tariff caps, volume or representatives. In a world where manufac- traffic thresholds to trigger any additional future turers seek to trim costs and improve concession, or expansion limits to incumbent customer service through the adoption of operators that otherwise require an open tender. sophisticated logistics processes, efficiency and the price-performance ratio are The establishment of a port sector regulator increasingly important. should only be effected in the event of serious threats to free competition within the port. It • Image of the port: The image the port proj- should preferably have the character of an ects is another factor in its competitiveness. arbitrator instead of a court of law, and be The preferred image is an optimum mix of accepted by the port community as being the above-mentioned components. independent. For a more detailed discussion of Box 10 summarizes the key elements influencing the economic regulation of ports, see Module 6. port competition. 3.10. Value-Added Services 3.9. Port Sector Regulator Generally, the function of a port as a node in When interport competition is muted or absent, the transport chain depends on its location and port authorities or public or private terminal on the economic and technical developments that

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Box 10: Elements Influencing Interport Competition Inland Transport System today’s transport evolution, particularly within he inland transport system (road, rail, the framework of the door-to-door transport of waterway, and pipeline) determines to a commodities. As transport and distribution Tgreat extent the captive area of a port. specialists, they greatly influence port choice Improvements to the inland transport system and interport competition. place ports in a more competitive environment. In Freight forwarders and MTOs have their cases where major ports may have a hinterland own networks in the region that provide up- that covers a number of countries, their zone of to-date information about technical, commer- competitiveness overlaps that of other ports. As cial, operational, and social differences a result, fierce price competition might exist. between (competing) ports. They contribute to the loss of identification with and loyalty

MODULE 3 Transshipment to specific ports on the part of the con- Transshipment (sea-sea transfer of cargo) of signees and shippers. Freight forwarders cargo, particularly containerized cargoes, is a and MTOs often have representative offices in major market chased by many, if not almost competing ports. all, major ports in the world. Transshipment has the advantage that it generates additional Switching ports is much easier for trans- traffic (two moves for one box) and the weak- port specialists such as freight forwarders ness of being foot loose. Cargo owners and and MTOs than it is for shippers and shipping lines constantly look for the port consignees. In addition, as consolidators of where the price-quality ratio best serves their small consignments and shipper representa- particular interests. Because the penalty for tives, they are relatively strong compared to changing ports of call for transit traffic is not transport providers and other relevant parties, very severe, carriers tend to switch their trans- which makes modification of transport rout- shipment ports with little provocation. ings easier. Assisted by freight forwarders and MTOs, large shipping lines now can Freight Forwarders and Multimodal change the ports of call with much less Transport Operators difficulty. Freight forwarders and multimodal transport Source: TEMPO—Port of Rotterdam. operators (MTOs) play a decisive role in

exist in its hinterland. Modern production tech- adding potential of the services. This potential niques and consumption patterns increase the use can vary product by product and activity by of transportation systems beyond levels suggested activity. Numerous activities can be classified as purely by the growth in trade and commerce. As value-added services (VAS). Box 11 identifies a a result, more specialized handling, storage, and number of them. other logistics facilities are needed. More and more, ports are becoming part of integrated VAS can be divided into value-added logistics logistics chains. This process of specialization (VAL) and value-added facilities (VAF). VAL and changing demands, which has taken place has two major components: general logistics over the last two decades in most Western coun- services (GLS) and logistics chain integration tries, is now taking place with even greater speed services (LCIS). GLS are, among other activities, in new market economies. loading and unloading, stuffing and stripping, storage, warehousing, and distribution. These From the port’s point of view, creating new are the more traditional logistics activities and services boosts economic performance as well as do not directly affect the nature of the product its attractiveness to existing and potential as it moves through the port. clients. This, in turn, can help maintain and improve a port’s competitive position. When Beyond these traditional activities, more complex assessing the wisdom of developing new servic- LCIS are being developed. To carry out activities es, it is important to pay attention to the value- that manufacturers do not consider part of their

90 Alternative Port Management Structures and Ownership Models

Box 11: Overview of Value-Added Services in Ports

value-added services MODULE 3

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 centers re-use communication safety and security services offices/wtc hotels, restaurants, shops

Source: Author.

core business, logistics service providers may take and repair shops. Box 12 broadly depicts the over parts of the production chain (for example, potential for both VAL and VAF activities for assembly, quality control, customizing, and pack- different types of cargoes. ing) and after sales services (for example, repair and reuse). However, LCIS are only appropriate Containerized and general cargoes typically for certain types of goods. The products that have the highest VAL potential. GLS and LCIS have the highest potential to benefit from such have the best opportunity to serve these car- services include consumer electronics, pharma- goes. The VAL potential for roll-on roll-off is ceutics, chemical products (except for those very limited. Trucks with drivers are too expen- carried in bulk), clothing, cosmetics and personal sive to be delayed while the cargo is modified; care products, food, machinery, and control additionally, these loads are usually customer engineering products. tailored. VAF, such as tanking, cleaning, repair, parking, security, renting, and leasing facilities The second group of VAS, that is, VAF, is very have a better potential to serve the roll-on roll- diverse. These types of activities cannot general- off market. Dry and liquid bulk flows have the ly be assigned to a particular type of product or lowest potential for both VAL and VAF. freight flow. It is possible, however, to impute a certain VAF potential by analyzing freight flows To provide a favorable environment for VAL such as dry and liquid bulk, general cargo, con- and VAF, many ports are developing distriparks. tainerized cargo, and roll-on roll-off. A large A distripark is an area where companies are container throughput might create the economic established to perform trade and transport- basis for establishing container repair facilities, related value-added services and can also handling vast quantities of chemicals requires include locations within the port’s larger hinter- port reception facilities, and substantial roll-on land region. There is no standard development roll-off traffic might justify truck maintenance plan for a distripark. As can be seen from the

91 Alternative Port Management Structures and Ownership Models

Box 12: Potential for VAL and VAF

high

containers VAF potential VAF general cargo MODULE 3 liquid built roro dry bulk low high VAL potential Source: Author.

various developments in the Netherlands, financial accounts and therefore helped ports to France, Germany, and the U.K. for instance, exhibit positive financial positions. there is a large variety in distriparks. For example, in Rotterdam, there are three distriparks. Whether national governments finance basic port The oldest one (Eemhaven) is devoted to con- infrastructure depends on the government’s polit- tainer cargo distribution, the second one ical and economic policies. For example, if ports (Botlek) is devoted mainly to chemicals, and the are considered part of the general transport infra- third and most recent one is also dedicated to structure of the country, then investments in containerized cargoes, and includes large ware- them may be considered to promote the national houses containing goods for European distribu- interest. Research shows that in 63 percent of the tion (for example, Reebok). top container ports, the public sector (either the national government or the public port authori- 4. PORT FINANCE OVERVIEW ty) was responsible for creating and maintaining (public) basic port infrastructure. Before 1980, service ports and tool ports were mainly financed by the government. The general In some countries, financing basic infrastructure infrastructure of landlord ports typically was is considered a public task (for example, in financed jointly by the government and the port France, Italy, and Croatia) because this part of authority, and the terminal superstructure and infrastructure belongs to the public domain, equipment by private operators. Fully privatized which is protected by law. To carry out con- ports were the exception. In the event a govern- struction activities or port operations in this ment had no funds for expensive port infra- domain, a public license is required. This structure, either port development was halted or requirement could reduce intraport competition money was acquired at preferential rates from if the licenses are granted only on a limited and an IFI such as the World Bank. discriminatory basis.

Ports require expensive infrastructure to be able An often occurring problem with public (thus to compete successfully. Until recently, port political) investment decisions is that the deci- authorities mainly relied on contributions and sion to invest does not necessarily originate at subsidies from national governments for build- the same level of government as that of the ing or improving basic port infrastructure. Such financing sources and responsibilities. Because contributions usually were excluded from port of this disconnect, the interest of public officials

92 Alternative Port Management Structures and Ownership Models to increase efficiency and profitability of port many governments are still willing to finance assets is usually limited because they are not part or all of long-term port investments as held accountable for the success or failure of these contribute to the achievement of public their investment decisions. policy objectives. Caution is warranted, however,

whenever governments contemplate underwriting MODULE 3 As mentioned earlier, the increasing role of such investments. private enterprise in the port sector exerts a direct influence both on port management and 4.1. Financing Port Projects operations, as well as on the way capital projects To further clarify financing approaches, it is are financed. The private sector has become important to distinguish among investments in interested in financing the construction of entire basic port infrastructure, operational port infra- terminals, including quay walls, land reclamation, structure, port superstructure, and port equip- dredging, superstructure, and equipment. This ment. Understanding these distinctions will help has given rise to a large variety of financing and in deciding which investments should be paid management schemes such as BOT (build- for by the port and which should be paid for by operate-transfer), BOOT (build-own-operate- the local or regional community, the central transfer), and BOO (built-own-operate). Each is government, and private investors. Box 14 lists designed to mobilize private capital while various types of port assets under these four balancing public and private interests. categories. Government’s views on ports are evolving. In addition to financing the construction, reha- Increasingly, ports are considered separate eco- bilitation, acquisition, and maintenance of nomic entities, although still subject to national physical assets, ports may also need to finance regional and local planning goals. As such, they organizational restructuring and associated should operate on a commercial basis. By the labor compensation as well as working capital same token, subsidies for operational port infra- to support operations. Each of these categories structure construction, such as port land, quay and their potential sources of financing are walls, common areas, and inner channels, discussed below. should be avoided.

Box 13 summarizes the EU’s views on subsidies, In many countries, the government is responsi- particularly those for infrastructure. ble for financing basic infrastructure, either directly or through a contribution to offset its There still is, however, a category of port cost when the project is conducted, for exam- infrastructure for which it will be hard to find ple, by a highway authority or a port authority. private investors: investments for expensive and In the Netherlands, construction of maritime long-lived infrastructure (for example, access and protection works used to be carried breakwaters and locks, entrance channels and out by and for the account of the government fairways, and coastal protection works). The with the port authorities obliged to pay one- main stumbling block for private financing of third of the relevant costs. In France, this issue such projects is their life span, which often is regulated in the Port Authority Law of 1965 exceeds 100 years, and the sunk investment (Law No. 65 – 491 of June 29, 1965), which aspect of these projects. Cost recovery of such allocates a minimum of 80 percent of the costs works often cannot be achieved in 20 to 30 of basic port infrastructure of the Autonomous years (see Module 4), which is a normal Ports to the national government. repayment period for long-term loans for infrastructure works by IFIs. Nevertheless, the For the government, there are two key issues second- and third-order benefits from such associated with making large direct investments infrastructure investments for national and in port facilities: how to find the necessary regional economies may be substantial. Hence, funds and how to recover the investment.

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Box 13: European Rules on Port Subsidies eginning in the 1960s, heated discus- • Subsidies should not disrupt competition. sions took place in Europe on the issue • The investment must be profitable from the Bof port subsidization. The United financial and socioeconomic points of view. Kingdom in particular accused continental • More than one party should benefit from the European countries of secretly subsidizing subsidy. their ports to improve their competitive position. Indeed, most European governments • Subsidy of mobile assets is not permitted. subsidized directly or indirectly the develop- • Subsidies to cover operational costs are not ment of their ports. No European rules or regu- permitted. lations were in place because the port sector The main criterion to assess whether subsidy is was not included in the Treaty of Rome. permitted is the issue of selective favoring of MODULE 3 However, rules were laid down within the the country’s business sector. With respect to framework of regulating subsidization of infra- ports, the European Commission is of the opin- structure. Article 93, paragraph 3 regulates the ion that investments in basic port infrastructure, admissibility of state subsidies in port infra- such as coastal works, port accesses, and structure as follows: operational infrastructure are not selective • Subsidies should be necessary for the proj- enough to be considered state subsidy. ect in question to be realized. Investments in operational infrastructure have • The period of subsidization should be limited. to be reported to the European Commission. Investments in a dedicated terminal that are not • Subsidies must be in the interest of the fully charged to the client are considered illegal European Union. state subsidies and are not allowed. • Subsidies must be compatible with the Source: Author. objectives of the common transport policy.

The ways in which the government (or any • Compensation paid by the port authority other public body) funds investments are in proportion to the volume of goods diverse: transported through a newly dredged channel (per ton or per TEU). • Direct investments coming from the government investment budget. • A fixed amount per year paid by the port authority to the government. • Direct investments coming from a special • A percentage of the annual port dues paid (port) fund. by the port authority to the government. • Loans from IFIs. Often, basic infrastructure elements are Direct investments, paid for by the investment financed by an IFI under a government guaran- budget or a special fund, are based on the tee. However, even when IFI financing is made assumption that they will have a substantial available, ports and governments must still face positive effect on the economy, as shown by the the challenge of providing matching shares for a positive results of a cost-benefit analysis (always period of 30 to 50 years and making interest heavily dependent on traffic forecasts). For payments over a period of some 20 years. investments broadly benefiting the entire nation, When considering financing of operational it is not unusual that a government would not infrastructure, port authorities have a number seek direct financial repayment. of options from which to choose. For service However, there are also situations where the ports or tool ports, governments will usually government may receive direct reimbursement finance the operational infrastructure, with or for the funds it invested via a variety of rates without the assistance of an IFI. For landlord and charges assessed against the beneficiaries of ports made up of self-contained terminals, the investments. These may take the form of: investment in the terminal should be financed

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Box 14: Categories of Port Assets Basic Port Infrastructure: • Docks. • Maritime access channels. • Port land (excluding superstructure and paving).

• Port entrance. • Access roads to general road infrastructure. MODULE 3 • Protective works, including breakwaters and • Rail connection to general rail infrastructure, shore protection. and marshalling yards. • Sea locks. • Dry docks for ship repair. • Access to the port for inland transport Port Superstructure: (roads and tunnels). • Paving and surfacing. • Rail connection between the hinterland and • Terminal lighting. the port. • Parking areas. • Inland waterways within the port area and • Sheds, warehouses, and stacking areas. connecting port areas with their hinterland • Tank farms and silos. Operational Port Infrastructure: • Offices. • Inner port channels and turning and port basins. • Repair shops. • Revetments and slopes. • Other buildings required for terminal operations. • Roads, tunnels, bridges, and locks in the port area. Port Equipment: • Quay walls, jetties, and finger piers. • Tugs. • Aids to navigation, buoys, and beacons. • Line handling vessels. • Hydro and meteorological systems. • Dredging equipment. • Specific mooring buoys. • Ship and shore handling equipment. • Vessel traffic management system. • Cargo handling equipment (apron and terminal). • Patrol and fire-fighting vessels. Source: Author.

by the terminal concessionaire or the lessee, well as of the operator, is the conclusion of a while the port provides the land (often in a con- long-term lease contract with the operator dition ready for construction). The port may (running for a period of 20 to 30 years) for the also provide the quay wall with the land, but, use of part of the port area. This type of increasingly, private concessionaires have been long-term lease has the legal character of a willing to invest in this infrastructure. property right and has four advantages:

Other financial arrangements are also common. • At the end of the contract, possession of For example, in U.S. public ports, the port the land reverts to the government or authority may have access to “cheaper” money port authority. than a private sector operator. In this case, the • The contract represents a property right authority has the option to issue tax-free port that under certain conditions can be revenue and general obligation bonds. Both give transferred to a third party. There usually ports access to capital markets; the former relies is a clause in such contracts stating that on the revenues generated by operation of the new such transfer of property rights requires facility to repay debt, the latter assures purchasers prior permission from the port authority. of the debt that the government will make good on any repayments should revenues from • All superstructures (buildings and equip- operation of the new facility prove inadequate. ment) may be financed and owned by the operator. The most attractive situation, both from the point of view of the landlord port authority as • It can be used as security for a bank loan.

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For the financing of common areas (all areas from a port authority may have a greater need within the port area not being part of a terminal for working capital than investment capital, espe- or other port enterprise), the port authority may cially in their start-up periods. With respect to make use of retained earnings, issue its own debt financing, operators face the problem of bonds (where permitted to do so by its statutes providing security because installations and and legal system) or make use of bonds, or equipment often may be leased under conditions simply take a bank loan. Except in the first that prevent them from being mortgaged. Since case, the associated risk is with the borrower. port operators are essentially private companies, The problem confronting public ports is what an attractive alternative to debt financing is to use as collateral or guarantees for the lender, through the flotation of equity shares, the success particularly since there may be restrictions with of which will depend largely on the degree of

MODULE 3 respect to the use of the port’s assets. confidence prospective shareholders have in the newly founded company and in its management. In the event of a major reorganization program for the port authority, substantial amounts of Supplier credit, provided that it includes the money may be required for compensation pay- financing of necessary spare parts over a period of ments to personnel. (See Module 7 for a at least three years, offers another potential source detailed discussion of labor issues affecting port of funding for the procurement of equipment, reform.) Such payments often have a short with the usual limitations of this type of financing. payback period. Nevertheless, traditional sources of finance may be unwilling to lend Finally, a joint venture between the port author- money specifically for this purpose. There is, ity and the operator offers what may be an however, a possibility for “triangular” financing, attractive source of finance for the operator. For that is, lending the money for some other transac- a specialized terminal, where the likelihood of a tion on condition that the funds thus liberated are competing terminal being constructed is remote, used to compensate displaced workers. Moreover, a joint venture may be reasonable. In most cir- a national government might be willing to cumstances, however, the likely effect of a joint provide funds for labor redundancy schemes with venture between a port authority and an opera- or without the involvement of an IFI. tor is to obscure the transparency of the relationship between the different port functions Port operators and providers of services who and, more pragmatically, to discourage the take over existing installations and equipment entry of new operators to the port. Box 15

Box 15: Multiple Terminal Ownership in Sri Lanka he Sri Lanka Port Authority (SLPA) faces a many services in the port area including intert- number of challenges. In 1999, the gov- erminal transfers, SLPA’s position as a neutral Ternment of Sri Lanka entered into a 30- landlord is compromised. Looking into the year concession for the South Asia Gateway future, a major expansion, the South Port, will Terminal (SAGT). SAGT is operated under a require that the role of SLPA become one of a BOT scheme by P&O Ports (now owned by nondiscriminatory landlord without a direct Dubai Ports World – DPW), with other partners hand in operations. This should improve effi- including Evergreen Marine Corporation and ciency and minimize the conflicts of interest. John Keels (Sri Lanka). SLPA has retained a role However, port reform in Sri Lanka is stalling. in the terminal as well. The Port of Colombo is Despite official government plans, JCT is not currently a service port, and its lead container corporatized and no port sector regulator has terminal, Jaya Container Terminal (JCT), is and been established on or before October 2004, will continue to compete actively with SAGT. as required by the concession agreement with Given SLPA’s stake in both JCT (100 per- SAGT. cent) and SAGT (7 percent), as well as in Source: Christiaan Van Krimpen.

96 Alternative Port Management Structures and Ownership Models describes the challenges mounted by such rela- agreement. Sometimes it is legally possible to tionships in the case of the Sri Lanka Port mortgage superstructure on the terminal. Using Authority. the land itself as collateral is therefore complicated. The land must have inherent worth and a

4.2. Financing Ports: From a user should be able to exploit it. If a right to MODULE 3 Lender’s Point of View use the port area concerned does not accompa- Port authorities or port operators seeking to ny the mortgage on port land, its value is con- finance new facilities or equipment typically siderably diminished. Another problem might have to offer some sort of security to a prospec- be that the national legislation grants only limit- tive lender. Generally, they have assets and ed rights to a mortgage. Lastly, in the event of a other support from political and business circles public port authority, the lender might be con- for the project they want to undertake. In many fronted with political processes complicating its ports, however, land is government-owned and ability to exercise rights under a mortgage. This cannot be used to secure financing. And, when makes the security less valuable to a lender. a port needs money to dredge a channel In most ports, the concession or lease to private entrance to remain attractive and competitive, operators is the principal security for lenders, the channel itself does not constitute credible provided that the conditions of the concession security for the lender. There are however, vari- or lease allow transfer of the contractual rights ous options for ports to provide lenders to another party. In the case of a full-fledged “comfort.” concession (including a BOT scheme), the finan- Prospective lenders will examine closely the cier often desires to have the ability to arrange position of the borrower, which might be a port for the operation of the terminal itself if the authority or a port enterprise. In the vast operator defaults. In the case of a concession or majority of cases, the latter are structured as land lease, a port authority is usually obliged to limited liability companies. In the case of loans transfer the concession or lease to a third party, to a public port authority, the state or munici- such as transfer to another port-related firm, pality usually provides a guarantee. A port when certain conditions are met. This might be authority might also be corporatized with the a cargo handling firm or terminal operating state or the port city as main shareholders. In company, or a port-based industry such as a both cases, the lender will assess the financial refinery or a chemical plant. Conditions attach- strength of the port authority and the public ing to the transfer typically require the new firm bodies owning it. This is often sufficient to to use the facilities in accordance with their ini- ensure financing of the venture without too tial assignment and to generate sufficient seago- much regard to the assets supporting it. In ing traffic. Anglo-Saxon jurisdictions, a borrower may cre- A port complex comprises a large variety of ate a “floating charge” (similar to a mortgage) other assets that might be mortgaged or used as over all assets. This avoids the need to consider collateral, such as warehouses, quay cranes, specific elements of the port assets as collateral. offices and other buildings, tugs, dredged chan- A port’s most valuable asset is its land; however, nels, and others. Some of these assets might land’s value as a security for financing varies provide security to a lender, especially when the significantly. Generally the land is owned by a assets can be used in other ports (for example, public body or by the port authority itself. In cranes and tugs). Others, because they are landlord ports, the land is concessioned or immobile or have few alternative uses, consti- leased to private operators, with the exception tute little or no security (for example, dredged of common areas, which usually have a low channels). An important aspect of securing commercial value. In the majority of cases, port financing is the legal right of a port operator to land cannot be mortgaged under a concession own buildings on land leased from the port

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authority. Lenders are usually prepared to duty-free status (as was the case at Jebel Ali) to finance buildings and certain types of equip- enhance the success of the venture. Properly ment in view of their intrinsic value. focused government support can be very important to provide additional comfort to Port firms, and sometimes privatized or corpo- lenders. ratized port authorities, typically take the legal structure of a joint stock or limited liability 4.3. Public-Private Partnerships company. The equity of such enterprises does not constitute security in itself, but may help to As private sector involvement in financing port attract investment funds. Rights of equity hold- and other infrastructure works has increased, ers to repayment usually rank immediately the tools for financing these facilities have become increasingly sophisticated and the legal

MODULE 3 behind the rights of a lender. When balance sheet financing is undertaken, a high level of conditions to be satisfied by the project more equity (in relation to debt) means that more strict. The private sector evaluates its participa- funds are available to absorb losses before tion in port infrastructure and superstructure lenders come under threat. projects based on the following elements: One of the most important elements of financial • Expected yield. security is the cash flow generated by the port • Adequate debt/equity financing structure or terminal. A lender almost always wants the (for example, 65/35, 70/30, 75/25). earnings of the project to provide security for the loan. Estimation of such earnings is highly • Strong sponsorship. complex because it involves assessing elements • Solid legal contracts. such as future traffic levels, port revenues and expenses, the expected general economic devel- • Transparent legal framework. opment of the country, potential exchange rate • Fair and open bidding procedures. risks, the future political climate, and other factors. The more accurate and reliable the traffic • Credible feasibility analyses (technical, and financial forecasts are perceived to be by institutional, financial, economic, and prospective investors, the higher the probability environmental). that a port authority or port operator will be Funding large infrastructure investments in able to attract risk capital and obtain loans. greenfield port projects is more risky because of Governments may also guarantee commercial certain complicating factors, including: loans against political risk and possibly use the • The large proportion of necessary equity guarantee programs offered by the IFIs. In the contributions (for example, a minimum port sector, lenders often take security via proportion of 60 percent) due to the high assignment of port charges. However, much will risk associated with long construction depend on the terms of the concession or lease and payback periods. agreement, terms of earlier financing, and the rights of third parties. Finally, financing can be • The difficulty of projecting future traffic affected by the provision of additional govern- volumes. ment support. A government may invest equity • The capital-intensive nature of the invest- in a firm it deems essential for the general ments. development of the port. It may also provide subordinated loans. Direct financial involvement • The continuing risks associated with opera- of governments and public port authorities is tions, such as a refusal of requests for tariff increasingly common, despite potential conflicts adjustments, changes in tax policy, or of interest. Sometimes a government may assign introduction of new handling techniques certain rights or grant concessions such as a that make existing facilities obsolete.

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5. PORT REFORM MODALITIES embarked on port reform and adapted the institutional and financial structure of their port sec- Today, the term port reform connotes the tors to market conditions. changing institutional structure of the port business and the much greater involvement of the Despite the social and economic reforms of the MODULE 3 private sector in the exploitation and financing past 35 years, the public sector has retained a of port facilities, terminals, and services. Port strong role in port development. Generally, in a reform, therefore, results in changing relation- market-oriented economy a government contin- ships between the public and private sectors. ues to be responsible for the development of public goods, goods that have a social utility, but The sharp increase in world trade over the last that cannot be provided by the private sector 60 years focused the attention of national gov- because of low profitability. Moreover, another ernments on the economic importance of ports. reason for continuing government involvement in This was especially the case in major ports the port sector is the strong ties to government developing large industrial sites within their responsibilities in the areas of land use planning, domain. In the 1950s and 1960s, many nations environmental protection, job creation, and the introduced institutional changes with the aim of economic stimulation of underdeveloped areas. coordinating port development at national and Box 16 is a compilation of a considerable num- regional levels and preventing overinvestment in expensive port infrastructure. For example, the United Kingdom established its National Ports Council for this purpose. Box 16: Reasons for Pursuing Port Reform In the former Soviet Union, Eastern Europe, General Reasons: and in many socialist-oriented developing coun- • Improve port efficiency. tries the situation was entirely different. Ports • Decrease costs and prices. were considered part of the national state • Improve service quality. structure (for example, as an element of the • Increase competitive power. ministry of merchant marine or ministry of • Change the attitude with respect to port transport) and were often controlled by national clients (become more client friendly). shipping companies. Every matter involving Administrative and Managerial Reasons: maritime policy was decided centrally, with port • Depoliticize the public port administration. authorities carrying out the various day-to-day • Reduce bureaucracy. nautical and operating functions. • Introduce performance-based management. At the beginning of the 1980s, the belief in the • Avoid government monopolies. management and operating capacities of nation- Financial Reasons: al governments faded in most market economy • Reduce public expenditure. countries. Central structures came under fire • Attract foreign investment. and often lost some of their powers. The priva- • Reduce commercial risks (investments) for tization wave launched in the late 1970s and the public sector. early 1980s by Margaret Thatcher in the U.K. • Increase private sector participation in the also affected the port sector and resulted in a regional or national economy. reassessment of the role of the government and Employment Reasons for Change: private enterprise. • Reduce the size of the public administrations. • Restructure and retrain the port labor force. The demise of the communist system in the • Eliminate restrictive labor practices. beginning of the 1990s resulted in the virtual • Increase private sector employment. collapse of centrally controlled port systems in Source: Various World Bank surveys between 1990–2000. the former socialist countries. They too

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ber of surveys seeking to summarize the most fre- regulations that enable private companies to quently cited reasons for change in the manage- operate in an area where previously only the ment or ownership of ports. public sector was allowed to operate.

5.1. Strategies and Reform Options In the case of commercialization, although the public port is not transformed into a private Many port managers and government officials company, it is given more autonomy and made believe that the only way to improve the per- accountable for its decisions and overall performance of public port organizations is formance. A commercialized port authority through the process of privatization. They hold applies the same management and accounting this view because they believe that certain char- principles as private firms and can adopt pri- acteristics of the private sector are indispensable

MODULE 3 vate sector characteristics and practices to to achieve commercial success. The term priva- become more customer oriented as well as more tization has therefore become synonymous (and efficient and profitable. confusingly so) with port reform. Privatization, however, more accurately refers to one aspect of In the case of corporatization, a public port port reform—the introduction of the private enterprise is given the legal status of a private sector into areas previously reserved to the pub- company, although the public sector or govern- lic sector, finally resulting in the transfer of port ment still retains ownership. All assets are land into full private ownership. transferred to this private company, including land lease rights. Land ownership usually Governments and port managers can select remains with the port authority. from among a variety of strategies for improving organizational and operational perform- The most complex form of reform is privatiza- ance, including: tion. A useful definition of this term can be found in the UNCTAD publication of 1998 • Modernization of port administration Guidelines for Port Authorities and and management. Governments on the Privatization of Port • Liberalization or deregulation port services. Facilities: “Privatization is the transfer of ownership of assets from the public to the private • Commercialization. sector or the application of private capital to • Corporatization. fund investments in port facilities, equipment, and systems.” • Privatization. More specifically related to the port sector are Each of these options may be equally valid and two more variations of privatization: successful forms of port reform, depending on the setting of the port in question. Each of these • Comprehensive privatization: A scheme options is defined below. in which a successor company becomes the owner of all land and water areas as Modernization of port administration assumes well as of all the assets within the port’s that performance can be improved by introduc- domain (this is equivalent to the sale of ing more suitable systems, working practices, or an entire port to a private company). equipment and tools within the existing system of bureaucratic constraints. The advantage of • Partial privatization: A scheme in which this strategy is that certain changes in the only part of the assets and activities of a organization can be made without the require- public port body are transferred to the ment to change laws or national policy. private sector (such as the sale of existing berths, the transfer of pilotage or towage Liberalization and deregulation are the reform functions, or a concession by a public or partial elimination of governmental rules and port authority to a private company to

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build and operate a terminal or a special- Effective corporate planning is dependent on ized port facility). strategy formulation involving group interaction. While group-based strategic decisions Hence, privatization expands the role of the pri- often can offer the best available alternatives, a vate sector in the ownership or operations of strict hierarchical organizational structure MODULE 3 existing port facilities and services, as well as in places the majority of important decisions in the the development of new port facilities. In the hands of a single executive. In such cases, the following sections, the various port reform success or failure of port development and poli- options are described in greater detail. cy is dependent on one person only, which is a 5.1.1. Modernization of Port Administration risky situation. But this is precisely the most frequently observed form of management in tradi- The strategies of liberalization, commercializa- tional ports. tion, corporatization, and privatization all attempt to improve the efficiency of the port Career planning and management development administration and the operations through the are important elements in a port modernization introduction of a business-like environment. strategy. Many ports have failed to introduce Although these strategies can be effective, some career planning and career development in the governments are reluctant to implement them organization, or omitted to link the two activi- because they fear that such institutional modifi- ties. As a result, such organizations are character- cations may lead to a disruption of services or ized by low employee motivation levels, high loss of government authority, prerogatives, and absenteeism, and high turnover rates at manage- power. As a result, governments sometimes pre- ment level positions. Efforts to improve the fer other less sweeping methods to improve administrative environment and performance organizational performance, such as the mod- should include the rational use of computer ernization of the port’s administration. Such a applications and the application of modern com- strategy assumes that the performance can be munication technologies. Such developments are improved even in the prevailing environment of perhaps the most significant technological efforts bureaucratic constraints. The advantage of this undertaken by ports. Many have developed strategy is that certain changes in the organiza- advanced computerized management information tion can be made without the necessity to make systems. EDI and information and communica- legal or policy changes. tions technology are excellent tools to improve port administration and communication. Examples of improvements that can be introduced without legal or policy changes are: In the final analysis, the modernization option generally has not led to fundamental changes in • Adoption of corporate planning practices. the port sector, which is what the reform • Application of human resources develop- process sets out to do. It should, therefore, be ment (HRD) planning. considered as a stepping stone toward a more comprehensive reform program. • Use of computer applications and management information systems (MIS). 5.1.2. Liberalization • Development of electronic data inter- Liberalization sets the stage for a private organi- change (EDI) and information and com- zation to carry out certain port activities previ- munication technology. ously reserved exclusively for the public sector Many ports have refrained from introducing (public monopoly). With this reform, the private corporate planning (strategic management or sector is authorized to provide selected port serv- strategic planning) because port managers fear ices to users in a competitive environment with that its positive effects may be undermined by the intent of increasing efficiency and improving bureaucratic or cultural considerations. port-client responsiveness. The essential feature

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of the liberalization option is implementing the nation) to compete effectively with the pri- legislation that permits the private sector to vate sector. provide facilities and services and to compete On many occasions, the public sector continues with the existing public port organization. The to rely on public subsidies, thereby undermining most important advantage of this system fair competition between the public and the pri- compared to other port reform systems is that vate sectors. This strongly argues for the clear the public port operator, even if inefficient, will separation of the regulatory and commercial continue to exist as a form of insurance against roles in a port, with the port authority taking on disruptions in service, while unsuccessful the former and the private operator the latter. private port operators can be replaced. Another potential problem associated with the

MODULE 3 Since liberalization may temporarily introduce liberalization option is the possibility that the competition between public and private port public port organization will use other unfair operators, the two must be able to compete practices to compete against private operators. effectively and fairly. This might require the The port authority, for example, may take introduction of an independent port sector reg- actions that are beneficial to the public termi- ulator. Actually, the logic of liberalization nals, but are disadvantageous to the private ter- should lead the public port authority to fully minals. One example is the dredging of certain withdraw from commercial activities and con- Asian ports; often, the government ministry or centrate on any necessary regulatory functions. the public port authority provides exclusive Liberalization is often opposed because of the dredging services. This public entity can refuse existence of internal as well as external cross- to offer this service to the private operators, subsidies. This, for instance, occurs when ports thereby putting those operators at a competitive with a statutory monopoly cross-subsidize disadvantage. Another possibility is that the unprofitable services in competitive markets service would be provided to the private sector with profits earned in monopoly markets. For at a higher price than the one charged to the example, in many ports the most profitable public sector. To avoid such potential conflicts activity is the container terminal operation, the of interest, the government may also decide to revenues of which frequently support bulk or liberalize or privatize these essential comple- general cargo facilities and services. Other mentary services to create a level playing field. forms of cross-subsidy occur when a public port Because of these situations, the logical conclu- organization realizes substantial revenues from sion for the liberalization option is for all com- nonmaritime-related activities, such as real mercial activities of the port to be ultimately estate development, and uses these revenues to transferred to the private sector. underwrite port-related costs. With this type of support to draw on, the public organization 5.1.3. Commercialization has a competitive advantage over its private Commercialization is the introduction of com- counterpart. mercial principles and practices into the man- On the other hand, the price advantage that the agement and operation of a port authority or public port body may have had diminishes as part thereof, requiring it to operate under mar- competition erodes its monopoly power and ket disciplines. The process can be achieved prices are set in a more competitive environ- through negotiated performance contracts ment. Its price levels cannot match those of the between the government, acting as the owner of private sector if it has to rely on inflated prices the port, and the port management. The agree- to subsidize other port services. The former ment specifies the port’s objectives in terms of monopoly may, as a consequence, be forced to performance goals, service quality, and social scale back or cease the unprofitable activities obligations. Commercialization is characterized (which, although unprofitable, may be vital to by the following:

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• Decentralization of the decision-making Since the essence of commercialization is to process. require and empower port management to perform as well as the private sector, changes in the • Relaxation of the hierarchy of the port institutional and legal structures of the port organization, thereby allowing port man- organization are required to remove bureaucrat- MODULE 3 agement to exercise much greater control ic obstructions. A common first step in the over: process of commercialization and the elimina- ~ Budgeting. tion of bureaucratic inefficiencies is to trans- ~ Procurement and purchasing. form the port organization into a truly autonomous port authority. Box 17 notes that ~ Maintenance strategies and programming. the governments of China and Mexico followed ~ Salary scales and employment condi- this course. tions of labor and staff. Commercialization should result in the creation ~ Hiring and firing. of a port authority board to oversee the organi- ~ Setting objectives and performance zation’s activities, removing that responsibility targets. from the central government ministry or city. At the same time, however, the government may ~ Formulation of strategies. still need to exercise some form of oversight to Essentially, commercialization aims to create safeguard the public interest. Commercialized an environment in which the port authority port authorities should: runs on a commercial basis. This involves a variety of business-type decisions. The chief • Be financially independent (own their executive typically has a certain freedom of assets, establish their own budgets, and action and refers only specific matters relating make their own investment decisions). to overall policy or strategy to the controlling • Have their own personnel schemes sepa- body (the relevant ministry or city council). rate and distinct from the national civil Commercialization is designed to allow port service, patterned on the schemes of pri- management to conduct, to a large extent, its vate companies. own affairs and at the same time imposes on • Have a management that is responsible it responsibility and accountability for its for and held accountable for the port’s decisions and performance. In practice, how- performance by a board. Board members ever, a common problem has been that gov- can be appointed by the national or local ernments continue to interfere in port deci- government, port users, or representative sions, undermining the authority of port man- labor organizations. agement. In many countries, the process of commercial- Commercialization seeks to provide port man- ization is only partially implemented because agers with decision-making authority and procurement and contracting practices remain responsibility similar to that existing in private subject to national government regulations. sector organizations. However, since the port enterprise may still have substantial monopoly A weakness of the commercialization process is power, managers may not be confronted that during its introduction, the acting public directly with the hardships and necessary disci- sector manager becomes the chief executive pline imposed by market competition. responsible for pushing through the changes in Therefore, a commercialized government the organization. The manager’s performance organization often will not be as efficient as a and commitment to the commercialization of comparable private firm, unless it is subject to the port authority greatly influence the manage- competition. ment team and the shape and pace of reform.

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change their management styles. This has Box 17: Creation of Commercialized Port proven to be a difficult transition and is the Authorities in China reason why, in many such processes, managers lthough the country has a long coast- with private sector experience soon replace the line, China had a long history of being a former civil service senior management. A well- “continental” country until the 1980s. In A thought-out training program may be an effective 1985, a strategic document known as “The Interim Regulations of the State Council of the tool to change attitudes and prepare manage- PRC on Preferential Treatment to Sino-Foreign ment and staff for the different style and culture Joint Ventures on Harbour and Wharf commercialization brings. Construction,” was circulated and implemented by the State Council of the PRC. 5.1.4. Corporatization of Terminals

MODULE 3 Consistent with the first steps toward reforms, the Eighth (1991–1995), Ninth The next gradation on the path to full privatiza- (1996–2000), and Tenth Five Year Plans tion is corporatization. Corporatization goes (2000–2004) placed port development among further than commercialization in that it the top priorities on the Chinese development involves the transformation of the public port agenda, particularly since the 1990s. authority or part thereof into a corporation. Before 1980, the port industry typically fell under highly centralized control. In 1980, the This means that the port authority or one or dual leadership mainly was led by the Ministry more of its constituent parts, such as a port of Communications. In the late 1990s it was authority–operated container or general cargo gradually shifted to the “dual leadership main- terminal, is converted into a legally and finan- ly led by local authorities,” implying that local cially independent legal entity with its own municipal governments were expected to act board of directors. The government or public both as “landlord” and “regulator,” thereby enhancing local governments’ intervention in port authority retains ownership in all shares of port affairs. the venture. By applying market principles, the Port authorities were either created or corporatized port authority is expected to func- transferred to municipal authorities as well as tion more efficiently. A corporatized port endowed with financial autonomy in the rou- authority may also accommodate both national tine administration and operation of ports. and local interests, as in the case in Poland. In Source: Dr. James Wang, University of Hong Kong. the case of a publicly managed terminal, corpo- Creation of Independent Port Authorities in ratization is usually the first step onto the road Mexico to privatization. Thus, a corporatized port authority, especially when based on a specific n 1993–1994, the management of the major law, can be considered a permanent organiza- ports in Mexico was transformed into the IAdministracion Portuaria Integral (Integral tional structure while a corporatized terminal Port Administrations). This decentralized the usually is a transitory organization. port system, set up individual port administrations coordinated by the Coordinacion Corporatization, then, is the process in which a General de Puertos, and opened the way to public sector undertaking, or part thereof, is for introduction of the private sector in opera- transformed into a company under private cor- tional activities in the ports such as cargo handling, storage, and towage. The porate law. This is achieved by selling shares in Secretariat of Communication and a new company that conducts the port’s busi- Transportation retained economic and safety ness and holds its assets, although the shares oversight of the decentralized port system. are issued and may be owned entirely by the Source: C.Bert Kruk, World Bank Staff. government (or port authority). The main objective is to decrease direct government control over the company and to make it more In other words, managers accustomed to civil serv- responsive to market forces. Similar to privati- ice procedures and practices have to drastically zation, corporatization can include financial

104 Alternative Port Management Structures and Ownership Models restructuring and be a catalyst for the introduc- eliminate the state monopoly within the tion of commercial principles. Corporatization affected sector. is, in effect, privatization without divestment. • Development of the company charter (for example, the memorandum and articles

For political or legal reasons (often both), com- MODULE 3 prehensive or partial privatization may be nei- of incorporation) for the corporatized ther appropriate nor possible. In such cases cor- port enterprise, and its subsequent incor- poratization may offer an effective alternative poration. for achieving more efficiency and greater mar- • Development of a corporate plan includ- ket orientation. Corporatization usually features ing traffic forecasts, a business develop- most of the following characteristics: ment plan, and pro forma income statement and balance sheet. • A complete separation of the public management and regulatory functions from • Capitalization and vesting of part of the the commercial activities that are being assets and liabilities of the former public corporatized. company in the new corporation. • Clear and nonconflicting objectives for • Creation of a new labor statute, provi- the new firm, set by the government. sion of financial and social measures to cope with excess personnel (such as pen- • Greater management responsibility and sion fund guarantees, redundancy pay- autonomy for decisions on operations, ments, or retraining), and transfer of per- investments, revenues and expenditures, sonnel from the former public entity. and on commercial strategy. • Retraining of management and staff to • Where no market-based scrutiny is possi- increase commercial orientation and ble, performance measurement against a improve managerial procedures. range of financial and nonfinancial criteria. The key difference from the other reform • Rewards and sanctions for managers options discussed is that the goal of corporati- based on performance. zation is to constitute the corporatized firm as a • Government ensures that the corpora- single, self-contained entity. The corporatized tized firm does not have any comparative company’s management should be free from advantages or disadvantages relative to direct government interference or control private port firms operating under similar (bureaucratic constraints) to allow them to market risks and conditions (for example, operate the company on commercial terms. At with respect to tax and interest rates). the same time, management should also be held accountable for its actions. Corporatization can be implemented either through incorporation under a commercial code The new corporation can be organized with as a limited liability company or as a statutory clearer lines of communication and responsibility. authority under its own articles of incorpora- Distinct targets can be set and adhered to. tion. The statutory option is the most common Stricter internal financial controls can be intro- approach for corporatizing port authorities. In duced and, where necessary, information and view of the public interest involved, it is also accounting systems established. This all seeks to the most appropriate one. make the business more aware of market and client requirements. During the initial phase of the corporatization process, the following principal actions are required: One of the corporatized terminal’s greatest strengths is its financial autonomy. This means • Preparation and enactment of any needed that tariffs should no longer require approval legislation, such legislation often serves to from the government or ministry (unless it is a

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monopoly environment and the government However, the most problematic issue affecting wishes to exercise strict control) and that the corporatized port authorities is the mix of pub- company should be allowed to establish its own lic and private objectives. The rationale behind procurement, contracting, and hiring and firing this type of reform is the expectation that cor- practices. In addition, such companies do not poratized ports operate as viable and effective rely on government support for investments and businesses. However, while part of the ports’ have the authority to negotiate loans directly enabling legislation may state that they should with commercial banks. The government, how- pursue commercial objectives and operate as ever, typically will continue to exert some meas- effective businesses, the public shareholders ure of political control. Usually this is achieved (ministers, commissionaires, aldermen, or coun- through the appointment of board members. cil members) have responsibilities other than

MODULE 3 strictly commercial ones, such as the delivery of 5.1.5. Corporatization of a Port Authority public goods. Among the reasons for pursuing corporatization There are two types of corporatization models. over other alternatives are: The first model’s goal is to transform former statutory authorities into government-owned • To allow time for the management to set- enterprises. This means that a corporatized port tle into its new role before contemplating authority would have a constitution consisting full privatization (as is the case of the of a memorandum and articles of association Rotterdam Municipal Port Management, that define the nature of the company and the until January 1, 2004, a commercialized manner in which the affairs of the company are port undertaking). to be conducted based on the “companies act” • To overcome the reluctance of private or “corporations act” in force. A regulatory capital suppliers to invest in the company. body in existence should oversee performance of the newly formed port authority and ensure • To protect the public interest. that conditions of the company’s constitution Having completed the corporatization of port and of the applicable companies act are met. operational activities, subsequently one can This model has been applied to Rotterdam consider the corporatization of the port authori- Municipal Port Management. ty as a regulatory body (for example, the case The second model involves the creation of a of the port enterprise of Antwerp). statutory government-owned enterprise (corpo- Negative aspects of corporatization include: ration) by specific legislation. This would mean that there is the potential for some degree of • In a majority of cases, the new corporate public (national, regional, or municipal) input entity still has a monopoly over the port and scrutiny. It also means the introduction of land. tailor made provisions, such as those relating to • Unless competition is created, the corpora- accountability and public control. tion may not be as efficient as anticipated. The distinction between the models focuses on • Governments are still able to politicize the issue of whether the organization is subject to the corporatized firm by retaining the corporate law or to the conditions of the statue right to appoint board members and and specific legislation. The difference between a executive directors. company incorporated under corporate law or by or pursuant to a statute is that the company’s • There will often be a need to introduce a constitution spells out the nature of the company port sector regulator to create a level as well as regulations for the internal government playing field among competing service of the company. This requires a rigid operating providers. framework and a regulatory regime that ensures

106 Alternative Port Management Structures and Ownership Models that the conditions of the company’s constitution inefficiencies that can create obstacles to foreign are neither breached nor abused to suit political trade. Indirectly, the entire population of a or other gains. country pays for port inefficiencies, which are reflected in the prices of both import and Corporative port authorities established by law export commodities. MODULE 3 as government-owned enterprises, on the other hand, are quasi–private sector companies. They Harnessing the efficiency and expertise of the are expected to operate like their private sector private sector. Increasing specialization in the counterparts, but are not subject to corpora- shipping and port industry requires highly tion’s law, instead they are subject to the provi- trained personnel, advanced systems and equip- sions of the statute under which they were ment, and capital-intensive cargo handling tech- enacted. Under this model, the public sector niques to meet the fast changing demands of holds a pivotal role in the structure and opera- port users worldwide. Government-owned firms, tion of the organization. with their cumbersome administrative procedures, poor cash flow generation, inflexible pay- Ultimately, the choice of one of the alternative ment schemes, and lack of market orientation models when corporatizing a public port author- usually cannot cope with these requirements. ity is a political issue. In some countries, (larger) ports are considered part of the public domain, Elimination of political interference. Although representing vital public interest. Other countries there are countries with well-balanced political view ports mainly as commercial entities. The systems and minimal political interference in the quality of governance also plays a role. Stable functioning of the state- or municipal-owned and democratic countries will be less inclined to port enterprises, the appointment of political corporatize their port authorities, unless for very nominees with inadequate experience to high specific reasons, which often have little bearing level positions in government-owned ports is a on efficiency. In Poland, the ports were corpora- well-known phenomenon. In contrast, privatiza- tized to combine state and municipal ownership tion of port operations often results in the selec- of port land. In Australia, the policy for port tion of professional port managers with an reform was an endeavor to improve efficiency in undiluted focus on the market and its changing the port environment, notably by distancing needs. government from day-to-day operations. Box 18 describes the process of corporatization for the Reduced demand on the public sector budget. Aqaba Container Terminal in Jordan. Partial privatization does not necessarily mean a total withdrawal of the government from port 5.1.6. Privatization investments. However, a large (often major) part of port investments can be undertaken by the pri- Privatization can be either comprehensive or vate sector without compromising wider social partial. The latter takes the form of a public- and economic benefits. Development of a mod- private partnership and is usually combined ern port still requires a balanced public-private with the introduction of a landlord port author- financial package with balanced risk sharing. ity. Comprehensive privatization remains an exception and is not a preferred option for Reduced expenditure on port labor. major ports. Government-owned enterprises traditionally have been a large source of direct employment; The reasons that might prompt governments or in the port sector, the greatest employment is in a port authority to enter into the privatization cargo handling services. A privatization scheme process are discussed below. that maintains restrictive working practices can- Removal of trade barriers. Outdated work prac- not be effective. In the long run, creating an tices, obsolete facilities, inadequate institutional internationally competitive port system, with all structures, and excessive charges in ports cause its direct and indirect economic spin-off effects,

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Box 18: The Port of Aqaba: Corporatization and Privatization he Port of Aqaba recently became part ADC’s philosophy is to participate as a major of the Aqaba Special Economic Zone, shareholder (up to 49 percent) in the privatized Tresulting in a considerable change in its terminals and services, issuing as grantor con- institutional structure. In 2000, the Jordanian cession agreements to foreign and local enter- parliament enacted the Aqaba Special prises. Currently negotiations are being con- Economic Zone Law (ASEZ Law, no. 32, ducted with a large international terminal oper- 2000) and established the Aqaba Special ator for a 30-year concession or BOT agree- Economic Zone Authority (ASEZA). This ment for the Aqaba Container Terminal, which authority enjoys financial and economic plays an increasingly important role in the autonomy and is governed by a Board of region. Commissioners nominated by the Council of Thus ADC will be acting both as a grantor MODULE 3 Ministers, endorsed by a Royal Decree. It of the concession, representing the national succeeded the former Regional Authority and interests of Jordan, and as a major share- the Municipality of Aqaba, administers the holder of the terminal. It should be noted that entire zone, and owns all public land in the great care should be taken not to confuse area. The authority is also responsible for the both roles. On the one hand, it is under- development of Aqaba port, the King standable that ADC desires to stay closely Hussein Airport, and all public utilities. The involved in the terminal development development of the zone has been very suc- because the Aqaba Container Terminal is the cessful under the new regime and invest- only container terminal in the country. On the ments have soared. In 2003, the Council of other hand, national interest should not be Ministers approved the establishment of the enforced via the board of directors of the ter- Aqaba Development Corporation (ADC) as a minal operator, but by ADC as grantor of the wholly owned government enterprise under concession. This would imply the careful ASEZA, enabling ASEZA to transfer all of the structuring of the concession agreement in port and airport’s operational assets to the respect to guaranteeing the quality of the new corporation. operations, the future extension of the termi- While port operations are still conducted nal, the employment of Jordanian nationals, by the Aqaba Port Corporation, ADC the development of value-added services, became the corporatized landlord port with and the termination of the agreement in the the task to privatize port operation. Its first event that the operator does not develop the action was the issuance of a management terminal in the interest of the country. The contract for the Aqaba Container Terminal to ADC nominated representatives in the board A.P. Moller Terminals, which within two years of directors should not be brought restored terminal operations to world-class into the uncomfortable and confusing standards. ADC also developed plans to pri- position of safeguarding both the national vatize the marine operations (pilotage, interest and the economic interest of the towage, mooring, and unmooring) as well as company. bulk and general cargo terminals in a later Source: Christiaan van Krimpen. stage.

is more valuable than the short-term objective • Divestiture (selling off government-owned of maximizing local dock labor. assets). • Deregulation. Other objectives. Governments sometimes pursue privatization for other reasons, such as rais- • Competitive tendering. ing revenues for the state treasury, disposing of • Private ownership of operational assets assets, and encouraging competition and broad- with market-based contractual arrange- er citizen participation in share ownership. ments. In its many variations, privatization usually In theory, privatization provides the same flexi- includes the following core features: bility to management as commercialization.

108 Alternative Port Management Structures and Ownership Models

Unlike under commercialization (where in the 6.1. Contracting Out and Use of worst case scenario the government is likely to Management Contracts subsidize the company if it fails to perform ade- One tool available to governments to improve quately), a privatized terminal operation can be port efficiency and performance is contracting permitted to fail, provided other facilities can MODULE 3 out to the private sector certain functions previ- handle its traffic. Or, existing facilities may be ously executed by the public port management. taken over by a new operator who continues A public enterprise may decide to contract out the operations. The management determines its certain of its operations through a tender-bid own fate, free from significant government procedure instead of conducting them in house influence, as long as it complies with regulatory when the following circumstances apply: requirements. • The functions can be performed at a price 6. REFORM TOOLS that is substantially lower than the cost Before deciding on a port reform process, gov- of conducting them in the public sector. ernments should articulate clearly the ultimate • There is a large field for competitive bid- goals of reform. Broadly, there are two alterna- ding. tives: • Government policy is to transfer gradual- • The public authority in charge of the port ly certain noncore activities of the public sector (either a service port or a tool sector to the private sector. port) wants to restrict its public role by Contracting out, however, should be handled privatizing cargo handling operations and with caution as it involves several risks: other nonlandlord activities. In this case, existing operations have to be privatized • If the number of potential bidders is lim- or corporatized and service or tool ports ited, a meaningful comparison of the bids reconstituted as a landlord port. Partial may not possible. privatization is the goal. • Potential bidders may form a cartel or • The public entity that has final responsi- otherwise collude when bidding for a bility for the port sector (most probably a contract. national government) wants to privatize • Contracting out may create a monopoly the entire sector, including responsibilities for those activities, which would be con- that generally are considered belonging to trary to the public interest, unless there is the public domain. Ownership of port a proper regulatory oversight framework. land, planning, investment and management are all transferred to private sector Also within the framework of commercializa- entities, which have no formal commit- tion, a separate contract for the management of ments to any public institution. the public port authority or public terminal Comprehensive privatization is the goal operator may be awarded. Use of such a tool (see Box 19 for an example of this type may be appropriate in cases where a port of privatization process). authority has experienced poor management for an extended period of time; the financial condi- This section focuses on the implementation of tion of the port authority needs to be substan- partial privatization, since that approach has tially improved with a view to its corporatiza- been used successfully to balance public and tion or privatization at a later stage on terms private interests and still meet the objectives of favorable to the ministry of finance of the coun- port reform. Box 20 shows the spectrum of port try concerned; or the port authority would gen- reform tools that will be discussed in greater erally benefit from the introduction of private detail in this section. management.

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Box 19: The Experience of the Hanseatic Landlord Ports n the northwest European continent, every service to ships, passengers, and cargo five universal ports—Antwerp, on condition that traffic and derived activity ORotterdam, Bremen, Bremerhaven, and are sufficiently large. Hamburg—compete intensely for business Often port administrations are confronted generated in overlapping hinterland areas. with the problem that land at the waterfront is Surprisingly, the basic organizational structure limited and opportunities for port expansion of all these ports is quite similar. They are are constrained due to geographical and operated in a public-private partnership, hydrological restrictions or political borders. where the public entity takes responsibility Even where no physical restrictions exist, only for: growing environmental consciousness or lack • Setting the legal framework and the guide- of funds may make the transformation of MODULE 3 lines for port development. green land into port sites or land reclamation • Providing the port infrastructure. outside the port area difficult and time consuming. As a consequence, port land is pre- • Administering and renting out the publicly cious and has to be used very carefully, not owned land. only taking into account the present day situ- • Regulating and supervising ship movements. ation but also changes in the future. The The port business proper—cargo handling, landlord model offers a good way to achieve storage, and physical distribution—is left this balance. entirely to the private sector. The combination Because under the landlord model port of public port ownership and private port sites are only rented out and not sold to pri- business is often referred to as the landlord vate port operators, the sites in the established model or, because the above-mentioned ports port area are at the disposal of the port admin- have a Hanseatic tradition, as the Hanseatic istration, at least at the end of the contract model. period. Often the port administration also has But is a landlord port also an efficient the right to terminate a contract early to relo- port? There are two main arguments to sup- cate a company in the port area, provided it port a positive answer to this question. First, pays for the relocation costs. This would not the landlord model opens up opportunities to be possible if the sites were sold. In Hamburg, adapt the port infrastructure quickly to this has proven useful, especially for restruc- changing requirements of world trade. turing older parts of the port no longer suitable Second, this organizational system provides for cargo handling activities. the possibility of competition in the port Source: Heinrich, Michael. 1999. “Port Efficiency—The between the different suppliers for nearly Public-Private Partnership.” (Port of Hamburg) World Ports Development, p.16.

The usual practice is for the government to and five years. Upon expiration of the contract agree on a management contract with a private period, it may either be renewed or awarded to sector operator. The operator agrees to employ another party. A management contract may also the existing port staff and to provide adequate be used as a stepping stone toward the granting and efficient service to all customers. This for- of a more extensive concession. It is important mer requirement (retention of existing staff), when entering into a management contract that however, often emerges as the main reason for the government or ministry has the right to the failure of management contracts (for exam- impose financial penalties or terminate the con- ple, the Port of Mombasa). The management tract in case the private operator does not meet company may be saddled with excess labor and specified minimum levels of efficiency, financial labor costs that cannot be sustained in a com- performance, or throughput. petitive market. 6.2. Concession Arrangements A management contract is usually entered into In concession agreements, governments are still for a specified period, generally between three widely involved in port management, mainly

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Box 20: Spectrum of Port Reform Tools

Public management and operations MODULE 3

Outsourcing

Management contracts

Lease and rent contracts

Full concession including Concessions BOT, BOOT, etc.

Build-own-operate (BOO)

Divestiture by license

Divestiture by sale

Private supply and operations

Source: Author.

through public landlord port authorities. At the Concessions are widely used in the port sector same time, the role of private enterprise in the today. A port concession is a contract in which sector will continue to grow. Service and tool a government transfers operating rights to pri- ports will gradually disappear and be transformed vate enterprise, which then engages in an activi- into landlord ports; in some cases, fully privatized ty contingent on government approval and sub- ports will emerge. For landlord ports, public bod- ject to the terms of the contract. The contract ies will retain the ultimate ownership of assets may include the rehabilitation or construction (especially land), but will transfer a major part of of infrastructure by the concessionaire. These the financial and operational risks to the private characteristics distinguish concessions from sector. Governments will act mainly as regulators management contracts on one end of the reform and land developers, while private firms will spectrum and comprehensive port privatization assume the responsibility for port operations. The on the other. Concessions, by permitting gov- main legal instrument used to achieve this realign- ernments to retain ultimate ownership of the ment of public and private sector roles and port land and responsibility for licensing port responsibilities is a “concession.” operations and construction activities, further

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permit governments to safeguard public inter- lease is that the lease rent is known to both par- ests. At the same time, they relieve governments ties in advance. The flat rate lease also provides of substantial operational risks and financial to the lessee the greatest incentive to fully use burdens. the available capacity of the terminal.

There are two main forms of concession used in The main characteristics of the flat rate lease are: ports today: lease contracts, where an operator • A specific sum of money is paid per enters into a long-term lease on the port land square meter of port area for a specific and usually is responsible for superstructure period of time. and equipment, and concession contracts, where the operator covers investment costs and • In principle, the lease represents a fair

MODULE 3 assumes all commercial risks. Such contracts are return to the port authority on the value often combined with specific financing schemes of the property. such as BOTs. • Lease payments may be adjusted for Lease contracts and concession contracts share inflation over the life of the lease. the same principal characteristics: To set lease payments at the proper level, the port authority must be able to forecast accu- • The government or public port authority rately the level of business (and, hence, the wear conveys specific rights to a private com- and tear on port infrastructure and the traffic pany. from which the lessee will benefit). It should • They have a defined term (10–50 years). also try to assess the true value of the land (for example, in its best alternative use) and attempt • They are geographically delimited. to recover this value through the anticipated • They directly or implicitly allocate finan- level of business transacted by the lessee. cial and operational risks. Because the lessee must make the same lease 6.2.1. Leasehold Agreements payment regardless of the revenue his business generates, he has a strong incentive to make full Landlord ports derive a substantial part of their use of the leased land and structures. A flat rate income from leases. Typically, only land or lease is often the preferred form of lease for a warehouse facilities are leased. Berths may be port whose primary objective is to maximize included or excluded from the lease rent. If throughput and benefits to the local economy. excluded, the port authority collects and keeps all revenue derived from berthing fees. There In a shared revenue lease, the lessor also gives are two basic forms of leases most commonly in to the lessee the right to use a fixed asset for a use today: flat rate and shared revenue leases. fixed period in exchange for a variable amount Both types of leases can be used for multiuser as of money. With a shared revenue lease there is a well as single-user (dedicated) terminals or minimum payment regardless of the level of berths. activity, but no maximum payment. The main characteristics of the shared revenue lease are: Flat rate leases give the lessee the right to use a fixed asset for a specific period of time in • A minimum level of compensation. exchange for periodic payments of a fixed • No established maximum level. amount. In the case of a land lease, this can be • Maximum compensation depends on the a fixed payment per year per square meter. facility’s capacity. Lease rates may vary depending on the degree of port site development (for example, unpaved • Minimum compensation may not fully versus paved land or land with or without cover the interest and amortization of the structures). The main advantage of this form of lessor (port authority) for the lease area.

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A shared revenue lease represents true partner- For these leases to succeed for all parties, how- ships between the port authority and the ever, two key conditions should exist: the ship- lessees. Under this arrangement, the port must ping line lessee should generate a large volume carefully determine the minimum lease pay- of cargo at the port (that is, it should be a ment, taking into consideration its financial major customer), and the port should possess MODULE 3 obligations, its own forecasts of traffic vol- additional facilities of the same type leased to umes, and its statutory and business tolerances the shipping line to prevent creating a monop- for risk. Once minimum throughput levels are oly (a public access facility should be available). attained, the lessee and the port share the bene- If the port does not have other similar facilities fits deriving from any additional activity. The (and other customers), the creation of a monop- shared revenue lease is the only approach in oly may conflict with the interests of both the which the port authority can maximize rev- port and the national economy. In this respect, enues, employment levels, and throughput. the following points should be kept in mind: Along with this potential for added rewards, however, come added risks. • Shipping lines may, at any point in time, decrease, reroute, or altogether halt their Box 21 shows how the two different forms of services as a result of changes in financial lease would work for a notional terminal. conditions or shifts in patterns of trade. Potential lease partners for a port authority are: A well-known example of this is the cancellation of the round-the-world service • Terminal operators. of United States Lines in the 1980s. • Cargo handling companies. • Shipping lines often merge or enter into • Dedicated terminal operators and ship- cooperation agreements (alliances) with ping lines. other shipping lines. Such practices may result in changing sailing schedules or the • Forwarding agents. establishment of special ties with other • Inland transport operators. ports. Today it is increasingly common for shipping • Shipping lines may reorganize their sailing lines to lease terminals from port authorities. schedules for reasons of internal policy.

Box 21: Comparison of Lease Systems

Shared value lease

Flat rate lease Lease payment Lease payment

Traffic volume

Source: Author.

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Signing a lease contract with an operating com- sibilities. Each party is distinctly aware of its pany may be less risky than with a shipping line rights, liabilities, and financial responsibilities. because the operating company usually does not Moreover, many governments today are seeking rely on a contract with one single user, but will to diminish their financial involvement in ports spread the risks and safeguard its business inter- and to use private sources to finance new port ests by having contracts with several clients, development, including construction of basic and in the case of a contract with a locally infrastructure such as quay walls. This implies incorporated port operator, should a legal (con- not only an increased role for the private sector tract) issue arise, it is generally easier to enforce in port development, but also increased finan- liens and other measures needed to compel lease cial exposure. In such situations, a simple and compliance than in the case of a company straightforward lease contract often is not suffi-

MODULE 3 whose home base is in another country. cient to cover all responsibilities and liabilities. As a result, a more complex contractual rela- Which form of lease is to be preferred? In gen- tionship, a concession agreement, has been eral, one may conclude that if the port’s princi- developed. pal objectives are to maximize throughput and provide maximum benefits to the local economy The primary objective of concession agreements through increased employment, a flat rate lease is to transfer investment costs from the govern- may be preferable. This is often the case when a ment to the private sector. Concessionaires are port is newly established and wants to develop obliged to construct and rehabilitate infrastruc- its business. Or if the port’s principal objective ture and operate a facility or service for a fixed is to maximize revenues, with an initial need to number of years. Concessions may be “posi- subsidize the terminal lessee, the shared revenue tive,” when a concessionaire pays the govern- lease may be the optimal choice. ment for concession rights, or “negative,” when the government pays a concessionaire for the 6.2.2. Concession Agreements services it provides under the agreement.

A landlord port for the most part does not The benefits of concessions in the port sector involve itself directly in port operations. include: Instead, private port operators and service providers conduct their business independently • Better and more efficient port manage- and compete in the market. The port authority ment (especially port operations) per- acts as a neutral landlord promoting the port as formed by private operators. a whole. Together, they represent the interests • Avoidance of the drawbacks associated of the entire port, with the port authority in the with monopolies through the inclusion of lead. detailed concession conditions. Relations between the port authority and the • The application of private capital to private sector cover two areas: commercial rela- socially and economically desirable proj- tions based mainly on concession and lease ects, freeing up government funds for agreements, and relations based on the public other priority projects. oversight functions of the port authority, such as enforcement of port bylaws, dangerous • Under certain circumstances, the creation goods regulations, and vessel management. of new revenue streams for governments. • The transfer of risks for construction, Relations between landlord port authorities and finance, and operation of the facility to private port operators have become increasingly the private sector. complex, and the alignment of responsibilities have further shifted. One of the valued features • The attraction and use of foreign invest- of a landlord port is its clear division of respon- ment and technology.

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Disadvantages associated with concession con- the port authority receives an operational tracts include: project and facilities in good working order. • The need for continuing close govern- The port authority may (depending on legal

ment regulation and oversight. MODULE 3 strictures) hold a financial interest in the SPC • The system requires a legal framework created by the concessionaire, or it may not. If that permits transfer of land rights to a the port authority chooses not to participate private party. financially in the SPC responsible for develop- • Winning bids are sometimes based on ing the port assets under a concession contract, unrealistic financial projections, placing then its role as an independent and impartial the sustainability of the concession agree- public entity does not significantly change. The ment in jeopardy. only real change is in the shift in responsibility for investments from the port authority to the • The danger that a concessionaire will not concessionaire. properly maintain the facilities under concession, returning them to the govern- If a port authority not only enters into a conces- ment in bad condition, or the danger that sion agreement with the SPC, but also partici- the concessionaire and the port authority pates in the company as a shareholder, then the disagree on the operational need for and port authority’s role changes more dramatically. financial feasibility of critical invest- By investing risk capital, the port authority ments. becomes more directly involved in port opera- Concession agreements are often developed as a tions. Sometimes this situation is prohibited by part of a BOT scheme and represent specific law (Poland). If the venture has a monopoly in agreements between a government or port the port (such as having the only container ter- authority and the special purpose company minal), the situation might be acceptable, (SPC) established by the concessionaire to carry although a conflict of interest may arise out construction and operation of a port devel- between the roles of port authority as an opment project. Under concessions, the ultimate investor and as the regulator of the monopoly. ownership of the affected assets is retained by If the venture competes with other terminals in the national or local government, or by the port the port, however, participation of the port authority. At the same time, part of the com- authority in the SPC will give rise to a serious mercial risks of providing and operating the conflict of interest and will undermine its inde- assets is transferred to a private concessionaire. pendent, neutral position. Depending on the specific situation, a conces- In agreements involving an SPC, a port authori- sion agreement may consist of a combination of ty should ensure that: contracts including: • The SPC provides adequate service • A leasehold agreement on nondeveloped throughout the term of the concession. land, the formal document under which • The SPC observes relevant safety and the port authority grants the SPC posses- environmental protection standards. sion of the concession area. • The charges levied on port users are rea- • A terminal access agreement, which regu- sonable and do not endanger the compet- lates the SPC’s access to the concession itive position of the port. area, and also the access by the port authority to the area. • The SPC performs proper maintenance and repair of all assets to ensure that on • A port services agreement, which regu- their return at the end of the concession, lates the provision by the port authority

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to the SPC of various port services such • Equal access to common areas in the port. as pilotage, towage, and dredging. • Payment of fees, royalties, revenues, and • A sponsor’s direct agreement, which is an canon (lease rental) to the port authority. agreement between the government or • Maintenance requirements for infrastruc- port authority and the SPC dealing with ture, superstructure, and sometimes the issue of competition. equipment. • A design contract between the SPC and a • Termination of the concession. technical consultant for the design of new facilities (the port authority usually has no • Return of land, facilities, and equipment direct control over who does the design after the concession period has expired. MODULE 3 work or the terms of appointment, but • Other issues as may be required. often retains the right to review any design). It is common practice that during construction, • A building contract between the SPC and the concessionaire and the port authority use an a construction company for construction independent test certifier to certify that all work or development work (with the port has been carried out in conformity with the authority typically exercising some form requirements of the concession agreement. of quality control). Upon the return of facilities, the SPC should be • Financing documents drawn up between required to carry out any work needed to bring the SPC and its lenders to provide finance them up to an agreed-on standard. Accordingly, for port development; a port authority provisions must be included to inspect facilities may provide partial financing. and identify any deficiencies.

• A management contract between the SPC A concession agreement for a greenfield project and its chosen manager (operating com- is less complicated than the takeover of an exist- pany) for provision of management serving terminal or port. In such a case, no personnel ices in operating the port. or existing facilities are acquired by the SPC. Generally, a typical concession agreement will However, a terminal access agreement still must clearly set out the terms relating to: be drawn up between the government or port authority and the SPC to cover such things as the • The land, facilities, and cargo handling building of access roads and rail, the provision of equipment included in the concession. water and electricity, and other facilities. • The functional requirements of the port 6.2.2.1. Master Concession. In some instances, or terminal, the proposed design solution port reform is implemented through a master for any construction, the construction concession contract, which enables a private program, and time schedule, including operator to carry out many of the port func- milestones. tions. This type of contract has rarely been used, • Rights and responsibilities of the conces- but it is an option. Usually, the principal choice sionaire and port authority (concession is between granting a full master concession, in sponsor) with respect to the completion whatever form, and implementing a landlord of the construction program. port structure comprising the public port authority and private terminal operators. The • Human resources development and the choice between the two options considerably employment of former port authority influences further port privatization process. employees, if applicable. When choosing a master concession, the govern- • Activities permitted to be carried out in ment leaves the unbundling of port activities for the concession area. a large part in the hands of the concessionaire.

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It might also be expected that retrenchment When designing BOT schemes, it is important to costs resulting from granting a concession would consider carefully which parts of the port can be primarily be borne by the government. concessioned and which parts should remain with the port authority. Generally, BOT schemes

The government should allow the concessionaire can be applied to all assets that can be exploited MODULE 3 enough freedom to structure its business accord- as a separate business. Key among these are: ing to its own requirements, otherwise the exercise does not make much sense. Lack of freedom • Fairways and channels: This part of the will lower the concession’s attractiveness. To port infrastructure can be concessioned make a master concession attractive for a private under a BOT scheme to require the con- investor, the concessionaire should be allowed to cessionaire to dredge and maintain the unbundle the port business in the way it thinks fairway (and, optionally, to operate aids to fit. On the other hand, introducing a landlord navigation) for a specified period during port system will require a much more active role which it derives an income from vessels for the government in structuring the various using the fairways under an agreed fare concessions of terminal and marine activities, as system (for example San Martin-Rosario well as reorganizing the port authority. Fairway, Argentina, described in Box 23).

6.2.2.2. BOT Arrangements. A landlord port • Terminals: BOT schemes are usually authority is typically responsible for constructing applied to specific terminals. There are fairways, quay walls, and terminal areas. Such many examples of such terminals, such as construction is usually based on a port master the former P&O terminal at Nhava Sheva, plan and carried out in close consultation with India; the South Asia Gateway Terminal at the future operator. Sometimes construction of Colombo; the Aden Container Terminal; such facilities has already started before agree- and the Port of Buenos Aires, Argentina. ments have been concluded with the prospective • Entire port complexes: A BOT structured operators. This may be the case when the market as a master concession contract could cover demand is strong and the port authority is confi- an entire port complex comprising various dent of finding clients and is prepared to take the terminals. Here, the SPC (or port operator) risk that port capacity will go unused. As a rule, assumes de facto the role of a landlord port port authorities should permit private operators authority for the assets it has agreed to con- to finance most of the additional capacity (includ- struct. The master concessionaire then ing the quay wall expansion). The port authority offers subleases of various terminals to can then concentrate on access infrastructure and third parties. Such a scheme can approach protective works relating to port extension and comprehensive privatization. The only real on renovation projects. Port authorities may distinctions are that under a BOT and mas- sometimes have difficulties amassing the invest- ter concession, the transfer of assets is tem- ment funds from dues or retained profits. In such porary and the concessionaire has no regu- cases, they have sought to acquire funds either latory responsibility for marine safety, envi- from an IFI (such as the World Bank) or from pri- ronment, or vessel traffic management. vate lending institutions. For specific port facili- There are no examples of effective imple- ties, such as container or bulk terminals, private mentation of this type of BOT master con- funding can be arranged through a concession cession scheme, but new legislation in agreement as described above. BOT schemes are Madagascar provides for une concession a specialized form of concession designed to globale, which is the equivalent to a master increase private financial participation in the cre- concession for small ports of local interest. ation of port infrastructure and superstructure without changing the landlord structure of the Other port assets cannot be easily concessioned concerned port (see Box 22). as individual items. The most important of

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Box 22: BOT Schemes and Port Development n recent years, governments have recog- given the risks involved, a developer would be nized the benefits of developing their ports unlikely to risk on a full recourse basis. Ieither through privatization or, more recently, If the concession agreement is between the through joint ventures or build-operate-transfer SPC (special purpose company set up by the (BOT) schemes. In this article, we consider the sponsors to undertake the project) and a port application of BOT schemes to port develop- authority (rather than the government), then in ment and some particular issues that arise. order for the project to be bankable, there may Prime examples of the use of BOT schemes need to be an agreement (an implementation are the development of new greenfield termi- agreement) under which the government guar- nals in Gujarat province (India), the new con- antees the port authority’s obligations and tainer terminal at Nhava Sheva (India), and the certain undertakings are provided by the gov- MODULE 3 proposed terminals at Chittagong ernment to the SPC or directly to the sponsors (Bangladesh), Colombo (Sri Lanka), and that cannot be given by a port authority (such Tangiers (Morocco). This follows the growing as the provision of a favorable tax treatment). trend as international port operators such as The commitments from the government are P&O Ports, Hutchison, PSA, and International likely to cover issues such as compulsory Container Terminal Services, Inc. seek to acquisition of land, free access for staff and develop global networks of terminals leverag- machinery, and sometimes protection for the ing off their experience. staff in the host country. It may also be neces- The benefit for the sponsors of a BOT sary, particularly in less developed countries, scheme is that because this is a well-recog- to look to financing for the project and related nized project finance structure, they can limit infrastructure from the International Finance their exposure to a relatively small equity injec- Corporation, the Asian Development Bank, tion and management involvement, with the or other multilateral agencies in order for the bulk of the financing coming from limited project to be bankable. recourse bank lending. The benefit for the Source: Williams, Mark Lloyd, Bill Jamieson, and Norton government is that they will be able to obtain Rose. 1999. “BOT Schemes and Port Development.” World an expensive infrastructure development that, Ports Development, p. 20.

these are assets such as breakwaters, piers, con- negotiate a BOT arrangement at an early stage necting channels, intraport roads, and other in the project preparation cycle, before the full common areas. These assets, however, can be scope of the project is known and before a part of a master concession agreement or a regulatory oversight regime has been decided. comprehensive privatization scheme. While this might generate significant revenues for the government in the short run, it may A carefully crafted concession is central to the saddle the concessionaire with an impossible- implementation of a BOT scheme. The conces- to-complete project. There are many variants of sion contract gives the concessionaire the right BOT-like schemes, including: to run the facility (with limited and clearly defined government oversight) and earn a com- • Build-own-operate (BOO): Full privatiza- mercial return on investment. The concession or tion of the terminal because the port land BOT agreement, with the required business and the facilities built on it are not returned plan, will set out estimates of the likely to the government or port authority. revenues, costs, debt repayment, and profit for • Equip-operate-transfer (EOT): Port infra- the SPC. This information is necessary to assess structure already exists, but superstruc- the project’s financial viability and its debt ture is supplied by the SPC. repayment capacity. Many planned BOT projects fail because their terms are negotiated • Build-transfer-operate (BTO): New port without taking into account whether or not the facilities are directly transferred to the project is bankable. Governments often try to competent authority (government or port

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Box 23: San Martin-Rosario Waterway Concession o export its products, particularly grains Puerto San Martin to a depth of 28 feet. A sec- and cereals, Argentina depends largely ond part of this phase consisted of deepening on its waterways. Before 1995, the main of the Parana Medio up to Santa Fe to a depth

T MODULE 3 Argentine waterway, the River Plate to Santa of 22 feet. Finally, this phase included reinstal- Fe (some 589 kilometers), was a hazard to lation and conversion of some 500 buoys and navigation. The water was not deep enough beacons to enable panamax-sized ships to and the river was poorly maintained. The depth navigate safely through some particularly diffi- of the waterway had silted up from 32 feet to cult stretches of the river. 24 feet, and navigation at night became The second phase included deepening the impossible. river channel from 28 to 32 feet. To improve the waterway, the Argentine An important feature of the project was the government issued a concession contract to toll, which could be applied to the entire water- deepen and maintain a 700 km plus stretch of way once phase 1 was completed. The toll is the river and to provide aids to navigation calculated on a vessel’s net registered tonnage according to IALA (International Association of and maximum draft, taking into account the Marine Aids to Navigation Lighthouse services actually offered by the concessionaire. Authorities) standards. After a lengthy tender- The toll is levied on all ships with a draft greater ing process, Hidrovia SA (a joint venture than 15 feet and is set at $1 per net register between the Belgian dredging contractor Jan ton. Ships with a draft less than 15 feet are de Nul and Empema SA, an Argentinean charged every three to six months at a reduced industrial group) signed a concession contract rate. The waterway is divided into sections and to upgrade the waterway. The 10-year contract subsections, and a ship is charged only for the represents a total value of around $650 million, sections and subsections actually transited. of which a significant part will be realized from The concessionaire is responsible for collecting tolls on vessels using the safer and deeper the tolls, while the Prefectura Naval has the fairway. authority to deny port clearances to any vessel The first phase of the work included deep- failing to make payment. ening the River Plate from Punto Indio to the Source: Author. Parana River and up the Parana Inferior to

authority) immediately after construction. government-owned port facility by the private Under BTO schemes, the ownership of sector, which would hold title to the expansion the assets being financed has been an only. Under such a scheme, the SPC would: issue for lenders who require asset-based • Operate the entire port facility under a collateral to secure bank loans. With project development agreement. BTO schemes, the only collateral is the concession contract itself, which may be • Manage the government-owned section insufficient. BTO schemes are necessary under a management contract. in countries where legal strictures do not • Expand the facility under a BOT con- permit private ownership of main port tract. infrastructure (for example Croatia, Italy, Costa Rica, and the Republic of Korea). In many cases, the government effectively becomes a partner in a BOT arrangement by • Build-own-operate-transfer (BOOT): investing in certain portions of the infrastruc- Ownership of land and facilities conveys ture. Private parties appear to be reluctant to to the concessionaire, but is transferred invest in basic port infrastructure, not only back at an agreed-on price at the end of because it makes it more difficult to price use the concession period. of infrastructure in a manner that permits the A special case is the wraparound BOT (WBOT); concessionaire to realize a reasonable return on this scheme is used in the case of expansion of a the investment, but also because these assets

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are largely immobile and have no comparable • A levy on profits accruing to the succes- alternative use. Political instability, change of sor company as a result of the disposal of control, antiprivatization backlashes (national- port land transferred under the privatiza- ization), unexpected new tax regulations, and tion scheme (in the U.K. this levy was set other governmental actions could make at 25 percent of the profit during the first comprehensive BOT schemes much less five years, 20 percent during the next two attractive. years, and 10 percent during the last three years of the levy period). 6.3. Comprehensive Privatization • Provisions for the transfer of port author- Comprehensive port privatization has, until ity personnel to the successor company now, been developed only in the U.K. and in (for example, the number and categories MODULE 3 New Zealand. Outright sale of port land com- of personnel, salaries, benefits, and pen- bined with a transfer of traditional public port sion rights) or their dismissal (for exam- tasks, such as safety and environmental over- ple, separation package, retraining sight (for example, harbormaster’s tasks), allowance, rehiring preferences). remains an exception. Other countries have introduced significant privatization schemes, • Terms for the transfer of public tasks, but mostly with respect to port and terminal such as aids to navigation, pilotage, han- operations. dling of dangerous goods, and protection of the environment to the successor com- Comprehensive port privatization often requires pany or other entity. the enactment of new laws, both to regulate the • The tax regime applicable to the succes- transfer of ownership and functions from the sor companies. public to the private sector and to define the borderline between redrawn public and private • Authority for the government to dissolve responsibilities and tasks. Such legislation the port authority once it is satisfied that should establish: the objectives of the enabling legislation have been met and to transfer all remain- • Authority for the port authority to estab- ing property, rights, and liabilities to the lish a new successor company or compa- successor company. nies to take over all or part of the authority’s business. Privatization legislation may include additional elements, depending on the local situation, the • The right of the successor company to structure of the former port authority and the issue shares, either to the authority or to specific legal, institutional, and socioeconomic a third party. situation in the country concerned. • The time and manner for selling or other- In the U.K., the benefits of comprehensive port wise distributing the shares to third par- privatization most often cited are: ties, as well as for a payment to the successor company from the proceeds of the • The generation of revenue for the treasury. sale. • The ability of privatized companies to • The basic authority and mechanisms diversify their businesses. needed for the government to shape and • Greater access to capital markets. direct the privatization. • The removal of restrictions on investment • A levy on the proceeds of the disposal of and borrowing. shares of the successor company (in the U.K. this levy was set at 50 percent of the • The introduction of new industrial net proceeds of the sale). relations practices.

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• A more commercial and entrepreneurial concerning the U.K.’s implementation of com- approach to management of the business. prehensive privatization. Generally, the U.K. model of port privatization is highly determined • Greater competition. by local factors and ideological considerations

These features, it was argued, would result in that are unique to the British experience. MODULE 3 improvements to the port system’s financial and However, it appears that: operational performance. Note, however, that not all of the above-mentioned benefits are due • The valuation of port assets sold to pri- exclusively to comprehensive privatization; other vate parties was judgmental because there port reforms may generate similar benefits. was no established market during the time of privatization. Subsequent trading A vast majority of maritime nations considers of port shares suggests that the original comprehensive privatization to be incompatible prices were only 25 percent of their true with national and regional interests. Specific market value. reasons why governments and port authorities have refrained from pursuing full privatization • Ports were sold at significantly discount- are diverse, but often include one or more of ed prices. Discounted sales (in addition to the following: the ruling that 50 percent of the sale proceeds from disposal of Trust Ports should • A public monopoly can easily become a be returned to the buyer) significantly permanent private monopoly. reduced the original debt of the new port • The macroeconomic benefits of large port company. Certain privatized Trust Ports, complexes to the regional and national therefore, realized very high profits (as economy are perceived to be threatened high as 20–30 percent of turnover) at the by comprehensive privatization. expense of port users and taxpayers. Although difficult to prove, privatization • The danger of discriminatory treatment via a concession, rather than outright of customers. sale, would probably have raised considerably larger revenues for the public • The risk that, in practice, privatization treasury. may undermine competition. • Transfer of port regulatory functions to • Fear of overinvestment in and duplication the private sector has raised serious of dedicated terminals for major clients, issues. The new privatized ports are which could unbalance demand for addi- essentially self-regulating and have little tional public transport infrastructure. incentive to safeguard and enhance inter- • Neglect of the port’s public service func- port competition. The driving force tion. behind the new port owners is corporate • Reluctance of labor unions to abandon interest rather than public interest. The government protection and their fear of question, then, is who protects the public losing jobs. interest? • Reluctance of public authorities to lose • In terms of investments and profits, pri- political control, including patronage. vatized U.K. ports have done better than the still-existing public ports. • Reluctance of public authorities to lose Privatization led to an injection of cash, income generated by the port business. but only for purchasing existing assets. Background on the U.K.’s port privatization is Former Trust Ports claimed that invest- provided in Box 24. After more than 10 years ments were hampered by financial institu- of experience, some conclusions can be drawn tions looking only for short-term returns.

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Box 24: Impetus behind Full Privatization in the United Kingdom he United Kingdom (U.K.) is the only National Dock Labour Scheme. The ports, example of a country with lengthy experi- therefore, operated with inadequate surpluses Tence in comprehensive port privatization. and with depreciation allowances based on A number of ports in the U.K., however, still historical costs. Without substantial surpluses, operate in the public domain. It is instructive to the ports had to raise the money they needed analyze the U.K. experience to discern the cir- for their modernization from fixed interest cumstances leading the U.K. to adopt a com- loans and bonds. The net result of these fac- prehensive privatization approach. tors was that the port operated with net The U.K., an island where no significant city deficits, leading to decapitalization over the is more than 100 miles from at least two ports, postwar period, up to around 1970. has strong competition among its ports. Thus, The main instrument for port privatization in MODULE 3 there appears no need for antimonopoly con- the U.K. is the Ports Act 1991. This law pro- trols specifically for the ports industry, other vides for the formation of harbor authorities of than those provided generally by the Monopoly limited companies under the Companies Act, and Mergers Commission for Industry. and for the subsequent sale of their shares. All Over the last 50 years, British port structures property, rights, liabilities, and statutory func- have evolved in response to three principal tions are transferred to the new port compa- needs: nies. Ministerial approval is required for the sale of shares and for the subsequent dissolu- • To modernize institutions and installations, tion of the harbor authority. The company has many of which dated back to the early years to pay the government 50 percent of the pro- of the industrial revolution, to make them ceeds of the sale of shares, less any amount more responsive to the needs of users. set aside for assistance to maximize employee • To achieve financial stability and improve participation. If the company later sells port financial performance, with an increasing land, a 25 percent levy is charged on the pro- proportion of financing coming from private ceeds of sales during the first 5 years, 20 per- sources. cent for the next 2 years, and 10 percent for • To achieve labor stability and a degree of the years 8 through 10. rationalization followed by a greater degree Under the Ports Act, after July 1993 the of labor participation in the port enterprises. Transport Secretary could, in the case of har- In the U.K., chronic labor unrest and outdat- bor authorities with annual revenues of more ed work rules constituted major reasons for than £5 million, initiate privatization of an port reform. In fact, the Ports Act 1991, which unwilling harbor authority, unless that authority started the full privatization process, was intro- articulated compelling arguments against it. duced and could be successful only after the Privatization began before the Ports Act abolition of the National Dock Labour Scheme 1991. The Thatcher administration privatized of 1989. This scheme gave port workers a vir- the British Transport Docks Board (BTDB) tual guarantee of lifetime employment, con- under the Transport Act 1981. Subsequently, tributing heavily to inefficiency and subsequent the Associated British Ports was established, poor financial performance in the port sector. floating 49 percent of its shares in 1983. The One of the main structural problems of the BTDB’s management formed the first manage- port system in the U.K.—especially among ment of the new company. The privatization of Trust Ports—was the composition of their BTDM was notable for its vigorous develop- boards, which were defined in statutes. These ment of national resources. boards tended to be strongly representative of Another form of privatization was applied to port users, who were by nature reluctant to another group of nationalized ports, the authorize tariff increases sufficient to generate Sealink Harbours (British Railway Board). the revenues needed to allow for depreciation These ports were sold to Sea Containers Ltd. and subsequent reinvestment in port facilities. by negotiated tender. Those tariff increases that were authorized These experiences encouraged discussions tended to be offset by increasing labor costs, among the management of a group of Harbour which increased steadily as a result of pres- Authority ports in favor of privatization by sure from organized labor, supported by the means of a management buy-out (MBO) or

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complementary terminal facilities located either Box 24: Impetus behind Full Privatization in in the foreland or hinterland. This practice is the United Kingdom (Continued ) most apparent in connection with containerized management/employee buy-out (MEBO). The cargoes. In the event that an operator engages

legislative mechanisms needed to implement in operating other facilities such as inland ter- MODULE 3 such reform are complicated, requiring the minals, rail facilities, or even entire port com- promotion of a private bill. This is costly and time consuming and may—in the event of plexes abroad, its objectives and motivations opposition by interested parties—result in are broader than those of a localized operator. unwelcome modifications to the original bill. As a result of the perceived uncertainties The phenomenon of supply chain management associated with this process, only a few ports can for instance be well observed in the Port of opted to pursue this course. Rotterdam, where very large crude carriers Source: Author. (VLCCs) discharge crude oil from various oil producing countries. Rotterdam has a virtual monopoly in this traffic in Northwestern Europe as a • The abolition of the National Dock Labor result of its very deep access channel to the North Scheme had a more profound effect on Sea (78 feet). Pipeline systems have been con- labor stability than the selling of port land. structed to connect the port with various refineries • Where terminals were already privately in the hinterland, such as in Belgium and operated (landlord ports), selling the Germany. Thus, the inland transport chain is underlying port land made little differ- effectively controlled by one port, creating a stable ence. For example, port land at Dover environment for the transport of crude oil as well (a former Trust Port) or Portsmouth as an attractive location for balancing refineries. (a municipal port) did not affect port The Rotterdam Municipal Port Management was output because port operations in both instrumental in developing the pipeline systems. ports were already in private hands. Some port authorities also seek to attract cus- • Some nationalized and Trust Ports were sold tomers to their port facilities by facilitating or under a M(E)BO scheme to former public cofinancing terminal facilities outside their port officials. These managers reaped windfall area. This more expansive view of a port profits by selling their shares at a later date. authority’s role has the potential to influence traditional port management structures, particu- • There are limited possibilities for port larly in ports structured on the landlord model. cities to redevelop obsolete port land. On the other hand, land speculation by priva- A port authority’s involvement in terminal oper- tized ports has become a reality because ations beyond its homeport may not be focused older port facilities are often situated near solely on improving logistics chains. The main the valuable real estate of city centers. objective might be to maximize the port author- The U.K. experience, therefore, has yielded very ity’s revenue by making more widespread use of mixed results and provides few arguments sup- its operational expertise and management, espe- porting comprehensive privatization (the sale of cially in the case where the port authority acts port land and transfer of all public functions to as terminal operator as well. the private sector) when other, less radical Port authorities seeking to become transport reforms can achieve the same objectives. chain facilitators should be aware of possible conflicts of interest and the potential loss of 6.4. Ports as Transport Chain their neutral position. Managing a port area, Facilitators including attendant public functions, is different Increasingly, major terminal operators are try- from optimizing a logistics chain, which can be ing to secure their strategic position by offering considered a supporting function for the ports

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Box 25: Singapore Creates PSA Corporation he Port of Singapore is a very successful ment, and development of the port; to control container port and, since 1986, the vessel movements and ensure navigational safe- Tbusiest port in the world in terms of ship- ty; to license and regulate marine services and ping tonnage, most of it containerized trans- facilities including conventional cargo terminals; shipment cargo. Singapore was a service port, and to regulate the port industry’s economic combining land ownership, statutory functions, behavior. The act states that no person shall pro- and cargo operations within one organization, vide marine or port facilities without a public and one of the few successful public service license or exemption from MPA. The authority ports in the world. In 1996, however, the gov- may control and fix the tariffs charged by ernment of Singapore decided to fundamentally licensees for handling and storage of origin-des- change the management structure of the port. tination cargo (that is, nontransshipment cargo). MODULE 3 The government changed the port’s struc- Transshipment cargo is not regulated because it ture by creating a corporatized entity (PSA is an international and highly competitive busi- Corporation) whose structure would be suffi- ness. The original service port structure has thus ciently flexible to permit it to operate and been changed into one of a landlord port. invest in the region, especially in container ter- The newly formed PSA Corporation acts as a minals located on major shipping lanes. regulated terminal operator under corporate law. Corporatization of part of the port authority’s It is free to operate as a global terminal opera- business meant increased financial autonomy tor. The question remains whether MPA will and generated greater cash flows. It also allow other private operators to carry out con- enhanced Singapore’s position as a hub port tainer operations in the Port of Singapore. The and was expected to contribute to the eco- legal possibility exists, but the introduction of nomic development of Singapore and the sur- intraport competition has not yet materialized. rounding region. The PSA Corporation will be Through this process, Singapore has sepa- listed on the stock exchange of Singapore. rated public oversight and land management Since the PSA Corporation has a monopoly functions (creating a public authority) from position in Singapore, it is regulated. The cargo operations (creating a corporatized ter- Maritime and Port Authority of Singapore was minal operating company under corporate established by an act of Parliament (The Maritime law). Once the government divests its shares and Port Authority of Singapore Act 1996) to pro- in this corporation, Singapore will have com- vide that oversight. The main tasks of the new pleted its transition to a landlord port. authority (MPA) are to promote the use, improve- Source: Author.

industry, and for that reason essential from a Special emphasis is placed on how these services competitive point of view. might be outsourced, concessioned, or privatized.

The PSA Corporation is a prime example of Marine services are port-related activities con- globalization of terminal operations. Since its ducted to ensure the safe and expeditious flow of establishment, it has become a leading player in vessel traffic in port approaches and harbors and the global terminal operating business and a safe stay at berth when moored or at anchor. today owns, manages, and operates a chain of “Safe” means that port conditions ensure that container terminals and logistics hubs through- vessels using the port, the port environment, and out the world. Before taking on this expanded the marine environment are protected from dan- role, PSA had to change thoroughly its legal ger. “Expeditious” means that vessels are not structure. Box 25 describes this transformation. unduly delayed and that the vessels’ port transit times, as a part of the total turnaround time in 7. MARINE SERVICES AND the port, are kept to a minimum. PORT REFORM Although ports may define marine services dif- This section discusses a variety of marine services ferently, and may have different methods of and how they are affected by port reform. providing them, in this section the term is used

124 Alternative Port Management Structures and Ownership Models to refer generally to services having a nautical marine services. The harbormaster operates out bearing, be it maritime safety, vessel traffic effi- of a port coordination center (or Captain’s ciency, or marine environment protection. Room), which is often part of an elaborate vessel traffic management system.

Other services (for example, fire fighting, immi- MODULE 3 gration and customs services, security, and port Frequently, harbormasters have police powers state control) may also affect port efficiency and and act as head of the port police. The main safety. While important to the overall operation functions of such police are enforcement of the of a port, these other services are not dealt with port bylaws, especially with respect to traffic in this section. regulations, protection of the environment, and accident prevention. When part of a port The specific marine services rendered by a port authority, the harbormaster also usually serves authority depend largely on the scope of the as head of the pilotage service. In the event that port’s marine responsibilities and jurisdiction. the pilotage service is not part of the port The scope of the ports’ marine jurisdictions authority, the harbormaster is responsible for does not follow a general rule, and there exists coordination between this service and port no international legislation or standard practice users. Finally, the harbormaster is sometimes that defines the responsibilities of port authori- responsible for regulatory oversight of the car- ties. Usually, marine services rendered by a port riage and storage of dangerous goods in the authority are geographically delimited by the port area as well as for ensuring the proper use area directly under control of the authority, of port reception facilities. which may encompass only the waterfront of riparian berths (the port’s domain). However, In view of the public character of the harbor- there are countries where the port authority is master’s responsibilities, this function is rarely also responsible for managing lighthouse servic- privatized. To do so would raise a conflict of es outside its immediate area of control. This interest between the public interest (safety, envi- extended area may cover harbor waters and ronment, and equal treatment under the law) approaches as far as the open sea. and private interests from the port industry. For example, since port time of ships is an impor- 7.1. Harbormaster’s Function tant cost and operational factor, the harbormas- Generally, the harbormaster (or port captain) ter will always be under pressure to grant pref- manages port activities relating to maritime erential treatment to shipping lines. Impartial safety and the protection of the marine environ- and consistent application of operational safety ment. The legal basis of the harbormaster’s measures for ships carrying dangerous or envi- function is usually embedded in a port bylaw ronmentally sensitive goods such as gas carriers, or, in the case of a state-owned port, in a specif- chemical parcel tankers, and VLCCs is essential ic law or ministerial decree. The harbormaster to the safe functioning of any port. The harbor- often has specific legal powers to act in emer- master, therefore, should not function within a gency situations. Typically, the harbormaster is purely commercial environment, but must have part of the port authority organization and freedom of action to carry out public tasks in heads the marine department. In some coun- an unimpeded and unbiased manner. tries, the harbormaster may work for an independent public entity such as the coast guard. Although the harbormasters might be part of a port authority’s management team, they should The harbormaster is responsible for ensuring be free to operate in their jurisdiction as inde- the efficient flow of traffic through port and pendently as possible from the commercial coastal waters (including allocation of vessels to management of the port. In carrying out emer- public berths) and—on behalf of the govern- gency measures in the event of accidents and ment or port authority—for coordinating all industrial disasters, the harbormaster should

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have full freedom of action and possess the ulti- smaller ports) might also operate a vessel traffic mate authority and responsibility for directing management system (radar). The port authority all necessary activities. In a fully privatized port, or maritime administration should regulate the the harbormaster should not be part of the port privatized pilot organization regarding: management, but should be employed by a • Training requirements and pilot national or regional maritime administration. qualifications. 7.2. Pilotage • Standards for obtaining a certificate or In a port reform process, pilots often are the license, and its revocation. first ones to demand privatization. Pilots usual- • Roles and responsibilities of the organiza- ly constitute a closed group of professionals tion for operation of a vessel traffic man- MODULE 3 (often master mariners), who are keenly aware agement system. of their unique position in the port environment. Successful vessel management relies heav- • Communication equipment and channels. ily on the efficient functioning of the pilot • Investigation of incidents and follow-up organization, a fact that pilots may use to maxi- actions. mum advantage during port reform. • Pilotage tariffs and financial record keeping. In many countries, pilots (or pilot organiza- • Medical fitness and continued proficiency. tions) have been more or less successfully privatized. This type of privatization, however, car- • Reporting requirements to the relevant ries the risk of creating a private sector monop- port authority. oly in pilotage services, especially when pilots 7.3. Tugboat Operations are privatized on a national or regional scale. Pilotage is an essential part of traffic manage- Tugboat operations are typically carried out by ment, and safe passage of vessels through a port private firms. If the volume of vessel traffic is not area requires expert teamwork of a vessel traffic sufficient to support a tugboat service on a com- management organization (Captain’s Room), mercial basis, a port authority may be obliged to tugs, mooring gangs, and pilots. A private sec- provide such service itself. Sometimes neighboring tor pilot monopoly that has the ability to bring ports can share tugboat services to reach volumes port operations to a complete and rapid stop sufficient to sustain a commercial operator. represents a significant risk for ports, carriers, In many instances, traffic density allows for and shippers alike. As a consequence, retaining only one private tugboat company to operate in pilots as part of a port authority’s marine the port area. In such cases, the port authority department may be desirable even when other should regulate the service regarding: aspects of port management and operations are privatized (see Box 26). • Minimum crew size.

There are two ways of privatizing of the • Minimum bollard pull. pilotage function. Pilots can be self-employed • Communication equipment and channels. and work under the oversight of a maritime authority that serves as the regulator and licen- • Roles and responsibilities relating to the sor of the individual pilots, or pilots can organ- vessel traffic management system. ize themselves into a private company. • Tariffs.

The pilotage company should have its own The optimum situation would be a number of infrastructure and facilities, such as pilot boats, tugboat firms competing vigorously in the port. communication equipment, and pilot stations. In that event, the port authority should not Sometimes a pilot organization (especially in have to regulate tariffs. Regulation of other

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Box 26: The Creation of a National Pilotage Monopoly in the Netherlands n 1988, the Netherlands Pilotage Service provided by the Loodswezen Nederland BV. became an independent organization, with Five foundations are responsible for education, the pilots acting as private entrepreneurs. social allowances, management of pension

I MODULE 3 The objectives of the government in the priva- funds, and allowances for special situations. tization of the pilot services were to reduce Privatization in the Netherlands did not the governing executive burden and to bring an end to the debate about pilot servic- improve efficiency and adequacy of the pilot es. The government Audit Office directed services. harsh criticism at the privatization process A public entity, the Nederlandse Loodsen and asserted that the efficiency improve- Corporatie (the Netherlands Pilot Corporation, ments did not benefit the shipping lines or the NLC) was created to manage the register of government, but solely the pilots. licensed pilots and be responsible for the edu- Notwithstanding the Audit Office’s criticism, cation and training of licensed pilots. All the Netherlands’ privatization of pilots is not licensed pilots constitute the NLC. considered a successful one. In every region, the licensed pilots have To a certain extent, the government’s objec- set up a legal entity, the Regionale Loodsen tives have been attained. The increase in the Corporatie (Regional Pilot Corporation, RLC). amount of pilot activity and the reduced num- The licensed pilots are all shareholders of the ber of licensed pilots have led to higher effi- Loodswezen Nederland BV (Pilotage Service ciency. However, pilotage became a virtual of the Netherlands Ltd.), which is responsible monopoly and the efficiency improvements for the exploitation of the independent pri- have led primarily to a very substantial rise in vate enterprise. All supporting staff is the pilots’ incomes. employed by this company. The company The cost structure of the pilotage organiza- collects the pilotage fees and makes pay- tion is not transparent. The fees are nonnego- ments to the pilots in accordance with the tiable, contrary to the fees for other marine financial statute. services and pilot fees in other ports. The The ownership of the capital goods used by magnitude and rigidity of pilot fees create the pilots is incorporated in the Loodswezen strong pressures to reduce other cost ele- Materieel BV (Pilotage Services Material Ltd.). ments in the highly competitive maritime trans- Individual pilots, united in regional partner- port sector. Overall, the present situation has ships, the “Pilot Associations,” render the proven unsatisfactory to port users. pilotage services. Supporting services are Source: Christiaan van Krimpen.

aspects of tug operations such as manning can • Minimum manning requirements. be at the discretion of the port authority and • Communication equipment and channels. will depend on the local situation. • Number of mooring boats and their 7.4. Mooring Services characteristics. Mooring services in smaller ports can be pro- • Tariffs. vided by the local stevedore. In larger ports, a mooring service is usually performed by a spe- 7.5. Vessel Traffic Services and Aids cialized private firm. Especially in a complicated to Navigation nautical situation (for example, single point Vessel traffic services (VTS) are usually part of mooring buoys, specialized piers for chemicals a port or a maritime authority. Such services are or gases, or ports with large tidal differences), provided in port areas and in densely used mar- mooring activities require expert skills and itime straits (such as the Dover Channel) or equipment. A port authority may choose to reg- along a national coastline (for example, the ulate this activity when only one specialized coast of the Netherlands). In principle, it is firm exists. Regulations should include: possible to privatize VTS under a concession

127 Alternative Port Management Structures and Ownership Models

agreement. VTS that should be regulated by the or part of the waste management costs in the competent authority should include: general port dues. Transport of waste from the ship to a reception facility also poses a • System functions, such as vessel manage- challenge, especially in larger port areas. Port ment and control, emergency functions, authorities should directly provide or organize and information and communication the provision of transport barges or trucks for functions. this purpose. • Types and specifications of radars and tracking software. The entire waste management system, including personnel and facilities, should be closely • Manning levels and qualifications. controlled by the competent authority. When

MODULE 3 • Reporting duties. private firms are engaged in waste handling, the authority should employ experts from its • Tariffs. organization to ensure compliance with all Responsibility for aids to navigation usually relevant laws, rules, and regulations. rests with a national maritime authority in port approaches and in coastal areas, and Generally, emergency response services are with a port authority in port areas. Often, carried out by a variety of public organizations provision and maintenance of buoys and such as the port authority (harbormaster), fire beacons are contracted out. Because aids to brigade, health services, and police. Some ports navigation are generally part of an integrated have sophisticated tools available to aid in crisis maritime infrastructure, the costs of providing management, such as prediction models for gas these services are included in the general port clouds. Such tools are often integrated in a traf- dues. Therefore, it is difficult to privatize fic center of the local vessel traffic management them. system (VTMS). Private firms (for example, tugboat companies) may play a subsidiary role in 7.6. Other Marine Services crisis management in the event that they are The control of dangerous goods for maritime equipped with fire-fighting equipment. Larger cargoes is usually performed by a specialized ports use patrol vessels and vehicles for a vari- branch of the port authority. The same goes for ety of public control functions. In some ports, the handling of dangerous goods in port termi- such patrol vessels also have fire-fighting equip- nals. Oversight and regulation of land transport ment on board. When a port does not have of dangerous goods is normally a responsibility patrol vessels available, a contract with a tugboat of the central government. The highly sensitive company should be arranged to guarantee avail- and technical nature of this work makes it inad- ability of floating fire-fighting capability. Port visable for privatization. patrol services are part of the harbormaster’s resources and, therefore, should not be Waste management services in ports often are privatized. privatized under strict control of a port authority or another competent body. Control of dredging operations by a port Privatization carries risks, however, especially authority is of utmost importance. Often, the with respect to the disposal of dangerous port authority or the competent maritime chemicals. Proper waste management can be administration does not have enough expertise expensive for shipping lines. With high costs, to exercise sufficient control over both mainte- ship captains might be tempted to dump waste nance and capital dredging. Port authorities into the sea or into port waters. Control of with large water areas under their control such dumping practices is extremely difficult, should employ sufficient competent personnel especially for chemical cargoes. To spread to prepare dredging contracts and oversee waste management costs, ports can include all dredging operations. Sounding is an activity

128 Alternative Port Management Structures and Ownership Models pr pu pu pr pr pu pr pu Other functions MODULE 3 pr pu pr pr pr Dredging services pr pr pr pu pu pu pr pr pu pu pu pr pr pu pu pu pr pu pu pr pr pu pr pu Pilotage Towage Mooring pr pr pr Cargo handling activities pu pu pu (buildings) Superstructure pr pr pu pu (equipment) Superstructure pu pu pu Port infrastructure pu pu Nautical infrastructure pu pu Nautical management pr pu pr pr pr pr pu pu pu pu pu Port administration Author. Model Public Public service port Private sector port Tool port Landlord port Box 27: Prevailing Service Management Models Box 27: Prevailing Providers under Different Port Source:

129 Alternative Port Management Structures and Ownership Models

that should preferably be carried out (or McDonagh, Stephen. 1999. Port Development contracted out) by the port authority itself. International. Dredging is usually carried out by private firms. Shaw, William, and Thompson. 1996. “Concessions It might be cost effective for some ports to use in Transport.” TWU Papers, Discussion Paper, their own dredges, especially when continuous World Bank, Washington, DC. and important maintenance dredging is Williams, Mark Lloyd, Bill Jamieson, and Norton required. Rose. 1999. “BOT Schemes and Port Development.” World Ports Development, p. 20. Box 27 summarizes the prevailing approaches for handling the most important port functions. World Bank. 1992. Port Development Strategies for Asia, Phase 1. National Ports and Waterways Institute, Louisiana State University. MODULE 3 REFERENCES Baird, Dr. Alfred J. 1999. “Port Privatisation, Saundry, Richard and Peter Turnbull. 1997. Private Objectives, Extent, Process, and the United profit, public loss: The Financial and economic per- Kingdom Experience.” Napier University, formance of U.K. ports. Maritime Policy Edinburgh, 4th World Port Privatisation Management 24(4): 319. Conference, London, 22–24 September 1999. UNCTAD (United Nations Conference on Trade and Drewry Shipping Consultants Ltd. 2005. Annual Development). 1984. Handbook for Port Planners Review of Global Container Terminal Operators – in Developing Countries. UNCTAD. 2005. Drewry House: London. UNCTAD. 1998. Guidelines for Port Authorities and Heinrich, Michael. 1999. “Port Efficiency—The Governments on the Privatization of Port Facilities. Public-Private Partnership.” (Port of Hamburg) UNCTAD/SDTE/TIB/1. World Ports Development, p.16.

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

130 PORT REFORM TOOLKIT SECOND EDITION

MODULE 4 LEGAL TOOLS FOR PORT REFORM

MODULE 4 The World Bank encourages dissemination of its work and will normally grant permission promptly.

ISBN-10: 0-8213-6607-6 ISBN-13: 978-0-8213-6607-3 eISBN: 0-8213-6608-4 eISBN-13: 978-0-8213-6608-0 DOI: 10.1596/978-0-8213-6607-3 MODULE 4 134 134 140 143 6.3.3.1. Part 1—Conditions Precedent to be Fulfilled by the Operator to be Fulfilled 6.3.3.1. Part 1—Conditions Precedent by the Port Authority to be Fulfilled 6.3.3.2. Part 2—Conditions Precedent 162 161 6.3.4. Term of the Concession Agreement of the Concession Agreement 6.3.4. Term Targets 6.8.1. Productivity 163 169 6.3.1. Preconcession Documents 6.3.1. Preconcession 6.3.2. Definitions Sample 6.3.3. Conditions Precedent 157 161 157 4.1.1. Vessel Traffic Management Traffic 4.1.1. Vessel 4.1.2. Pilotage and Safety in the Port 4.1.3. Order 4.1.4. Reporting and Communication and Handling Transport Cargoes: 4.1.5. Dangerous 4.1.6. Pollution and Reception Facilities 4.1.7. Regulation of Other Port Functions 146 145 146 146 149 149 146 6.4. Concession Parties 6.5. General Rights and Obligations of the Operator 6.6. General Rights and Obligations of the Port Authority of Rights, Obligations, and Assets 6.7. Transfer 6.8. Performance Parameters of Employees 6.9. Transfer Majeure 6.10. Force 6.11. Lease of Facilities 6.12. Site Access 6.13. Governing Law 165 164 166 163 168 171 173 171 175 175 5.1 Legal Structure of Port Competition Regulation of Port Competition 5.1 Legal Structure Land Rent 6.1. Full Concession, Leasehold, and 6.2. Full Concession and BOT Schemes Structure 6.3. Full Concession Agreement 151 154 154 156 1.1. National Ports Commission1.1. National Ports 2.1. Preface 2.2. Definitions Functions of a Port Authority 2.3. Objectives and Considerations 2.4. Corporatized Ports—Special Problems 2.5. Implementation 3.1. Licensing 3.2. Marine Management 3.3. Financial Issues 3.4. Violations 3.5. Appealing Port Authority Regulations 3.6. Liability for Damages 4.1. Port Operating Regulations 136 138 132 138 143 140 142 143 145 5. Port Competition Modalities 6. Full Concession Agreements 150 154 1. Introduction and Overview and Overview 1. Introduction a Ports Law for Drafting 2. General Approach Operations Terminal 3. Port Authority and 4. Port Regulations 132 131 139 145 MODULE FOUR CONTENTS MODULE 6.14. Freedom to Set Tariffs 175 6.15. Taxes 175 6.16. Concession Fee 176 6.17. Insurance and Indemnity 176 6.18. Physical Security 176 6.19. Unclaimed Cargo and Carriers 178 6.20. Information and Communication 178 6.21. Termination and Prolongation 179 6.21.1. Termination Due to Noncompliance 179 6.21.2. Termination Compensation 179 6.21.3. Option to Continue 180

MODULE 4 6.21.4. Bankruptcy 181 6.22. Expiration of Concession 182 6.23. Arbitration 182 6.24. Costs 183 6.25. The Tender Process and Transaction Preparation 184 6.26. Miscellaneous Conditions 186 7. BOTs and Construction 186 7.2. BOT and BTO Arrangements 187 7.2. BOOT Arrangements 188 7.3. Functional and Technical Design under a BOT Arrangement 188 7.4. Design and Construction Flaws 190 7.5. Building Conditions 190 7.6. Construction Program 191 7.7. Zero Date 191 7.8. Drop Dead Date 192 7.9. Extension Events 192 7.10. Completion Tests and Take-Over 192 7.11. Hand-Back and Transfer of Facilities 193 7.12. Lender Security 194 7.13. Change in Law 194 Annex I—Checklist of Concession/BOT Agreement Provisions 196 BOXES Box 1: Singapore: Transforming a Service Port into Landlord Port 133 Box 2: Panama: Enabling Legislation for a Concession 134 Box 3: Eastern Europe: Decentralizing Port Management 134 Box 4: Latin America: Allowing Private Stevedoring Operations 136 Box 5: Object of Port of Rotterdam, Ltd. 136 Box 6: Caution: Single National Ports Authority can be Hazardous to Economic Health 137 Box 7: Functions of Corporatized Port Authorities 137 Box 8: Division of Shares in Corporatized Port Authority 138 Box 9: Violated Neutrality: A Port Director with Two Hats 140 Box 10: Maritime Domain: A Potential Impediment to Port Development 141 Box 11: Marine Management Tasks to be Separated from Corporatized or Privatized Port Tasks 142 Box 12: Harbormaster’s Powers and Functions 142 Box 13: Reference Clauses on General Regulations of the Authority 144 Box 14: Reference Clauses on Specific Regulations of the Authority 144 MODULE 4 Box 15: Reference Clauses on Damages Clauses on Damages Box 15: Reference Clauses on Liability Box 16: Reference Protection on Port Safety and Environmental Clauses Box 17: Reference on Reporting Clauses Box 18: Reference Cargoes Dangerous on Loading and Discharging Clauses Box 19: Reference Management on Waste Clauses Box 20: Reference Case Aires Box 21: The Buenos Competition Act Box 22: Sample Port Port Lease, and Rent Contracts—Landlord Box 23: Full Concession, to a Concession or BOT Agreement Box 24: Main Schedules of Concession on Term Clause Box 25: Reference 147 Terminal on Nomination of Operator of a Container Clause 149 Box 26: Reference Clauses on General Rights and Obligations of the Operator Box 27: Reference Clauses on General Rights and Obligations of the Port Authority Box 28: Reference Clauses on Permitted Activities Box 29: Reference (BOT arrangement) Clauses on Newly Built Assets in the Concession Area Box 30: Reference of Assets Clauses on Transfer Box 31: Reference 167 Targets Clause on Productivity Box 32: Reference 155 164 of Personnel Clauses on Selection and Transfer Box 33: Reference 166 144 165 Majeure Clauses on Force Box 34: Reference Clauses on Lease of Facilities Box 35: Reference 150 145 Clauses on Site Conditions Box 36: Reference 157 148 Clauses on Access to the Site Box 37: Reference Clause on GoverningBox 38: Reference Law Clause on Price Discrimination Box 39: Reference Clause on Taxes Box 40: Reference 163 Clauses on Concession Fee Box 41: Reference 153 Clauses on Insurance and Indemnity Box 42: Reference 152 Clauses for Security Box 43: Reference 172 Clauses on Unclaimed Cargoes Box 44: Reference 167 Clauses on Information and Communication Box 45: Reference the Port Authority by Clause on Termination Box 46: Reference 169 by the Operator Clause on Termination Box 47: Reference 171 Due to Noncompliance Clauses on Termination Box 48: Reference Clauses on Prolongation Box 49: Reference Clauses on Bankruptcy Box 50: Reference 173 172 Clauses on Expiration of ConcessionBox 51: Reference Clause on Arbitration Box 52: Reference 173 175 Clause on Costs Box 53: Reference Box 54: Clauses on Miscellaneous Conditions 176 Port Situation) Maintenance (Landlord Clauses on Construction and Box 55: Reference 175 177 a BOT arrangement) (including Agreement Clauses on Scope of a Concession Box 56: Reference 179 189 Clauses on Construction Program Box 57: Reference 177 180 Design Clauses on Infrastructure Box 58: Reference 181 187 Design and Construction Problems Clauses on Technical Box 59: Reference 178 180 176 Clauses on Site Conditions Box 60: Reference Clauses on Construction Box 61: Reference 178 Date Clauses on Zero Box 62: Reference 183 191 181 181 184 186 190 191 185 192 192 193 MODULE 4 o 8 h aeo t are 196 198 197 193 194 193 193 195 Box 70:Reference ClausesonLawChanges Box 69:Reference ClauseonLender’s Security Box 68:TheCaseofSt.Maarten Box 67:ACaseofLegalLimitationsAdverselyAffecting aPortConcession Box 66:Reference ClausesonHand-BackofFacilities Box 65:Reference ClauseonTake-Over Tests Box 64:Reference ClausesonExtensionEvents Box 63:Reference ClausesonDrop DeadDate MODULE 4 y Julian of the World Bank Transport Division. Transport Bank World y Julian of the . g .or .ppiaf The Public-Private Infrastructure Advisory Facility (PPIAF) Infrastructure Advisory Facility Public-Private The the quality improve countries facility assistance aimed at helping developing PPIAF is a multi-donor technical sector involvement. private of their infrastructure through on the facility see the information more For site:Web www The Netherlands Consultant Trust Fund Trust Netherlands Consultant The Ministry Affairs French of Foreign The Bank World The (USA) MaritimeInternational Associates TEMPO),Mainport known Consultancy as (formerly Holding Rotterdam Municipal Port Rotterdam Management (The Netherlands) (The Maritime Group Rotterdam The Netherlands) Holland and Knight LLP (USA) ISTED (France) (USA) Nathan Associates (Chile) Latin America and the Caribbean for Commission Nations Economic United (USA) Consulting PA The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technical the financing thanks to and elaborated was prepared Toolkit Reform of the Port Edition First The organizations. following of the contributions We wish to give special thanks to Christiaan van Krimpen, Christiaan van to special thanks give wish to We John Koppies, of the Rotterdam Veldman and Simme Maritime Group, of ITF,and this work. to formerly Marges Kees their contributions for Marios Meletiou of the ILO Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure Trust and Infrastructure Transport Netherlands The from a grant through provided was also assistance Financial Transport, Ministry (Netherlands Fund of Works, of the the enhancement Management) for Public Water and content,Toolkit’s contracted. Maritime (RMG) were Group the Rotterdam of which consultants for Acknowledgments from of a grant assistance with the financial has been produced Toolkit Reform of the Port Second Edition This TRISP,a partnership the U.K.between Bank,World Department and the Development International for learning for and sharing of knowledge of transport in the fields infrastructure services. and rural The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel, Toolkit Reform and publishing of the Port preparation The Ronald Kopicki,“Bert” Cornelis Kruk, and Bradle welcome. are Comments Help Desk. Transport Bank World the Please send them to Fax: 1.202.522.3223. Internet:[email protected]

MODULE

4 MODULE 4 Legal Tools for Port Reform SECOND EDITION

1. INTRODUCTION AND OVERVIEW ransformation of port structures often requires new legislation. This module identifies fundamental points to consider when developing T such legislation, with examples from existing port reform regimes, although the examples provided should be used for reference purposes only. Because every country has a unique legal and institutional context, it is impossible in practice to present a model law that fits the wide variety of fundamentally different legal systems. With such a diversity of legal and policy regimes worldwide, the exact purpose of a port law may vary from country to country. Sometimes an existing law is changed to accommodate new institutional structures that were made necessary because of changed socioeconomic conditions. Other times, a law lays the groundwork for the public sector to participate in port development and infrastructure investments, or enables the private sector to carry out port activities that previously resided in a public sector monopoly. The reference provisions presented in this module are not meant to cover completely each and every issue. They have been derived from a large variety of laws, regulations, and contracts. They are meant to be used as tools for port reform to shape the legal foundation for marketable and bankable regulatory and contractual arrangements.

The examples are derived from a variety of and others. In the case of a port authority that institutional structures covering not only tasks is part of a municipality, no specific law is nec- and responsibilities of port authorities, but essary because the legal basis of such authority also related institutions such as a national is part of municipal legislation. However, ports council (or commission), a port fund, the fundamental elements of this module

131 Legal Tools for Port Reform

might still be considered in drafting such Commissions may be asked to contribute to the legislation. development of the national ports policy by offering advice on: It is often thought that the sole purpose of a ports law is to create an institutional frame- • The prioritization of policies that will work to develop and manage seaports. It maximize private participation in the port should, however, be emphasized that a ports sector. law should also establish a flexible business • The preparation of a national ports (restruc- framework that enables a port authority to turing and investment) plan based on an compete successfully in national and interna- objective evaluation of project proposals tional transport markets. received from the port authorities. MODULE 4 A ports law often creates one or more port • The allocation of public sector funding authorities, as well as a host of other port-related for port development. bodies, such as a ports council/commission or similar advisory or regulatory body. It might also • The administration of an investment fund set operational conditions for private operators. established specifically to finance port Finally, such a law may regulate organizational development. and financial relations between public organs • Measures to prevent monopolistic practices (such as the state, regional governments, or in the ports and to encourage competition. municipalities) and the maritime administration. • The role of the maritime sector in the There are various legal acts that relate to ports overall national transport strategy and policy, port management, and port operations. national export policies. Therefore, when discussing port laws in this The president and or chairman and the members module, the expression “port law” includes of the commission should be appointed from among other policy laws, port competition among persons with extensive experience in laws, port privatization laws, harbor regula- port management; shipping; inland transport; tions, and statutes of (public) port enterprises. commercial, financial, or economic matters; 1.1. National Ports Commission applied science or the organization of workers; or have demonstrated their ability in other fields Particularly in countries where the port sector is of port-related operations (including the fishing still under development, the national govern- and the shipbuilding industries, in particular). ment has an important role to play. This role may be expressed in a national ports policy If a country decides to institute a ports commis- formally authorized by the parliament. The sion, it should be empowered with the necessary preparation and implementation of this policy tools to function effectively. Therefore, a ports usually is the responsibility of a transport or commission should be assisted by an executive port ministry. secretary and a small professional staff. Members of the staff should receive remuneration in accor- Sometimes, to involve major sectors of the dance with applicable conditions for civil servants. ports community in the development, a Finally, the costs of the commission should be national ports commission (or ports council) is borne by the state to ensure its independent status. established by law. Generally, the commission has an advisory role. The general objective of a 2. GENERAL APPROACH FOR national ports commission is to provide input DRAFTING A PORTS LAW to the development of a national ports policy. Generally, the commission provides this advice A port authority is usually established by a spe- to the council of ministers through the minister cific ports law, either as a public or commercial of transport. entity (for example, joint stock or limited liability

132 Legal Tools for Port Reform company). The following two examples illustrate authority or port trust. In these countries, new some key juridical attributes to be considered. port laws are aimed at converting service ports into landlord ports, requiring the separation of The ports law in Singapore states: public landlord responsibilities from cargo han- There is hereby established a body to be dling activities (see Box 1). New port laws regu- MODULE 4 known as the Maritime and Port Authority lating the tasks and responsibilities of a (public) of Singapore, which shall be a body landlord port authority have been combined corporate with perpetual concession and a common seal, by that name, be capable of: a) suing and being sued; b) acquiring, holding, and developing or disposing of property, both Box 1: Singapore: Transforming a Service movable and immovable; and c) doing and Port into Landlord Port suffering such other acts or things as bodies useful example of a port authority corporate may lawfully do and suffer. structure change is represented by two Alaws enacted in Singapore. Prior to the Some countries have opted for a corporatized change, the port functioned as a public port authority. To that end, the Polish ports act service port. As the port authority increasingly states: became engaged in terminal operations abroad and other commercial activities, public Joint Stock Companies, administering ports functions and commercial functions were separated. A new statutory board (the of fundamental importance to the national Maritime and Port Authority of Singapore economy, are established under this Act and [MPA]) was set up. The commercial and operate on the basis of the Commercial marine activities of the original Port of Code, unless otherwise provided for by this Singapore Authority were corporatized. Two Act. acts implemented the changes, one providing for the dissolution of the Port of Singapore Companies mentioned in paragraph one Authority and the other establishing the MPA have a public service character. (Singapore Acts 6 and 7, 1997). The prefaces of these laws are, respectively: The Belgian main ports (Antwerp, Ghent, • “An Act to provide for the dissolution of the Oostende, and Zeebrugge) are regulated by the Port of Singapore Authority and for the Flemish Port Decree, 1999 (Official Gazette No. transfer of its property, rights, and liabilities 99/992). The relevant provisions (Article 4) are: to a successor company and others, to make financial arrangements for that com- (i) Port authorities are public entities. They pos- pany and for matters connected therewith, to repeal the Port of Singapore Act sess the exclusive powers to deal with port (Chapter 236 of the 1985 Revised Edition) issues. These issues cannot be transferred, either and to make consequential amendments to in whole or in part. other written laws. Be it enacted by the President with the advice and consent of (ii) Entities participating in port authorities the Parliament of Singapore, as follows...” shall have a public character. • “An Act to establish and incorporate the Maritime and Port Authority of Singapore, (iii) Port authorities are subject to corporate to provide for its functions and powers, and law, unless incompatible with the provisions of for matters connected therewith; and to this decree or other legal acts. repeal the National Maritime Board Act (Chapter 198 of the 1985 Revised Edition) In Asia and Africa, the institutional structures and to make consequential amendments to certain other Acts. Be it enacted by the of many ports were often patterned after their President with the advice and consent of European counterparts. The vast majority were the Parliament of Singapore, as follows...” public service ports responsible for all port serv- Source: Author. ices. Dockers were employed by the public port

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Box 2: Panama: Enabling Legislation for a Box 3: Eastern Europe: Decentralizing Port Concession Management n Panama, a concession contract was con- n the past, Eastern European ports were cluded between the state and a private managed mainly by centralized authorities. Ioperator. The text of the contract was IAfter the introduction of market reforms, it included in a specific law authorizing its con- became necessary to decentralize port man- clusion. The opening text of the law is: “Law agement and modernize former state-domi- of 1995, whereby Development, Construction, nated structures. More independent port Operation, Administration, and Management authorities were established, often with some Contract of a container Terminal in the North form of state participation. The prefaces of Coco Solo Area, Province of Colon, between the relevant laws reflect these changes: the State and the Corporation Colon MODULE 4 • “The Act regulates the principles for estab- Container Terminal, S.A. is approved.” lishing governing bodies for ports, their Source: Author. organizational structure, and their operation. The limits of port areas are stipulated in separate regulations. The Act is not recently with the establishment of private oper- applicable to naval ports.” (Port Law of ating companies in accordance with the nation- Poland, December 20, 1996) al commercial code. • This Act establishes principles of operation and management of ports and the safety of Some situations require a law to specifically reg- navigation within port areas.” (Port Law of ulate the development and construction of a ter- Latvia, June 22, 1994) minal by a private operator through authorizing Source: Author. the award of a concession contract (see Box 2).

A ports law may be very detailed or merely set Domain”). Finally, the law should regulate the forth basic principles of port management and organizational, financial, and fiscal relations operation. Regardless of the form adopted for between the related public organs (such as the the port’s regime, to create a solid basis for national government, regional governments, and clearly delineating port functions and responsi- municipalities) as well as with regulators, such as bilities, a core set of provisions should be the maritime administration, the fiscal authority, included. These provisions and their key fea- and the competition commission. tures are described below. Two approaches have been developed for draft- 2.1. Preface ing the preface of a typical port law: a preface A preface states the objective of the law and stating only the objective of the law (see Boxes 3 some general conditions. The approach adopted and 4), or a preface of general conditions, elabo- is a function of the underlying legal system. For rating on the objective and a number of bound- example, some countries use a combination of ary conditions. In several cases, the definitions statute and implementing regulations; others pass used in the law are included in the first section. a decree that applies a privatization or concession law to a port or ports. The objective might 2.2. Definitions be to create new port authorities or to reform an The second element of a ports law should com- existing port authority. Also, the preface should prise definitions of the main terms used in the indicate whether transfer of rights to private par- law. The port business, especially as a specific ties (for example, lease, concession, or build- mix of public and private interests and financiers, operate-transfer [BOT]) is permitted. It might be will require that the interplay of these interests necessary in such instances to make correspon- be balanced and result in well-circumscribed ding changes in laws governing public property functions. The law should likewise define mar- (for example, in the case of the “Maritime itime and port infrastructure, identifying which

134 Legal Tools for Port Reform are under the authority of the state and which Dues: Port dues, cargo-related dues, and are under the authority of a port authority. pilotage dues. Sometimes it may be necessary to designate several types of ports, such as “ports of national Harbormaster: The harbormaster appointed by interest” and “ports of regional interest,” or as law and such harbormaster’s appointees, repre- MODULE 4 in the French Ports Law of 1965, Ports sentatives, deputies, or delegates appointed in Autonomes and Ports d’Intérêt National, with accordance with such law. each exhibiting its own definition. Marine services and facilities: All services It is highly advisable to precisely define critical performed in port areas and the approaches functions, features, and port administration thereto, in respect to towage, mooring of bodies. In the port field, investors and lenders vessels, sounding of navigable waters, the lifting will review definitions of a port law closely to of sunken vessels, salvage of vessels, fire fighting determine if there are ambiguities that may aboard vessels, and all related activities as affect security interests or lender rights. Because well as the provision of facilities, vessels, and there is no internationally accepted terminology, equipment to perform these activities, but not the following list is only an illustrative compila- necessarily including pilotage. tion of the most commonly used terms. Maritime access: Fairways, dredged channels, Often words used in legal agreements are and other waters providing access to ports, capitalized to indicate they have been defined. equipped with aids to navigation for commercial sea-going and inland vessels. Aids to navigation: All floating, stationary, and on-shore objects dedicated to assisting sea-going Operational infrastructure: Port facilities and and inland vessels in the safe navigation at sea constructed works dedicated to commercial and in inland waters including buoys, beacons, handling of sea-going and inland vessels, such lighthouses, vessel traffic systems, tidal measur- as quay walls, piers, jetties, roll-on roll-off facil- ing systems, and fixed objects and markers. ities, berthing aids, and also secondary connecting roads within the port area, including all Authorized pilot: A pilot employed or author- appurtenances and components thereof. ized by a competent authority to pilot vessels. Pilot: Any person not belonging to a vessel who Basic infrastructure: Sea locks, breakwaters, piers, has the conduct thereof. sea walls, and other protective works not directly involved in the transfer of goods; maritime access- Port authority: Every port undertaking agency es and canals; primary roads to and from the established under the subject law. ports; and also railway tracks, pipelines, and buffer zones situated at the borders of the port. Port (or seaport): One or more port areas forming an autonomous functional and economic Concession: An agreement entered into by a entity, of which the boundaries are established person with the port authority in which such by authority of the relevant government body person becomes entitled and obliged to provide and whose activities are governed in accordance port and marine services in a specified area of a with national or other relevant law. port, or in a port in its entirety, including or excluding the right to construct, alter, and Port dues: Dues levied on a vessel for entering, maintain basic and operational infrastructure, using, and leaving the port. superstructure, and equipment, subject to the Port infrastructure: All infrastructure located terms and conditions set out therein. within the seaport or in the land and sea access- Concessionaire: Any person who has concluded es containing basic infrastructure, operational a concession agreement with the port authority. infrastructure, and superstructure.

135 Legal Tools for Port Reform

Box 4: Latin America: Allowing Private Box 5: Object of Port of Rotterdam, Ltd. Stevedoring Operations he Port of Rotterdam, Ltd. (Haven ntil the 1980s, Central and South Bedrijf Rotterdam N.V.), established in American ports were usually part of the T 2004, has the legal structure of a Ustate and managed as public service limited liability company according to the ports. During the 1990s of the last century, Dutch Commercial Code. No other specific many countries in the region have changed ports legislation is applicable. Article 2.1 of its their port structures to allow private stevedoring statutes reads as follows: operations. The general conditions of the • “The object of the enterprise is to exercise Mexican ports law (1993) describe the or cause to be performed the port business objectives of such a law: “This Act has a public and within this framework the furtherance character and shall be observed in the entire MODULE 4 of strategic position of the Port of territory of the State. The objective of the law is Rotterdam within the European perspective, to regulate ports, terminals, marinas, and port both on short and long term. installations, their construction, use, acquisition, • More specifically, the purpose of the enter- exploitation, operation, and ways of administra- prise is: tion, as well as the execution of port services.” ~ The furtherance of an effective, safe, and Source: Author. efficient vessel traffic management, the responsibility for maintaining order and safety in the port area and the power to Port services and port facilities: Port terminal act as competent authority therein. services and facilities for handling, storage, and ~ The development, construction, manage- transportation of goods on port land and for ment, and exploitation of the port and handling of passengers carried by vessels. industrial area of the Municipality of Rotterdam. Public license: A license granted under a port ~ Contributing to the city’s development, act and for the purposes of the act; a public development of port areas located there- licensee shall be construed as the recipient of a in, and the improvement of living condi- public license and subject to its terms and con- tions within the city and the Rotterdam ditions. region, even in case such activity is (initially) not profitable.” Superstructure: Sheds, silos, warehouses, and Source: Author. housed facilities of all kinds, and all infrastructure and equipment not identified under basic and operational infrastructure. which might be a public entity or a corporate entity under the commercial code of the relevant Vessel: Includes ships, boats, air cushioned vehi- country, such as a joint stock company. The law cles, or floating rigs or platforms used in any should also indicate which public entity has the form of operations at sea or in port, or any right to establish a port authority in the event other description of a vessel. that the state is not doing so. This might be a region, province, city, or a combination. 2.3. Objectives and Functions of a Port Authority In the case of corporatized or privatized port authorities, linkages will be needed to the mer- The third section of a ports law should delineate cantile, corporate, or commercial code. the objectives and functions of a port authority. Provisions should be included on shareholding, Usually, a port authority exercises jurisdiction over for example, or conforming changes made to a port territory, which should constitute an eco- commercial or corporate laws. nomic and functional unit. The establishment of a port authority as this legal entity is one of the There is an important point affecting port major elements of a ports law (Box 5). The law authorities established as joint stock companies. provides the legal status for the port authority, Generally, port authorities are responsible for

136 Legal Tools for Port Reform operating the entire port. In the event of a landlord port situation, a corporatized or Box 6: Caution: Single National Ports privatized port authority must ensure a level Authority Can be Hazardous to Economic playing field among many terminal operators Health and other service providers. To avoid conflicts ince ports generally compete among MODULE 4 of interest, the law should explicitly regulate the themselves both in the international and Snational transport markets, a national powers and duties of the port authority in ports authority, comprising all ports of a relation to private operators with respect to country, is not a preferred option. investments and share participation. Occasionally, a national ports authority is established on the grounds that there is only Powers and duties of a port authority regarding one major port in a country with a number of land management require specific attention in smaller ports with a regional function. the law. A landlord port authority is responsi- However, even in such a case, a more effective system could consist of an autonomous ble for land management and overall port port authority for the major port, and a sec- development. Special attention should be paid ondary ports directorate within the ministry of to the regulation of ownership and use of port transport that exercises the overall tutelage land under the law. A port authority may own on the national port system. the land or have a perpetual or time-specific Source: Author. right to use the land. Powers to act as a landlord may need to be specifically elaborated, as Box 7: Functions of Corporatized Port well as the limitations of such powers, such as Authorities the interdiction of the sale of port land. While he Polish ports law chose a straightfor- the authority is engaged in, or provides for, ward landlord model for its corporatized construction of operational infrastructure, the T port authorities. The functions of the enti- maintenance of such infrastructure constitutes ties managing the ports include the following: a duty for the authority. The ports law should • Managing land and infrastructure. specify the exact responsibilities of the port • Forecasting, scheduling, and planning port authority and those of the state with respect to development. investments in basic and operational infrastruc- • Construction, development, modernization, ture, maritime accesses, port access roads, and and maintenance of port infrastructure. rail and waterway infrastructure as well as • Acquisition of new land for port use. hinterland connections.

Generally, the objective of a port authority is to • Maintenance, rehabilitation, renovation, and efficiently and economically manage the port. In construction of operational infrastructure a public landlord port, its objectives should be (usually the construction of basic aligned with the macroeconomic goals of the infrastructure is a responsibility of the state). state and the needs of the region, such as the • Establishment of contractual (concession creation of jobs, strengthening of the economic or lease) and other conditions (public structure, and so forth (see Box 6). license) for private operators to provide port services. Fundamental port functions that should be considered in the law include (see also Box 7): • Coordination of berthing and unberthing of vessels. • Administration, management, and physi- • Ensuring public order in the port area. cal development of the port area. • Safeguarding the port environment. • Maintenance, rehabilitation, renovation, • Port marketing. and construction of basic and operational infrastructure. • Port security.

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2.4. Corporatized Ports—Special Considerations Box 8: Division of Shares in Corporatized Port Authority If a port authority is established as a joint stock ne example of a government seeking company, matters of share issuance and capital- to be directly involved in port manage- ization arise. The ports law should include Oment is Poland. Under the new ports clauses pertaining to the way this is handled, law, the Polish state retains 51 percent of the consistent with the provisions of relevant com- shares of its corporatized national ports, thus mercial, mercantile, and securities laws. exercising control over the board of directors, and gives these shares preferential treatment One key consideration is whether a government, in the event of liquidation of a port enterprise. The relevant clauses are as follows: national or local, intends to exercise direct influ- MODULE 4 ence in the port authority via its shareholder’s • “A joint stock company named ‘Port Authority of Gdansk S.A.’ shall be estab- rights (for example, the nomination of the chair- lished by the State Treasury, which will man of the board or the port director). In the retain at least 51 percent of the company’s event of a corporatized authority, the govern- shares whilst the Municipality of Gdansk ment or other public body usually owns 100 will hold at least 34 percent of the shares.” percent of the shares. In some countries, the • “A joint stock company named ‘Port shares are divided between a national govern- Authority of Gdynia S.A.’ shall be established by the State Treasury, which will ment, local government, and other public or retain at least 51 percent of the company’s private shareholders in such a way that the shares whilst the Municipality of Gdynia will involved public entities retain a majority voting hold at least 40 percent of the shares.” position. In some corporatized situations, vot- • “A joint stock company named ‘Port Authority ing shares can be allocated to private investors. of Szczecin-Swinoujscie’ S.A. shall be estab- Once private investors have a majority voting lished by the State Treasury, which will retain position, the port authority can be considered at least 51 percent of the shares, whilst the Municipalities of Szczecin and Swinoujscie as being privatized (see Box 8). will each hold 24.5 percent of the shares.” In general, due to the (semi) monopoly position • “The shares owned by the State Treasury of landlord ports and the public interests and the Municipalities are registered shares and have a preferential nature, establishing involved, it is not advisable to allocate shares to priority rights to port authority assets in the private investors. This may cause serious con- event of liquidation.” flicts of interest; private investors mainly seek to Source: Author. increase shareholder value whereas the public sector may take considerations of general interest into account. Also, flotation of all or part of initial shares could be determined on the basis the stock is not considered a viable option for of their book or market value, whichever is less. the same reason. Depending on the port policy of the country Capitalization can be effected through transfer concerned, limits can be imposed on the sale of by law of all relevant properties to the new port shares. In many cases a government may want authority. These might include all operational to retain the right to determine port policy. This infrastructure, related land, and superstructure, requires the possession of the majority of the including such assets as equipment and other voting shares, or of “golden shares.” A clause rolling stock. When a landlord port is created in the law guaranteeing such majority position together with a new corporatized port authori- should then be considered. ty, one or more separate operating companies with the legal structure of a limited liability 2.5. Implementation Problems company might be set up to take title to the Implementing a new ports law presents a superstructure and equipment. The value of the wide variety of issues and often results in

138 Legal Tools for Port Reform disagreements among the parties involved. The city. If a decree is required by the ports law, it major issues encountered in implementing new should be enacted at the same time as the law ports laws are described below. itself. 3. PORT AUTHORITY AND Effects of port reform on the existing work MODULE 4 force. Port reform is often triggered by over- TERMINAL OPERATIONS staffing at ports and restrictive labor practices. One important issue to be considered in port However, the objective of a new ports law is laws is the relationship between a port authority not labor reform, but port reform. Labor and port services providers, in particular the reform may be a by-product when a port must cargo handling companies operating in the rationalize its workforce to improve efficiency port’s territory. Generally, it is undesirable for a and reduce costs. A ports law might set condi- public port authority to be directly involved in tions for the transfer of personnel from the terminal operations. A port law may explicitly existing port authority to the new one. Since prohibit a port authority from providing cargo port reform is often accompanied by a reduc- handling services. A further step to avoid con- tion of the size of the port’s workforce, the flict of interest issues would be to prohibit a ports law may establish and regulate a port port authority from being a shareholder in a workers fund to soften the impact of labor terminal operating company located in its port force reductions. The fund can be used for area. Notwithstanding potential conflicts of redundancy payments or retraining programs. interest, a port authority with the overall Valuation of assets and the capitalization of a responsibility to develop the port area may new port authority. A valuation should be con- sometimes opt to make strategic investments to servative. Often, ports in the process of reform develop a sector of the port business (see Box 9). have to dispose of a large variety of outmoded There is an increasing trend for port authorities, equipment and poorly maintained port infra- particularly in the event that there is only one structure and buildings. This obsolescence and major terminal in a port, to acquire minority maintenance backlog must be fully taken into shareholding (say 10 percent) in the special pur- consideration when assessing the value of the pose vehicle (or operator) constructing a termi- port’s assets. Otherwise, private sector bids in nal under a concession or BOT agreement. port privatization may reflect significant dis- There are commonly two reasons for taking counts as the bidders take into account the need shares: to pay for the substantial investments that will • The port authority wants to participate in be required to modernize and upgrade the infra- the future profits of the terminal, and this structure. equity participation partially offsets some Replacing top management. Ports functioning concession fees. within the framework of competitive markets • By acquiring shares, the port authority require a different management ethic to lead the has the legal right to get inside informa- difficult reform process and steer the new port tion on the accounts and profits of the authority safely through the shoals of competi- terminal operator. This is useful when tion and other commercial activities. part of the income depends on throughput Creation of a clear definition of the port area. (concession or TEU [twenty-foot equiva- This definition should be established at the out- lent] fees), which is usually the case in set of reform and not be postponed to a later concession agreements (see Box 9). date (for example, until later decree of a council The situation becomes more complicated when of ministers). Significant differences of opinion a port accommodates more than one major often arise with port cities as to which areas are terminal competing against each other. In order part of the port and which areas are part of the not to compromise its independent position as

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because it usually has the legal power to revoke Box 9: Violated Neutrality: A Port Director licenses for violations without administrative with Two Hats appeal. n 1998, the shareholders of Rotterdam’s largest container terminal, ECT (Europe The law may authorize the issuance of public IContainer Terminals), decided to put the licenses to operate terminals. Because public company up for sale. Agreement was reached licenses require extensive oversight by the port with Hutchison Port Holdings from Hong authority and reporting by the licensee, their Kong to buy the terminal. To protect Dutch interests, the Municipal Port Authority, together utility should be balanced against the bureau- with the Dutch ABN-AMRO Bank, retained the cratic burden for the port authority and the majority of the shares, although Hutchison port licensees. The same goals may be better gained operational control of the terminal. The MODULE 4 achieved through concession or leasehold port director of the Rotterdam Municipal Port contracts, as these are more flexible for both Authority was nominated as a member of the Supervisory Board of ECT, apparently in a parties. However, in the event of inclusion of a move to exercise as much local influence as public license authority in a ports law, rules possible. This, however, clearly violates the should be set for transfer, renewal, and neutrality of the port authority because the cancellation of a license. Unlike for a concession port director: or lease, where breaches are matters of • As a public servant must represent the contract and law, license breaches fall under interests of the entire port. administrative (or even criminal) processes for • Must advise the municipality on matters their resolution. involving competing container terminals in the port. In this regard, the following reference text may • Has the legal task as a board member of be used: ECT to represent and defend the interests of the company and its personnel. No person shall provide: (i) any marine service • Has to advise the municipality about public or facility; or (ii) any port service or facility, investments, including those regarding the unless he is authorized to do so by a public ECT terminal. license granted by the port authority. The combination of potential conflicting functions may result in loss of confidence by the Every public license granted by the authority local port community. shall be in such form and for such period and Source: Author. may contain such conditions as the authority may determine.

the landlord, a port authority should either Usually, a corporatized port authority does not possess shares in all terminals or in none at all. have the power to grant a public license. It can only set conditions for the provision of port 3.1. Licensing services under commercial contracts (such as A port authority might be authorized to exer- leases, rent contracts, or concessions) with port cise licensing and regulatory functions with service providers. respect to marine and port services and facilities. Regulation of marine activities is related to 3.2. Marine Management the harbormaster’s function, as well as to the Marine management tasks form part of either a transport of dangerous goods and protection of national maritime administration or of a public the environment (such as rules pertaining to dis- port authority. Marine management, which is charge of ship wastes into port waters, tank essentially a public safety task, should be cleaning, and the use of port reception facili- performed separately from a corporatized or pri- ties). The licensing power of the port authority vatized port authority to prevent a conflicting with respect to port services can be extensive mix of commercial and safety objectives. A ports

140 Legal Tools for Port Reform law should make that separation of objectives • To exercise regulatory functions for the clear. Because of overriding safety concerns, protection of the marine environment. which may run counter to the profit-making • To discharge or facilitate the discharge of objectives inherent under this type of port international obligations of the port authority, combining marine management tasks MODULE 4 authority with respect to marine safety with managing a corporatized or privatized port and protection of the environment. may not be the best option for managing navigational port safety (see Boxes 10 and 11). • To promote measures for the safety of persons who work at or visit the port. The function and duties of a port authority regarding marine safety and environmental pro- • To combat or to provide for combating tection are: marine accidents in the port, including fire fighting and ambulance services. • To regulate and control navigation within • To secure public order in the port area the limits and the approaches to the port. and to exercise police functions in coop- • To disseminate nautical and other rele- eration with the civilian police authority. vant information to ships and all other • To play an important role in the provi- involved parties. sion of security within the framework of • To control maritime transport and load- the ISPS (International Ship and Port ing and discharging of dangerous goods. Facilities Security) Code.

Box 10: Maritime Domain: A Potential Impediment to Port Development European country enacted a ports law in land that are by their nature intended for public 1996 that included port land and even maritime use or are declared as such. Ainland terminals as the “Maritime In respect of these Articles, the following Domain.” This concept developed among shall be considered as the Maritime Domain: Mediterranean countries to protect local coast- the seashore, ports and harbors, breakwaters, lines from undue commercial exploitation. embankments, dams, sandbars, rocks, reefs, However, the inclusion of ports has potentially mouths of rivers flowing into the sea, sea far-reaching negative effects for the commer- canals, and live and inanimate natural cialization of port operations and may seriously resources (fishes, minerals, etc.) in the sea and impede the reconstruction of the national ports in the marine subsoil.” sector. Article 51: “There is no property or other pro- Proposals are under consideration to put prietary rights in the Maritime Domain on any the port sector on a normal commercial foot- basis. ing, but the current law is still valid. The main Anyone is free to use and/or to be benefited issue to be resolved is the current law’s provi- by the Maritime Domain according to its nature sion that no private property is allowed in the and purpose in conformity with the provisions Maritime Domain. Relevant articles from the of this law. basic provisions included in the Maritime Domain are listed below. Special use and/or economic exploitation of a part of the Maritime Domain may be conced- Article 48: “The Maritime Domain is the public ed to physical and legal persons (concession) estate of interest to the Republic of ..., is under provided that such use is not in contradiction its special protection, and shall be used and/or with the interests of the Republic of ... exploited under the conditions and in the manner prescribed by law.” Special use of the Maritime Domain is any use that is not general use or economic Article 49: “The Maritime Domain includes the exploitation of the marine domain.” internal waters and the territorial sea, its seabed and subsoil, as well as parts of the dry Source: Author.

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Box 11: Marine Management Tasks to be Box 12: Harbormaster’s Powers and Separated from Corporatized or Privatized Functions Port Tasks The statutory powers and duties of the har- • Control and coordination of vessel move- bormaster are the focus of a port authority’s ments in the port and the port approaches. safety function. They can be incorporated in a • Monitoring of the pilot organization. ports law or be included under a Maritime Code with a cross reference in the ports law • Dissemination of nautical and operational to such provisions. information to all concerned parties. The harbormaster may: • Provision of safe berthing practices. • Ensure compliance with laws and regula- • Control of handling and storing dangerous tions on nautical safety and international

MODULE 4 cargoes and control of safe loading and conventions aboard a vessel, including fish- discharging practices. ing vessels and other categories of vessels • Keeping law and order (together with the regardless of flag and affiliation. regular police). • Provide for verification of vessel documents • Combating marine accidents and coordina- and of necessary qualifications of the crew. tion of search and rescue operations. • Regulate, restrict, or prohibit the move- Source: Author. ments of vessels in the port and in the approaches to the port. • Register a vessel’s arrival in and departure If the harbormaster’s function forms part of a from the port. national maritime administration, its powers • Direct a pilot service and when necessary and duties are usually regulated in a Maritime assign a pilot to a vessel in regions not Code. Often, however, the harbormaster (port requiring compulsory pilotage. master or port captain in some jurisdictions) is • Direct where any vessel may be berthed, moored, or anchored and the method of part of a port authority’s organization. If so, the anchoring (only when dealing with public ports law or relevant port bylaw should include quays). a section dealing with the specific powers and • Give directions to a vessel or terminal duties of this function. Generally, the harbor- to ensure safe transport, loading, and master may issue general and specific directions discharging of dangerous goods in the port. to shipping within the framework of its powers. • Inspect a vessel within the framework of The harbormaster is usually the operational Port State Control. commander responsible for marine safety and • Ensure the keeping of law and order in the for combating the effects of incidents involving port area. ships or terminals. At the same time, the har- • Coordinate the combating of marine or bormaster is involved in regulating traffic and other incidents. acts as the main nautical adviser to the port • In the event of any risk for loss of human authority’s governing board (see Box 12). life or damage to any property, direct the removal of any vessel from any place in the 3.3. Financial Issues port area to any other place and the time within which such removal is to occur. It is very important to regulate a port authori- • Declare berths, locations, anchorages, and ty’s financial powers and have them conform fairways that may be used by vessels and the with applicable fiscal and public administration areas that are prohibited or restricted areas. laws. A port authority, whether public or private, Source: Author. may do very well in attracting investment, especially from private sources, if it is managed financial rules and regulations as other parts of like a commercial business. Many ports, however, the public administration. This is particularly are part of an overall state, regional, or the case for a public service port authority, municipal structure and subject to the same where the administrative costs of burdensome

142 Legal Tools for Port Reform procurement procedures can be high, as for elements (including shareholders’ example when a cabinet of ministers is the only dividends and a reasonable profit). body authorized to approve the purchase of • The port authority can take loans and quay cranes or other high-cost equipment. issue bonds and securities. MODULE 4 Another issue that may hamper efficient port 3.4. Violations management is a legal provision that requires approval of long-term concession agreements A ports law may explicitly list a number of by a council of ministers, or even a parliament, specific administrative, civil, and criminal as is the case for instance in Croatia and offenses and empower the public port authority Yemen. A central government may define a to assess fines for their violation, subject to general policy with respect to concession administrative or judicial appeal. Such offenses agreements in the port sector, but should may pertain to: not interfere in the detailed negotiations on • Damage to port authority property. concession agreements, which should (preferably) be conducted by a port authority. This • Unlawful operation of port services. obviously also applies not only to service ports • Evasion of dues. but also to landlord ports. • Unsafe operation of vessels. Since a port is a functional and economic entity • Pollution of the marine environment. that often operates in a competitive market, clear financial powers for port management 3.5. Appealing Port Authority should be included in a ports law. These include Regulations the powers to: In most ports, safety and security regulations • Levy charges, rates, and fees. are spelled out in port bylaws. Regulations in the bylaws have a public character and bind all • Make a reasonable profit. operators in the port area. However, a port • Take loans and issue bonds and securities. authority may decide to issue specific regulations in addition to those which can be found in • Establish its own procurement rules. the bylaws. In that case, the operator should • Keep financial records and to present have an opportunity to appeal the application annual audits conducted by independent of such regulations, especially if their applica- accountancy firms. tion will result in significant economic harm to the operator. Examples of legal language used to define certain aspects of financial authority include: Provisions of the concession agreements may further provide the operator with the opportu- • Ship and port dues and charges and nity to request an expert opinion binding both income from real estate, whatsoever their parties. Pending the decision of the experts, the nature, arising in the port domain, are contested regulation of the port authority earned and destined for the port authority, would be suspended. The general rules for arbi- with exclusion of all other authorities. tration of disputes contained in the concession • The tariffs are determined by the port agreement may also apply to this section (see authority. The proceeds of the tariffs shall Box 13 and Box 14). be sufficient to meet the financial needs of the port, including operational expenses, 3.6. Liability for Damages the maintenance of assets, the payment of The respective liabilities associated with occu- interest, allocation for depreciation of pancy and use of the site must be clearly pre- assets, and other standard commercial sented in leases and concessions. Generally, the

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operator pays for all damage caused to the site Box 13: Reference Clauses on General by mooring or unmooring of vessels or during Regulations of the Authority cargo handling operations. In a landlord port, hen using the site, the Operator shall the port authority is responsible for maintenance observe all regulations given by the of the quay wall. The responsibility for damage Authority and/or any other compe- W is therefore limited for a mutually agreed period tent government entity: after a vessel arrives at the quay wall (or pier). • For promoting safety in general. Damage to the port authority’s property by a • To avoid and combat fire in particular. vessel can usually be recouped from a marine • To avoid danger, damages, injury, or nuisance. insurance company. The operator may be • To avoid pollution of or damage to the envi- required to pay for damage even if acting pur- ronment and excess taxation of the soil. MODULE 4 suant to orders or instructions of officers (such Source: Author. as pilots) of the port authority (see Box 15).

Box 14: Reference Clauses on Specific If a port authority carries out marine services, Regulations of the Authority such as pilotage, towage, and other related activities (for example, vessel traffic [radar] hould the Operator object to the regulations given by the authority in respect to services), liability for the effects of default, neg- Sthe use of the concessioned/leased ligence, or any other wrongful act should be property as referred to in the previous para- limited as much as possible. Therefore, the law graph, and which are not given by virtue of any might contain a clause outlining such a limita- power or obligation contained in a government tion. Examples of such a clause are: regulation or port bylaw, then the decision of three experts shall be binding in respect of the question whether, or to what extent, those regulations are necessary and reasonable. The provisions on Arbitration mentioned in Section Box 15: Reference Clauses on Damages [number] are equally applicable. he Operator shall be liable to pay for all The Operator may invoke the decision by damages that are detected in the prop- experts within six weeks after the day of dis- Terties of the Port Authority during the patch of the letter with which the Authority time that the berth is used by a vessel or dur- notified the Operator of the regulations ing the three months thereafter. The Operator referred to above. shall only be released from that obligation if Pending the decision of the experts, the and to the extent that he proves that this implementation of the regulation given by the damage can be attributed to a cause other Authority in respect of the use of the conces- than the one referred to. sioned/leased property shall be suspended The Operator shall also be liable to pay for without releasing the Operator from the finan- all damages that are detected at a later stage, cial or other consequences arising out of the which may have been caused to any Port noncompliance with the regulation. Authority property as a result of such use, The costs of the aforesaid experts shall be without it being able to invoke that he did not for the account of the party who is held to be act contrary to any order and/or instruction in the wrong, while, if the parties are both given by officers authorized by the Port held to be in the wrong on one or more Authority to do so. points, these costs shall be divided by the If, in the opinion of the Port Authority, as a experts in a fair and reasonable manner. result of any use of the site, including the The experts shall be notified of the provi- quay wall, damage is caused to the site, the sions of this agreement to the extent that hav- bank protection or port works and/or the ing them is important for the conduct of their sites, or bank protections or port works in the work. By accepting his appointment, an expert vicinity of the leased property, the Operator subjects himself to the aforesaid conditions. shall pay the repair costs of such damage. Source: Author. Source: Author.

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• Notwithstanding the grant of any public license, the port authority shall not be Box 16: Reference Clauses on Liability liable in any circumstances for any injury, he Operator shall be deemed to be in loss, damage, or cost sustained by any charge of goods deposited in its custody as from the time that: person as a result of any default or omis- T MODULE 4 sion of any public license or any agent or • It has taken the goods from the shipper or any person acting on his behalf up to the employee of the licensee. time the goods are shipped or otherwise • The port authority shall not, where, with- disposed of. out its actual fault or privity, any loss or • The goods are discharged from ships up to destruction is caused by any vessel or to the time of delivery to the consignee or any person acting on his behalf or until final any goods or other thing whatsoever on disposal. board a vessel, be liable for damages • Transshipment containers/goods are beyond an aggregate amount [currency received up to the time they are reshipped. of country] for each ton of the vessel’s The Operator shall indemnify the Authority in tonnage. respect to any liability the Authority may incur for loss and/or damage to goods in custody Inclusion of such provisions should be consid- of the Operator. ered in light of the overall goals for port devel- Source: Author. opment. For example, limitations of liability may have a chilling effect on some investors, who would have to seek someone other than the port authority to assume liability risks that Because port regulations are dependent on spe- exceed the limit. Therefore, the port authority cific local circumstances, development of gener- should be provided with the power to waive ally applicable port regulations is not feasible. such liabilities or readjust the liability limit. Therefore, in this section only a selection of the most important issues is discussed. Another liability to consider is concerns the loss or damage of goods. The concession or lease 4.1.1. Vessel Traffic Management agreement should hold the operator liable for goods deposited in its custody during port oper- Vessel traffic management focuses on the safe ations. The operator should indemnify the port passage of vessels through the port area. Traffic authority against liability for goods at the ter- density in a major port—especially in the case minal (see Box 16). of sea-going and inland vessels using the same port waters—may require an elaborate system 4. PORT REGULATIONS of traffic regulation and management. This system comprises four principal elements: 4.1. Port Operating Regulations • The vessel with all its sophisticated com- Port regulations (port bylaws) are usually issued munication and positioning equipment, by a public port authority and have a legal such as satellite communication and anti- basis either in a specific law such as a Maritime collision radars. Code (as in Azerbaijan), a port law (as in Singapore), or a municipal law (as in • The available port facilities, such as ves- Rotterdam). Port bylaws are generally well sel traffic systems and modern aids to considered and provide very detailed regulations navigation, often with advanced features relating to the conduct of vessels, safety, and such as centralized digital radar displays, order in the port area; the protection of the collision prediction, and CCTV (closed environment; the use of pilots; documentation circuit television) as well as pilot boats, of disembarking passengers; loading and patrol boats for traffic control, tugs, and discharging of goods; and crisis management. mooring boats.

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• Clear traffic regulations consistent with Generally, the harbormaster (or port captain) is International Maritime Organisation responsible for maintaining good order in the (IMO) conventions (if applicable) as port area, often in cooperation with specialized well as long-established communication port police, and, in emergencies, with the regu- procedures. lar police, fire brigade, and ambulance services.

• Well-motivated and trained pilots, traffic 4.1.4. Reporting and Communication and radar operators, patrol boat crews, tug crews, and other shore personnel. Part of reporting and communication with the harbormaster (or port captain) is standard, such Provisions regarding these issues are found not as vessel entry and departure. Expected time of only in port regulations, but also in pilotage arrival at the port is usually reported at least 24 MODULE 4 laws and regulations, vessel traffic regulations, hours prior to arrival and regularly updated. and IMO conventions. Departure of a ship from berth is usually reported 4.1.2. Pilotage to traffic control three hours before unmooring. There are special procedures for reporting danger- The sea or harbor pilot is the first representa- ous or noxious substances carried by the ship. tive of a port encountered when a sea-going Border police and customs require a host of docu- vessel enters port waters. The pilot acts as ments. In the event that a country is a member of adviser to the captain during the ship’s transit. the Port State Control Agreement, the port The efficiency of the pilot service is of major authority controls ship documentation to prevent importance both for port safety and efficient substandard ships from using the port. Rules traffic management. should be made by ports for captains or agents to inform the harbormaster or Captain’s Room in a 4.1.3. Order and Safety in the Port timely manner about goods loaded or discharged Since it is not feasible to mention all port regu- at the terminals, especially with respect to danger- lations on port safety, only those provisions that ous and noxious cargoes. Reports must also be are of general application are listed here. The made to the appropriate authority concerning any main subjects are: accidents or incidents that occurred on the vessel when calling at the port or alongside a berth. • Berthing requirements. Reports are usually made to the Captain’s Room • Manning of a vessel when at berth. of the port or marine authority responsible for • Shifting of ships. disseminating the relevant information to all parties concerned, such as the terminal of desti- • Use of anchors. nation, the tug company, the boatmen, customs • Use of stern- or bow-thrusters when and immigration, ship chandlers, and others. alongside. Information is often entered into a port system serving the entire port community (see Box 18). • Air pollution from vessels. Data communication between ship and port • Repairs aboard and alongside ships. authorities is increasingly conducted electroni- • Transport, handling, and storage of dan- cally via satellite communication devices (GPS or gerous, hazardous, or harmful goods. Internet). Modern ports increasingly accept messages only in digital format. • Reporting and removing substances and objects floating in port waters. 4.1.5. Dangerous Cargoes: Transport and • Fumigation of ships. Handling • Ships causing serious danger, damage or Over the last four decades, the IMO has been hindrance (see Box 17). recognized as the principal forum for all matters

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Box 17: Reference Clauses on Port Safety and Environmental Protection Air Pollution • It the works cause danger, damage, or hin- t is prohibited to allow smoke, vapors, drance.

fumes, dust, or steam to escape from a ves- The above shall not apply when a ship is MODULE 4 Isel, which cause or may cause danger, harm, berthed at a shipyard licensed to carry out hazard, damage, or hindrance within or outside such works. the port area. The injunction shall only be imposed when The Port Authority shall publish the names of it has become apparent that conditions substances that may cause unacceptable imposed by the Authority have not been com- stench or hindrance when being loaded into or plied with or, in the opinion of the Authority, no discharged in bulk from a vessel. It is prohibited effective measures can be taken to prevent or to load or discharge such substances unless end the situation of danger, serious damage, the Port Authority has issued a license to do so. or serious hindrance to the port area and/or Removing Objects and Substances from the the nearby population. Port Water Fumigation of Vessels When a person by fault or negligence intro- It is prohibited to use or cause to be used duces an object into port water, hereby caus- gases on board a vessel for the purpose of ing danger, hazard, harm, or hindrance within disinfecting ship and cargo without a license or outside the port area, he shall ensure: issued by the Port Authority. • That the harbormaster is informed without A vessel that used gases for disinfecting delay. ship and cargo is prohibited from berthing or • That the object or substance is removed being alongside a berth unless a declaration from the water immediately, unless this is from a licensed expert has been issued stating not practically possible. that the vessel is gas free. The port authority may issue further detailed Danger, Harm, Damage, or Hindrance from regulations in order to prevent pollution of port Vessels waters. The Port Authority may impose an injunction Execution of Repair Works on Board on the vessel to enter port, to berth, or to remain alongside a berth if the vessel, in the It is prohibited to execute or cause to execute opinion of the Authority, causes or may cause works on board a vessel with respect to reno- serious danger, harm, damage, or hindrance to vation, repair, or maintenance in the following the port area and/or the nearby population. cases: Reporting Data on Security • When a ship is berthed in a Petroleum Harbor and the works cause open fire • International Ship Security Certificate (ISSC) and/or sparks. number. • When is ship is carrying dangerous goods or • Date of issue/expiry. when it concerns a tanker for which no • Name of organization issuing the ISSC. cleaning certificate has been issued. • Name of ship security officer. • If the works are impairing a vessel’s readi- • Ship security threat level. ness to maneuver. Source: Author. affecting the safety of shipping. The transport be consistent with IMO rules as much as of dangerous cargoes has been one of IMO’s possible. main responsibilities since its founding in 1958. Its rules, requirements, regulations, It is estimated that more than 50 percent of standards, codes, guidelines, and recommen- packaged goods and bulk cargoes transported dations have been implemented by port by sea can be classified as dangerous, haz- administrations all over the world and are fol- ardous, or harmful. Some of the substances lowed and observed by both port authorities transported are dangerous or hazardous as a and the ports industry. Port regulations should matter of safety and are also harmful to the

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Box 18: Reference Clauses on Reporting Arrival and Departure Master of a vessel: The Master of a vessel shall inform the harbor- • Name and call sign of the vessel and the master of: International Maritime Organisation (IMO) • The ETA of the vessel at the port at least 24 identification number, if applicable. hours before arrival. • Nationality of the vessel. • The shifting of the vessel in port at least • Length, breadth, and draught of the vessel. three hours prior to such event. • ETA in port or at the pilot station, as required • The vessel’s departure from port at least by the competent authority. three (two, one) hour before unmooring. • Expected time of departure (ETD). • Planned route.

MODULE 4 • Damage to the vessel, the equipment, machinery, and other items that may impair • The correct technical names of dangerous or maneuverability of the vessel and that may polluting goods, the UN (United Nations) endanger the safety of the port area and/or identification numbers, where applicable the the nearby population, directly upon occur- IMO hazard class in accordance with rence of such incident. International Maritime Dangerous Goods • Other data required by the harbormaster in (IMDG), International Bulk Chemicals (IBC), connection with the vessel’s presence in the and International Gas Carriers (IGC) codes port area. and the type of vessel as described in the International Code for the Safe Carriage of Notifications shall be made in digital form to Packaged Irradiated Nuclear Fuel (INF the address determined by the Port Authority. Code), and the quantities of the goods and Dangerous Goods their location on board. In the case such The Port Authority may require reporting data goods are transported in tank or cargo con- on dangerous cargoes loaded to or discharged tainers; their identification marks and signs. from vessels in the port, or from vessels that • Confirmation that a cargo list, manifest, and have not been cleaned from such substances. suitable stowage plan is available on board The Port Authority may also require when that accurately lists the dangerous and pol- and in what manner these data shall be pro- luting cargoes carried on board as well as vided to the Authority. their location. Reporting Data on Dangerous Goods • The number of crew members on board. The following data shall be provided by the Source: Author.

marine environment, other cargoes are haz- dangerous to the public. Often, handling liquid ardous only when carried in bulk, and some cargoes such as oil, oil products, gasoline, or dan- may be considered harmful to only the marine gerous chemicals may only take place in designat- environment. Between 10 percent and 15 per- ed harbor areas or zones that do not pose a threat cent of the cargoes transported in packaged to nearby population centers (see Box 19). The form, including freight containers, bulk packag- entry and presence of dangerous, hazardous, and ings, portable tanks, tank containers, road harmful cargoes in port areas and their attendant tankers, trailers, unit loads, and others, fall handling should be fully controlled to ensure gen- under the above categories. eral safety. The passage of ships carrying dangerous cargoes is a critical responsibility of the vessel Generally, port regulations may require a license traffic system. Ships loading or discharging dan- for handling specific cargoes. With respect to ves- gerous cargoes are usually regulated by an expert. sels loading and discharging dangerous cargoes, port regulations usually include detailed provi- Cleaning of ship holds still containing residues sions. The port authority may prohibit loading, from dangerous cargoes may need to be sepa- handling, and discharging of dangerous cargoes in rately regulated and controlled. Disposal of oil harbors where such activities would be especially and chemical wastes should also be strictly

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sites. In the event of industrial or chemical sites Box 19: Reference Clauses on Loading and located in the port area, the port authority Discharging Dangerous Cargoes should also be fully informed about possible he authority shall make regulations for dangers and risks with respect to explosions

the transport, loading, handling, or dis- and damage to the environment. MODULE 4 T charging of dangerous, hazardous, and/or harmful goods in the port and the 4.1.6. Pollution and Reception Facilities approaches thereto. Such regulations may concern, inter alia: The goal of MARPOL is to prevent pollution • Documents to be presented to the harbor- from ships. This has been widely adopted master. throughout the world. It obligates signatory • Berthing requirements, including tug assis- states to ensure the provision of adequate port tance. reception facilities for waste that can be used • Security and supervision. without undue delay. National legislation imple- • Fire prevention and accident control. menting the convention usually places responsi- • Activities that may cause danger, hazard, bility for ensuring such provision on port and/or hindrance. authorities. Many ports meet the obligation by • Loading and discharging of cargoes. allowing suitable, qualified waste management • Incident reporting. contractors to offer services. In such cases, the The Authority may prohibit loading, handling, authority is responsible for thorough quality or discharging of dangerous good at wharves control at the facility. Cleaning facilities for oil or docks where such loading, handling, and and oil wastes can often be economically discharging appears especially dangerous to the public. exploited. However, cleaning facilities for chemical wastes generally do not offer by-products Source: Author. that can be extricated and marketed by a waste management contractor. controlled and carried out through installations owned or controlled by the port authority in An important issue to consider is whether the accordance with the International Convention port will merely facilitate the provision of these for the Prevention of Pollution from Ships services directly to ships through licensed, quali- (MARPOL 73/78) on port reception facilities. fied contractors or provide the facilities itself (shore facilities and collection barges, if neces- With respect to vessel management, the port sary). In the latter case, the port is responsible authority may regulate the navigation and place for the effective removal of waste materials of anchoring or mooring of vessels carrying (see Box 20). dangerous goods. It also might regulate the 4.1.7. Regulation of Other Port Functions mode of utilizing, stowing, and keeping dangerous cargoes on board vessels and the A variety of other aspects may be regulated by a conveyance within the port of any kind of port authority under a ports law, such as: dangerous cargoes with any other kind of goods, articles, or substances. • Inquiries with respect to any case where damage has been caused by or to a vessel Finally, a port authority should have full infor- in port. mation about the type and amounts of danger- • Keeping and placing buoys, beacons, and ous goods in the port area and about locations other navigational aids as well as provi- where those goods are stored or handled. sion and maintenance of lighthouses. Detailed regulations should be issued by the port authority or the competent environmental • The landing of personnel belonging to an agency with respect to location and segregation armed service. of dangerous cargoes on terminals or industrial • Cleaning of basins, works, and premises.

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• The use and manning of harbor craft Box 20: Reference Clauses on Waste (sometimes requires fire-fighting Management capabilities). o person shall provide any waste handling facility-cum-collection service • Provision and maintenance of pontoons. Nunless he is authorized to do so by a • Manning and use of tugs and boats. public license granted by the Port Authority (or Environmental Agency). • Special police powers for patrol boat per- Every public license granted under this sonnel (may also be included in the har- section shall be in such form and for such bormaster’s function). period and may contain such conditions as the Authority may determine. • Disaster control and emergency commu-

MODULE 4 A public license for the exploitation of a nication procedures. waste handling facility may include conditions • Fire-fighting procedures and operations. requiring the public licensee: • To comply fully with the requirements of the • Prohibiting the embarkation and disem- MARPOL 1973/78 on adequate port recep- barkation of persons except at such tion facilities, especially with regard to places as may be authorized by the port Annex I (Oil), Annex II (Noxious Liquids), authority. Annex III (Packaging), Annex IV (Sewage), and Annex V (Garbage), if and when appli- 5. PORT COMPETITION cable. MODALITIES • To prepare itself to deal with any emergency threatening the health of the popula- There are three categories of port-related com- tion and the pollution of the environment. petition. Interport competition arises when two • To comply with any rules, regulations, pro- ports in the same or in different countries com- cedures, and standards as specified in the pete for the same cargo. The scale of interport license or which are given by a competent authority. competition often depends on the size of the hinterland of the concerned ports. For example, • To allow control and inspection of facilities and administration by any competent Rotterdam competes with Antwerp, Hamburg, authority at all times. and Bremen for cargoes destined for Central Subject to this Section, the Authority may mod- Europe. Transshipment container trade compe- ify the conditions of the public license granted. tition often concerns an entire region; for exam- Any public licensee aggrieved by the modifi- ple, in the South Asian region, the port of cation of conditions by the Authority under this Colombo is competing with Singapore, Tanjung subsection may, within 30 days of the receipt of Pelepas, Dubai, Salalah, Aden, and possibly in it, appeal to [Court] (ask for arbitration). the future with Vallarpadam. Intraport competi- The Authority may give directions for or tion refers to a situation where two or more with respect to standards of performance and terminal operators within the same port area procedures to be observed to ensure the reliability and the environmental friendliness of compete for the same type of cargoes. the facilities and the waste collection, as well Intraterminal competition refers to two or more as the prevention of undue delay to vessels. (stevedoring) companies competing within the Any person who fails to comply with any same terminal. This situation is rare and usually direction given under this section shall be only exists within small ports operating under the guilty of an offense. service port model with independent stevedores. It shall be the duty of the public licensee to provide environmentally acceptable, reliable, In general, intraport competition is favored by efficient, and economical services to the ship- both government and port users, but is not ping community in accordance with the provi- always feasible. It depends on the volume of the sions of public license granted to it and the directions of the Authority. cargo, which may not be sufficient to allow two or more operators to run a profitable and

150 Legal Tools for Port Reform effective business. Establishing competition in • Monopoly situations, which are most likely the port sector requires four steps: to occur in medium size or smaller ports. In many ports, only one container or oil termi- 1. Assessment of sector unbundling, espe- nal exists. Generally, when a monopoly or

cially in the case of a public service port. merger situation is not in conflict with the MODULE 4 This relates to the financial and economic public interest, it may be permitted. feasibility of creating more than one terminal handling the same commodity. A port competition regulator should only be established in the event of serious threats to 2. Implementation of the new port manage- competitive behavior within the port. It should ment structure, if and when required. preferably have the character of an arbitrator 3. Conclusion of concession or lease agree- rather than a court of law, and be accepted by ments that include tariff regulation mech- the port community as being independent. In anisms, if required by the absence of the case that boundaries between port authori- intraport competition. ties and terminal operators are vague or nonexistent (when a port authority not only runs its 4. Introduction of regulatory oversight by own container terminal but also owns shares in the government (port competition act), a competing facility, as is the case in Sri Lanka), a but only with respect to those tariffs that regulator might be a solution for guaranteeing a relate to a monopolistic market situation. level playing field for all port operators. A When intraport competition is muted or regulator, however, should not jeopardize the absent, the terminal operators (whether public legal powers of port authorities to operate or private) have an incentive to use their freely in the market or the ability of a terminal monopolistic market position to charge high operator to negotiate tariffs with its clients. tariffs (particularly for captive cargoes), which Box 21 discusses the consequences of over com- may justify regulation. The need for such petition in ports with insufficient volume, high- regulation may lead to the creation of an lighting the case of the Port of Buenos Aires. independent port competition regulator. This regulatory function is usually instituted by law. In a landlord port model, the public port authority itself is the first to exercise control The main objective of the regulator is to ensure over excessive pricing by marine or port services fair competition among competing operators in providers. A well-devised concession agreement the port; control monopolies (including public still constitutes the best means to prevent an ones) and mergers; and prevent anticompetitive operator from misusing monopoly power. practices. Generally, a port sector regulator has legal powers to interfere in anticompetitive In Module 6, a detailed analysis is provided practices such as: concerning port regulation, including competition regulation. The next section emphasizes the • Use of a dominant position to prevent or legislative aspects of such regulation. lessen competition. 5.1 Legal Structure of Port • Cross-subsidization from monopoly services to contestable services, where it Competition Regulation threatens fair competition. The introduction of a port competition act is only deemed necessary in the event that inter- • Price fixing among competitors. and intraport competition is absent or not suffi- • When a firm or a person providing port ciently developed to prevent monopolistic services pursues a course that of itself has behavior, either by a port authority or a port or is intended to have the effect of restrict- operator (see Box 22). Reasons for introducing ing, distorting, or preventing competition. regulation in this respect are:

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Box 21: The Buenos Aires Case n 1993, bid documents were issued by the The current rate-of-return to terminal opera- Argentine government offering concessions tors in Buenos Aires is beneath average long- Ifor six terminals in Buenos Aires (Puerto term cost of the provision of the services by Nuevo). The bid was for six conventional finger segmenting the market into four operators. Each piers of which two piers (numbers 1 and 2) terminal incurs considerably higher costs than could be bid as one. This resulted in five oper- the combined average cost of one large opera- ating concessionaires of which one had to tor. The clients have been denied access to close down within 13 months after starting services provided in the most effective manner operations. From the remaining four operators, possible. one specialized in general cargo and bulk, and Moreover, the three terminals operating in three in container handling. The story of

MODULE 4 Puerto Nuevo suffer unfair competition by the Buenos Aires was told in September 1998 by operator Exolgan at Dock Sud, operating at the Trevor H. Bryans of P&O Ports during a World Provincial Administration. It is estimated that Port Privatization Conference in London. the commercial advantage to Exolgan is “Unbeknown to the Puerto Nuevo bidders at approximately $40 per box. The commercial the time of submitting the bid, another conces- advantage to Exolgan arises from the following: sion was to be granted for container operations. • The ‘Tasas a la Carga,’ payable by A fourth container terminal, called Exolgan, was importers/exporters to the terminal, which is developed at Dock Sud, only 8 km from Puerto then passed on to the Federal government, Nuevo. This area falls under the Buenos Aires does not apply at Exolgan. The ‘Tasas a la State Province jurisdiction, and not under the Carga’ is $3 per ton on import cargo, and $1 Federal government. The position then was that on export cargo. It is collected by Exolgan, there were four container terminals in the Port of but not passed onto the Province. Buenos Aires, to handle 500,000 containers, fur- • Under the terms of the bid in Puerto Nuevo, ther reducing the size of the cake, and casting the Concessionaires had to absorb a pro- considerable doubt on the achievability of the portion of the waterfront and AGP labor. In commitments made in winning the concessions. the case of TRP, this amounted to almost The issue of competition, and how it is 900 people, although the terminal only addressed in government policy, is an issue, required 430. Reducing this labor to the which is fundamental to the success of privati- required number cost in excess of $10M. zation. Competition becomes an obsession with Exolgan was not required to absorb any of port authorities planning for privatization. Ports the redundant or surplus labor, although that with insufficient volume to support one efficient labor was originally employed at Dock Sud. operator, look to bid two or more concessions. • Volume commitments were made by the The Port of Buenos Aires is a perfect example Puerto Nuevo terminals as part of the bid. of this obsession with competition, which has led Shortfalls in these volume commitments to overcapitalization, five concessions have been must be paid for by the operators. No similar let, and there is only sufficient volume for two, or commitments were required from the opera- at the most, three efficient container terminals. tor at Exolgan. As mentioned previously, the operator who • The rental fee payable to the Province by won the concession of terminal 6 has gone Exolgan is payable for the quay area only; bankrupt, mainly as a consequence of lowering the remainder of the land is free-hold. tariffs to subeconomic rates to retain business, • Stringent performance guarantees and bonds and since the early part of 1995 a savage price had to be made by the operators in Puerto war developed, which has seen average-per-box Nuevo, and stipulated insurance costs cov- revenues plummet from $400 preprivatization to ered. This was not the case at Exolgan.” less than $200 today, and they are still falling. Source: Author.

• A port authority not only functions as a Ports Authority owns and operates the landlord, but also provides stevedoring Jaya Container Terminal, which competes services or operates a terminal. The latter is with the privately operated South Asia the case in Sri Lanka, where the Sri Lanka Gateway Terminals (SAGT) managed by

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Box 22: Sample Port Competition Act ereinafter, the main provisions of a Port (ii) A marine service provider with another Competition Act are mentioned. marine service provider.

H (iii) A port service provider with another MODULE 4 The main recital of the Act may state the fol- port service provider. lowing: (iv) Upon complaint of any port user prior WHEREAS it has been deemed appropriate to to or upon such a merger, to decide promote and oversee competition in the ports whether the merger situation is incom- sector, ensure the equity of access to the ports patible with the promotion of competi- of [country], and to create an atmosphere of tion and to make an order thereon. confidence for port users and investors in com- (d) On the application of the ports authority mercial marine and port services and facilities. under section [number], to review the NOW THEREFORE, be it enacted by the draft of the concession agreement in Parliament of the [country] as follows: terms of the said section and advise the Important are the functions of the port regula- port authority on whether any provisions tor and the powers to interfere in the market. thereof may be incompatible with the An example of the relevant provisions are: promotion of competition, may amount to an anticompetitive practice, or may (1) The functions of the port regulator shall be result in an abuse of a dominant position. to act as the economic regulator and competition authority for the ports sector in (e) In response to a complaint of any port [country]: user, to investigate whether the occurrence of cross-subsidization exists from (a) Upon complaint of any port user, to dominant services to contestable servic- investigate and make orders in relation es, and make an order thereon. to complaints concerning alleged anticompetitive practices or abuse of a (2) The port regulator shall prescribe the dominant position. instances in which a merger notification is required to be given to it under paragraph (c). (b) Upon complaint of any port user in relation to tariffs, to investigate whether those tar- The provisions above are an example of light iffs amount to or evidence an anticompeti- regulation, only upon complaint of the port tive practice or an abuse of a dominant authority or the users of the port facility. position and to make an order thereon. However, the regulator has the option to make an order to modify the tariffs when it decides (c) Upon notification to the port regulator in that a certain situation violates fair competition terms of [subsection (2)] hereof prior to in the concerned port or port sector. any merger of: Source: Author. (i) A marine service provider and a port service provider.

P&O Ports. In this case, a port competi- government introduced competition tion act was deemed necessary to prevent regulation provisions in the concession possible misuse by the port authority of agreement with the terminal operator, its dominant position because it was also although it is only applicable to domestic responsible for pilotage and towage serv- containers. No restrictions were put in ices and creating an atmosphere of confi- place with respect to transshipment dence for private port users and activities. investors. As indicated above, port competition regulation • There is only one terminal operator han- may either be introduced by law or be part of a dling a specific commodity (often con- concession agreement with a port operator. tainers). In Yemen, there is only one large There is also the possibility of a merger between container terminal handling the entire two port operators, resulting in the creation of national container traffic. Therefore, the a monopoly in the concerned port. In such a

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case competition regulation may be necessary This is a very important feature for advancing either in terms of tariff regulation or in pro- the business plan of a private investor in a port hibiting the merger for being incompatible with terminal. fair competition. 6.1. Full Concession, Leasehold, 6. FULL CONCESSION and Land Rent AGREEMENTS What differentiates a concession agreement More elaborately discussed in Module 3, con- from a leasehold? When would one instrument cession agreements are a relatively new develop- be preferable over another? Box 23 summarizes ment in ports. Business opinions differ about the formal differences and similarities. the legal nature of a concession agreement—as MODULE 4 well as its configuration. Some concession The main reason to apply a full concession agreements have more in common with a priva- contract is fiscal. In the 1980s, many ports tization model, while others resemble a leasehold (especially service ports) were in dire financial contract. Because comprehensive privatization straits: government-controlled, overmanned, constitutes an unrestricted and irrevocable trans- badly maintained, without market orientation, fer of port land from the public to the private and often not able to provide even essential sector, a concession agreement, with or without port services. This situation did not occur solely BOT types of arrangements, cannot be conceived in developing countries, but also in many as being comprehensive port privatization, but developed countries. In developing countries, only partial port privatization. During the last however, the financial resources necessary to decades, application of concession agreements modernize port facilities and to provide for have gradually become the preferred method to redundancy payments for excess personnel were develop public-private partnerships and are usually lacking. Concession agreements provided most successfully applied within the landlord a timely solution: private investors provided the port structure. money to modernize port facilities and often were willing to take over some port personnel Concession agreements were originally devel- liabilities. This freed up government resources oped for service ports. Landlord ports usually for use in other parts of the economy. For all did not need concession agreements, but used their advantages, concession agreements do leasehold agreements instead. Both types of have a price, most particularly the surrender by agreements have much in common and some the government of full and complete control consider a leasehold contract to be a variant of over port development. a concession. To avoid misunderstanding, the term “full concession agreement” will be used 6.2. Full Concession and BOT to describe a concession in its broadest form; Schemes that is, a series of contracts that define the rela- If the concessionaire obtains the right to tionship between the government and the pri- construct significant parts of the operational vate sector regarding the right to exploit port facilities as well as the operational port land and facilities as well as the obligation to infrastructure (mainly quays and land construct port infrastructure and provide super- reclamation works), a concession could be structure. combined with a BOT arrangement. In the In some aspects, a leasehold might be consid- case of legislation designating part of the ered a long-term rent contract. But contrary to infrastructure to be of a public character, the a rent contract, a leasehold conveys a possesso- concession may be considered a public license. ry interest. Therefore, a leasehold can be trans- However, the part of the concession constituting ferred or sold to another private party under a public license is generally not negotiable. the conditions stipulated by the port authority. The government authority granting the license

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Box 23: Full Concession, Lease, and Rent Contracts—Landlord Port

Characteristics Full concession Leasehold Land rent

Terms 25–35 years 10–25 years 10 years MODULE 4 License Maybe, depends on Maybe, depends on Maybe, depends on legislation legislation legislation Government Yes No No guarantees (loan, taxes, exchange rate, and competition conditions) Obligation to Often, depends on No No assume port local situation personnel liability Port assets may Yes Maybe, depends No be pledged as on legislation security Performance Yes Yes or no depending No monitoring by on the contract port authority Traffic guarantee by Yes, depends on Usually not No concessionaire, contract lessee, or renter Private investment Yes No No in port infrastructure Private investment Yes Yes Yes in port superstructure and equipment Tariff control by Depends on situation No No government or port authority Terminal Concessionaire or Lessee Renter management his chosen operator Payments Fixed and variable Lump-sum (fixed) Fixed or shared revenue Legal character Joint venture, often Mainly limited Limited liability of private party including shipping line liability company company Responsibility for Yes Depends on legislation Usually not environmental conditions Business plan Yes Depends on contract No required conditions Reversion of Yes Yes Yes user rights after contract period Compensation for Depends on contract To be transferred to Not applicable newly built facilities new lessee or to be removed Source: Author.

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usually reserves the right to unilaterally WBOT. Finally, the WBOT concept packages a modify license conditions. BOT with a privatization of the public infrastructure. Under a WBOT structure, existing The most important BOT arrangements com- government-owned port facilities are expanded bine many variations of long-term leasing with by the private sector, which holds title only to preagreed investment commitments. In port the additional infrastructure. Under this model, reform, the most commonly used models are a private operating company would then: BOT, BOOT (build-own-operate-transfer), BTO (build-transfer-operate), and WBOT (wrap- • Operate the entire port facility under a around BOT). These variations are described in project development agreement (PDA). more detail below, and also later in this module • Manage the government-owned port

MODULE 4 in “BOTS and Construction.” facility under a management contract. BOT. Legal title to the newly constructed port • Expand the facility under a concession or infrastructure, and sometimes other assets, BOT contract. remains with the government or port authority until the end of the concession period. The con- • Have both the management contract and cessionaire concludes a long-term leasehold concession or BOT contract wrap around agreement, which conveys rights similar to the PDA. holding title over the land. This agreement is usually attached as an annex to the concession. 6.3. Full Concession Agreement Structure BOOT. It is also possible that legal title for the While the principal framework for the relation- land is acquired directly by the concessionaire. ship between the port authority and the conces- Under a BOOT model, the parties agree to have sionaire is specified in the main concession title over all assets that are passed to the gov- agreement, there are a number of other docu- ernment at the end of the concession. For many ments that form part of the concession. The large terminal operators, the BOOT model is a concession agreement and related documents preferred option. can be used in a number of circumstances, BTO. This arrangement addresses instances in including when: which legislation forbids ownership by private parties for what is considered public infrastruc- • A private operator concludes a conces- ture or part of the maritime domain. Ownership sion agreement for an existing public may be directly transferred to the government terminal. after construction (for example, Costa Rica, and • A private operator concludes a conces- Croatia). The investor in the terminal facility will sion agreement with a BOT arrangement construct the terminal on privately owned land for an existing terminal that must and subsequently transfers title to the government undergo large-scale reconstruction and be or port authority. Generally, this form of public- thoroughly reequipped. private partnership is considered more complicated • A private operator constructs an entirely than the more common BOT scheme, especially new terminal under a concession agree- with respect to liability and increased government ment with a BOT arrangement (greenfield involvement. Under the BTO model, ownership project). of port facilities becomes an issue for lenders and investors, particularly when fixed assets are Box 24 presents a short list of the important required as collateral for financing. In such cases, topics usually treated in a concession agreement lenders may require some form of government and related documents, whereas Annex I guarantee regarding adherence to the terms of the presents a comprehensive potential list of concession agreement. concession and BOT agreement provisions.

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• Letter of intent (LOI): A preconcession Box 24: Main Schedules to a Concession or agreement stating the concessionaire or BOT Agreement sponsor’s intention to design, construct, or a. Definitions renovate a new or existing port facility, and

- Definitions the port authority’s willingness to establish MODULE 4 - Interpretation terms for a privately operated facility under b. Conditions precedent a concession agreement and to cooperate - To be fulfilled by the operator with the concessionaire or sponsor in com- - To be fulfilled by the government plying with certain local requirements (for c. Authorized maps of development area example, permits, registrations, and qualifi- - Current terminal cations to do business). The LOI is prepared in accordance with draft functional - Extension works specifications that were originally submitted d. List of current terminal personnel employed as part of the bid documentation. e. Identified permits • Detailed project report (DPR): A docu- f. Functional requirements of the extension ment submitted to the port authority as works an outline of the functional design or g. Design solution general technical design and time sched- h. Construction program ules (milestones) for the various phases of I. Milestone achievement dates and mile- the construction. Once approved by the stone sunset dates authority, the DPR would be incorporated j. Commissioning tests in the concession agreement, at which k. Minimum insurance covers point the milestones become binding. - Precommissioning insurance • Joint development agreement (JDA): An - Postcommissioning insurance agreement among members of the spon- l. Maintenance policy sor group that allocates project responsi- m. Transfer arrangements bilities (for example, shareholding, n. Hand-back financing, construction, or tax advan- - Hand-back requirements tages). This agreement might include a - Expiry date inspection port authority or even a ministry. - Form of hand-back certificate • Technical operations agreement: An o. Termination procedures agreement that specifies joint use of and p. Throughput responsibilities for technical facilities, - Annual throughputs such as shore cranes or operational infra- - Traffic and throughput information structure. r. Initial capitalization 6.3.2. Definitions Source: Author. Every concession agreement includes a list of 6.3.1. Preconcession Documents definitions to delineate precisely both the subject matter and the concepts used throughout Often, either pursuant to the terms of an the agreement. These definitions will vary from award, or for purposes of securing financing country to country and legal system to legal commitments, the parties execute various pre- system. Outlined below are examples of the concession documents that either outline the most commonly used definitions. The capital- fundamental terms of the concession or become ization of a word within agreements often indi- incorporated into the concession itself. Among cates the word is specifically defined within the these documents are: definitions section of the agreement.

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Agreement: The concession agreement, entered pieces of stone, foundation remains, poles, into between the Port Authority of [port or pipes, cables, scaffolding, pavements, demarca- country] and the Operator, of which this sched- tions, and structures on or at the grounds that ule is a part, including all the schedules thereto, were founded, placed, or built by the port and as it may be amended, varied, or modified authority or by the former users before the from time to time. commencement of the right of lease as part of a concession. Applicable permits: Any and all permissions, clearances, licenses, authorizations, consents, Building contract: The contract or contracts no-objections, and approvals of or from any entered, or to be entered, into between the governmental authority of whatsoever nature Builder and the Operator for the construction

MODULE 4 required from time to time in connection with of the works with respect to the [Name] the ownership, development, financing, con- Container Terminal or (port) facility, in a form struction, operation, and management of the that contains provisions approved by the Port terminal at the Port of [name], concessioned to Authority concerning its assignment to the Port the Concessionaire, and for undertaking, per- Authority or enabling the exercise of other step- forming, or discharging the obligations contem- in rights of the Port Authority. plated by this Agreement or the Port Services Business plan: In respect of a financial year, a plan Agreement and the Site Lease Agreement, as set for the business of the Operator consisting of: out in Schedule [number] hereto. (a) The strategic and marketing objectives of the Approved DPR: The DPR approved by the Port Operator for that financial year. Authority for the development of the various phases of the site, the approved form of which (b) The operating and financial targets of the shall be signed for identification by the parties Operator including monthly income, balance to this Agreement and shall include any amend- sheet, and cash-flow statement. ments to the DPR approved by the Port Authority in accordance with this Agreement. (c) Business and financial forecasts of the Operator for the 4 (four) financial years Bank: Every shore structure (excluding a quay following that financial year. wall), measured in each case from the crest line of the ground to the bed line, and including Change in law: The occurrence of any of the related artificial structures. following subsequent to the date of signing this Agreement: Basic port infrastructure: Immovable assets destined for general use of the port area, such as: (a) The modification, amendment, variation, alteration, or repeal of any existing Law or • Maritime access channels. Decree of any government authority. • Port entrance. (b) The enactment of any new Law or the impo- • Port basin(s). sition or issuance of any new Decree by any governmental authority. • Protective works, including breakwaters and shore protection. (c) The commencement of any Law or Directive • Accesses to the port for inland transport or Decree that has not yet entered into effect at (roads, rail, inland waterways, and tun- the date of signing this Agreement. nels, and so forth) (d) Changes in the interpretation, application, Basic structures: All immovable property, with or enforcement of any law or judgment by any the exception of such property that is subject to court within the [country] having jurisdiction the right to lease. Basic structures include all over the government.

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(e) Any Applicable Permit previously granted, [reference to appropriate document, accounting ceasing to remain in full force and effect for practice, or method of depreciation]. reasons other than breach or violation by or the negligence of the Operator, or if granted for a Effective date: The date of fulfillment of all the limited period, being renewed on terms different Conditions Precedent. MODULE 4 from those previously stipulated. Financial closing: The fulfillment of all condi- Conditions precedent: Shall mean the obligations precedent to the initial availability of tions to be fulfilled by the Parties prior to funds under the Financing Documents and the Effective Date in accordance with Article receipt of commitments for the equity required [number] read with Schedule [number]. for (Phase 1 of) the project and immediate access to funds. Credit agreements: The loan agreement(s) entered into, or to be entered into, between the Financing documents: All loan agreements, Lenders and the Operator to provide finance to notes indentures, security agreements, letters of the Operator in order that the Operator may credit, share subscription agreements, subordi- fulfill its obligations under this Agreement. nated debt agreements, and other documents relating to the financing of the Project, as the Cargo handling services: Cargo terminal same may be amended, supplemented, or modi- management and operations including cargo fied from time to time. handling services for stevedoring; landing; transporting; cargo consolidation; warehousing Force majeure: An event or circumstance or a of general, liquid, or dry bulk cargoes. combination of events or circumstances beyond the reasonable control of either party, which Concession area: The port areas within the port materially and adversely affects the performance of [name], known as [name], as more fully by that party of its obligations under this described and delineated in Annex [number] to Agreement and that cannot reasonably be fore- this Agreement. seen or prevented (such as civil disturbance, armed conflict or act of foreign enemy, wars, Concession fee: The monthly price per meter for blockades, insurrections, uprisings, sabotage, the use of leased property and, in addition to embargo, revolution or riot, action or inaction such amount, a Throughput Royalty to be paid of public officials, expropriation, nationaliza- in recognition of the port authority’s ownership tion or confiscation of facilities, earthquakes, (user) rights as specified in Section [number]. mudslides, lightning, typhoon, fires, storms, Container services: Container terminal manage- floods, epidemics or plagues, acts of God, and ment and operations, including container han- other natural disasters). dling services for stevedoring, landing, transporting, and warehousing; stuffing and strip- Good industry practice: As applicable to the ping; consolidation of containerized cargoes. Operator, its contractors, subcontractors, operators, subconcessionaires, sublessees, and all Debt: Any indebtedness of the Operator for the other third-party agents of the Operator, prac- purposes of financing the investment in and tices, methods, techniques, and standards, as enhancement, development, design, construction, changed from time to time, that are generally commissioning, and operation of the Terminals accepted for use in international port construc- and the Extension Works, or any other costs or tion, development, management, operations, expenses in relation to the obligations of the and maintenance, taking into account condi- Operator under this Agreement, related thereto. tions in [country].

Depreciated replacement value: Shall have the Grounds: The grounds given out in lease to the meaning assigned to it in accordance with the Operator under this Agreement.

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Hand-over: The process of providing peaceful Concession Agreement in accordance with the and vacant possession of and access to the terms of this Agreement; (c) as a result of which Concession Area and all cargo handling equip- the Operator is unable to or is prevented from ment as well as infrastructure and superstruc- carrying on the Operations of the Terminal; or ture by the Ports Authority for the conduct of (d) its exclusive right to build, own, operate, the business of the Terminal as contemplated by and transfer the Extension Works at the this Agreement, together with such access rights Concession Area is diminished or impaired. as are described in the Site Lease Agreement. Operational port infrastructure: Infrastructure Joint development agreement: The Agreement essential to port operations, to include any or dated [date] between the Sponsors and, among all of the following items:

MODULE 4 other things, allocating project responsibilities between the Sponsors as per Annex [number]. • Inner port channels including turning and port basins. Law: Any applicable [country] law, statute, • Revetments and slopes. proclamation, bylaw, decree, directive, decision, regulation, rule, order, notice, judicial order, • Roads, tunnels, bridges, and locks in the judgment, or delegated or subordinated legisla- port area. tion, including directions or guidance, issued • Quay walls, docks, jetties, and finger piers. pursuant to any legislation. • Aids to navigation, buoys, and beacons. Lead sponsor: [Name] having a major Equity Share as per the Joint Development Agreement. • Hydro and meteorological systems.

Lenders: Local or foreign financial • Specific mooring buoys. institution(s), corporations, companies, or • Vessel traffic management system banks providing secured and unsecured credit (VTMS). facilities to the Operator, including lease and • Port land (excluding superstructure, ter- hire or purchase facilities to the Operator pur- minal road system, and paving). suant to the Financing Documents. • Access roads to general road infrastruc- Lenders direct agreement: The agreement ture, rail connection to general rail infra- between the Lenders (represented by [Name] structure, and marshalling yards. Bank acting as Security Agent), the Concessionaire, the government and/or Port Port equipment: Equipment (nonfixed assets) Authority, including the rights of the Lenders essential to the operation of the port, to include under the Concession Agreement, the Port any or all of the following items: Services Agreement, the Management • Tugs. Agreement, and the Site Lease Agreement, assigned to the Security Agent under the • Line handling vessels. Assignment of Project Documents and charged • Specialized vessels for depth survey and under [the Commercial Mortgage] as well as the fire fighting. procedures and obligations of the parties in the event that the concession is terminated prior to • Dredging vessels and equipment. expiry. • Ship and shore handling equipment (such as top cranes, gantry cranes, and grain Material adverse effect: Circumstances that elevators). adversely affect: (a) the ability of the Operator to observe and perform in a timely manner its • Cargo handling equipment (apron and obligations under this Agreement; (b) the ability terminal), such as transtainers, top lifts, of the Operator to avail the benefits of the and trailers.

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Port services agreement: The agreement entered, 1. A duly certified copy of the Operator’s or to be entered, into between the Port Certificate of Incorporation (and of any Authority and the Operator for the provision of certificate of incorporation on change of marine services by the Port Authority in relation name or certification on registration as a to the Terminals to be operated by the Operator public company). MODULE 4 pursuant to this Agreement in agreed terms. 2. A certified copy of the Memorandum and Project: The development, financing, design, Articles of Association of the Operator, in construction, operation, and maintenance of the the form approved by all shareholders of site in accordance to the provisions of services the Operator and by the Lenders. to the users. 3. A duly certified copy of the Certificate of Regulatory authority: Any authority (referred to in Incorporation (and of any certificate of Article [number]) constituted by law in [country]. incorporation on change of name or certification on registration as a public Site: The wharves, piers or quays, buildings, company) of the company holding the and other infrastructure and superstructure majority of the shares of the Operator. leased or given in concession to the Operator 4. A certified copy of the Memorandum and under this Agreement. Articles of Association of the company Sponsors: The Consortium selected (through a holding the majority of the shares of the process of competitive bidding in [month], Operator, in the form approved by all [year]), led by the Lead Sponsor. shareholders of the Operator and by the Lenders (if any). Terminal: The terminal facility proposed to be developed in accordance with the terms of this 5. Certified minutes of a Meeting of the Concession Agreement by the Operator. Board of Directors of the Operator evidencing: Transport infrastructure linkages: The road, rail, or water infrastructure linkages agreed to (a) Consideration by the directors of: in the Approved DPR, identified as material i. A draft of this Agreement and the other transport infrastructure required for the devel- Project Documents. opment or operations of the [terminal, port]. ii. The Operator’s rights and obligations Quay wall: A vertical or almost vertical shore under the this Agreement and the other structure, including related support structures. subsidiary agreements.

This list may be augmented with other items or iii.The legal capacity of the Operator to the definitions may be expanded depending on undertake the Project and enter into and the specific objectives of the concession and perform the Project Documents and the considerations of the national concession law. authority of the directors to exercise the powers of the Operator to do the same. 6.3.3. Conditions Precedent Sample (b) A valid resolution of the directors approv- Below are two sample conditions precedent, one ing the execution, delivery, and perform- applicable to the operator, and one applicable ance by the Operator of each of the to a port authority. Project Documents, except the Building Contract, which will be concluded with a 6.3.3.1. Part 1—Conditions Precedent to be Fulfilled by the Operator. Delivery by the competent Builder subject to Article Operator to the Port Authority, in form and [number] not later than [number] months substance satisfactory to the government (acting from the Effective Date or such later date reasonably), of the following documents: as agreed on between the parties.

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6. Documentary evidence of the execution 6.3.3.2. Part 2—Conditions Precedent to be and delivery of each of the Project Fulfilled by the Port Authority. Delivery by the Documents and of the satisfaction or Port Authority to the Operator, in form and waiver of any conditions precedent under substance satisfactory to the Operator (acting reasonably), of the following documents: each of the Project Documents except the Building Contract. 1. The execution by or on behalf of the Port 7. Documentary evidence of the receipt by Authority of the Port Services Agreement the Operator of the Applicable Permits and the Site Lease, in the form agreed by (and any applicable other Consents, if the Operator, respectively, the Sponsor any) as listed in Schedule [number]. and the Port Authority prior to or on the date hereof. MODULE 4 8. Documentary evidence that the Operator 2. The receipt by the Operator of a legal has taken out the insurances required by opinion from counsel for the Port Article [Number] of the Agreement (other Authority in a form and substance rea- than those insurance relating to construc- sonably satisfactory to the Operator with tion that cannot be procured until after respect to the due authority, valid exis- the Effective Date). tence, execution, delivery, and perform- 9. A certified document made out by the ance of this Agreement, the Port Services Operator stating that all Movable Assets Agreement, and the Site Lease, and con- and Facilities, associated spare parts as firming that all necessary government well as warrantees referred to in Article approvals, including the approval to [Number] have been accepted by the enable the Port Authority to enter into Operator and the transfer value of $ such agreements, have been secured. [number] million has been paid to the 3. Documentary evidence that all Applicable Port Authority, and that the Operator Permits currently in force at the [name] holds harmless and indemnifies the Port Terminal have been assigned by the Port Authority and keeps the Port Authority Authority to the Operator for the remain- so indemnified against each and every ing duration of the term of such Permits. liability that the Port Authority may incur to any person whatsoever and 4. Documentary evidence of the receipt by against any claims, demands, proceed- the Authority of all other Applicable ings, damages, costs, losses, obligations, Permits required to be obtained by it (and liabilities, and or expenses sustained, as listed in Schedule [number]) under law. incurred, or payable by the Port 5. A Certificate from the [independent Authority with respect to the Movable expert], as Test Certifier, stating that the Assets and Facilities and associated spare Commissioning Tests have been conduct- parts. ed in a proper manner and to the satis- 10. Confirmation of the Operator that it has faction of the [independent expert]. satisfied itself as to the nature and extent 6. The issuance of the Commissioning of the conditions of or affecting the Certificate from the [independent expert], Concession Area (including climatic, as Test Certifier, in accordance with hydrological, hydrogeological, ecological, Schedule [number] hereof. environmental, geotechnical, and seismic 7. A Certificate from the Port Authority conditions), but only in respect of the that the ownership of the Movable Assets existing Terminals. and Facilities at the Terminals has been 11. Execution of the Financing Documents by transferred on the Actual Hand-Over all parties to such documents. Date, by the government to the Operator

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pursuant to the completion of the Commissioning Tests to the satisfaction Box 25: Reference Clause on Term of of the Operator and/or the Sponsor. Concession his Concession Agreement shall com- 8. Documentary evidence of the receipt by

mence on the [day] of [month] of the MODULE 4 the Operator of all new Applicable Tyear Two Thousand and [year] and shall Permits required to be obtained by it (and end, in whole or in part, on [day] of [month] of as listed at Schedule [number] under law) the year Two Thousand and [year]. prior to the Actual Hand-Over Date. The Operator has the option to extend the duration of this Concession Agreement by a 6.3.4. Term of the Concession Agreement period of maximum [number] years, immediately following the present period, taking into The term of the agreement is a strategic issue. It consideration the provisions given in Article mainly depends on the respective amounts of [number]. Upon pain of lapsing of this right, investment the port authority and the conces- the Operator shall notify the Authority in writing at least [number] years before the exten- sionaire have made or will make. In a landlord sion might commence that he wishes to avail port, standard lease contracts that involve limit- himself of his right. ed investment on behalf of the concessionaire are typically 10–15 years. BOT-type agreements are usually concluded for a period of 25–35 The effectiveness of a full concession agreement years, with options to renew. Investments of is dependent upon the fulfillment of specified lessors in superstructure and equipment often conditions precedent and evidence that no cir- exceed those of a port authority by a large mar- cumstances exist that may result in the early gin; whether this is the case or not, both parties termination of the agreed terms (see Box 25). have an interest in a mutually beneficial long- term relationship. This is especially true when 6.4. Concession Parties concluding a full concession agreement with a Parties under a full concession agreement usually BOT arrangement. Shorter term arrangements consist of a port authority and a sole sponsor (10 years or less) are suitable for tool ports or or a consortium of sponsors (often called a spe- management contracts, but in general do not cial vehicle company or special purpose compa- provide much security or stability for the port ny [SPC]). The consortium may not necessarily authority and offer no major incentives to the be identical to the operator, but may include the concessionaire to improve performance or to operator as a consortium member. introduce innovative operations. The amount of share capital provided for a new Concession documents must also indicate pre- venture is one indication of the consortium’s cisely when the concession period actually confidence regarding the port’s prospects and starts, which can be a complicated issue. Some future development. In developing countries, the of the provisions come into force on signature, International Finance Corporation (IFC) may be such as warranties, confidentiality provisions, a source of share capital for the venture. and clauses relating to applicable law and dis- Whether the port authority itself may take pute resolution. In the event of the transfer of shares is debatable, but preferably the port assets or construction of infrastructure under a authority should not be a shareholder because it BOT arrangement, relevant conditions come could create conflicts of interest due to its role into force upon satisfaction of waiver of pre- as a landlord port manager and regulator and existing conditions. Conditions precedent deal compromise its position with respect to other largely with delivery and proper execution of port users. Based on the estimated income certain documents required to give effect to or expected during the concession period and the support obligations under the concession infrastructure and superstructure to be agreement. constructed during the concession period, the

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purposes and for handling certain cargoes. Box 26: Reference Clause on Nomination of Within these limits, an operator is free to develop Operator of a Container Terminal the business. Detailed restrictions for cargo his INDENTURE made and entered into handling on the terminal should be avoided, at [place] this [number] day of [month] with the exception of dangerous and polluting [year], by and between the Port T cargoes. Authority of [name] a body corporate [a public entity], incorporated under the [name] Act No There are many other critical subjects to be [number] of [date] and having its Head Office included in a concession agreement. Two issues at [street], [city], in [country], (hereinafter called and referred to as “the Authority,” of main importance are: which term or expression where the context • The right of the concessionaire to transfer so requires or admits, means, and includes MODULE 4 the said Port Authority and its successors or the leasehold rights to a third party, assignees) on the one hand, and the (name) including conditions under which such Container Terminal Ltd., duly incorporated in transfer can occur (the right to transfer [country] under the Companies Act of [date] should be sufficiently flexible to encour- and having its registered office at [name] age the financing of port improvements). street, no.[number], [city] in [country] (hereinafter referred to as “the Operator”), which • The right to own all newly constructed term or expression shall where the context so buildings and superstructure improve- requires or admits, means, and includes the ments on the premises during the lease said Container Terminal Ltd. and its successors and assignees), on the other hand, period, with compensation by the port authority (lessor) after termination of the Article... agreement, or, in the case of transfer to a The Authority hereby appoints the Operator to provide cargo handling (or container) services third party, sale of such assets according at the port area(s) known as [name of area], to the terms of the finance agreements (in under the terms and conditions specified in some jurisdictions it may be necessary to this Agreement. require such sales to comply with local Source: Author. procedures or applicable bulk transfer notice requirements). Full concession agreements (including BOT consortium should be expected to leverage its arrangements) and lease agreements usually investment with borrowed money from various stipulate that the fixed assets revert to the port sources, usually from a syndicate of commercial authority at the end of the lease. Transfer may banks or through the issuance of bonds or other be effected with or without compensation, capital market instrument under an indenture. depending mainly on the duration of the con- Finally, the consortium may conclude a manage- tract and the investment value of the fixed ment contract with a professional operating assets. It is not unusual for a port authority to company. Both the financing arrangements and pay the concessionaire or lessee the depreciated the management contract form part of the con- value of the assets at the end of the concession cession documents (see Box 26). period. Finally, a concession agreement may contain an 6.5. General Rights and exclusivity clause designed to prevent the con- Obligations of the Operator cessionaire or operator and any of their sub- The operator generally acquires leasehold rights sidiaries from competing with other terminal and obligations when assuming the control of operators for the particular traffic for which the an existing facility under a concession agree- concession was granted, within defined geograph- ment. The concession agreement generally limits ical areas and for stated time periods, as the mar- use of the leased premises exclusively for port ket situation and the scope of the investments

164 Legal Tools for Port Reform may reasonably require. In any case, this time period must remain short enough compared to Box 27: Reference Clauses on General the length of the concession agreement, and not Rights and Obligations of the Operator exceed a period of preferably five years after ubject to other provisions of this completion of the building program in the case Agreement and its liability under any law, MODULE 4 and without in any way limiting its ability, of a BOT arrangement. S the Operator hereby undertakes and binds itself to the following at the Concession Area: Generally, port infrastructure constructed by a • To provide, inter alia, effective and efficient concessionaire through a BOT arrangement container (cargo handling) services accord- remains the property of the port authority. With ing to the performance parameters as respect to movable assets placed on the conces- described in Annex [number]. sion area by the concessionaire, ownership • To ensure that facilities leased by the rights over these assets generally remain with Authority are operated with due care and the concessionaire (with the right to pledge skill and in accordance with the terms of this Agreement. these assets as collateral to financiers) through- • To repair and make good to the satisfaction out the concession period and may, depending of the Authority all damages and breakages on the concession agreement’s terms, be trans- to infrastructure and superstructure made ferred to the port authority when the concession by the Operator or by third parties acting terminates. Some legal systems allow a conces- under the responsibility of the Operator, fair sionaire or lessee to own buildings, installa- wear and tear excepted. tions, and other immovable property located on • To ensure that the sites are kept clean, and port authority owned land (for example, in the that the environment is fully protected. Netherlands). Therefore, operators may use • To draw up rules for safe systems of work these assets as collateral for bank or sharehold- and operational procedures to ensure health, safety, and welfare of all workforce er financing. In countries where the port area and terminal users in compliance with the constitutes part of the Maritime Domain, pri- applicable laws and regulations, interna- vate ownership of immovable property will be tional practices, and the authority’s guide- considered fixtures that cannot be owned inde- lines. pendently from the Maritime Domain (for • To implement an effective safety and secu- example, in Croatia). In such cases, user rights rity system and to comply with the guide- (in some instances including the right to mort- lines of all competent Authorities. gage—but not own outright—the asset) may be • To ensure that any safety and security remedial action requested by any compe- allowed under the concession. Whichever is the tent Authority is acted upon immediately. case, the port authority should include in the The Operator shall apprise the Authority of concession detailed provisions pertaining to the current work schedule, the previous day’s ownership or user rights over those assets that vessel operations, and the following day’s are erected by the concessionaire in the conces- vessel planning and work schedule. sion area (see Box 27). Any damage to the site’s environment shall be assessed and restoration costs billed to 6.6. General Rights and the Operator, who shall bear such costs. Obligations of the Port Authority Source: Author. During the concession period, the port authority often assumes dual roles. On the one hand, relationship with a private sector port user. the port authority serves the public interest as a There is an increasing trend for port authorities regulator monitoring performance under the to become commercial actors, interacting with concession agreement. On the other hand, the private terminal operators as economic part- port authority may possess a stake in the port ners, rather than acting as regulators. This trend enterprise as a participant in a public-private is born of necessity—the port authorities and

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terminal operators need each other. Therefore, it is a major challenge to find the proper bal- Box 28: Reference Clauses on General ance between the regulatory relationship and Rights and Obligations of the Port Authority the commercial interests of both parties. In this ubject to other provisions in this context, rights and obligations of the port Agreement, the Authority shall exercise regulatory functions in respect of the authority have been modeled within the frame- S conduct of port operations as detailed in the work of a landlord port model. following subsections: Investments and capacity calculations are pri- • Allocate berths at the request of the Operator, in accordance with established port marily based on traffic and throughput fore- policies, in order to satisfy the Operator’s casts. In the case of a BOT arrangement requiring work program in the best overall interest.

MODULE 4 significant outlays by a concessionaire, the port • Chair Port Operations Meetings with one or authority (or the national government) might more representatives of the Operator and of obligate itself not to concession, promote, or other port users. commence another competing terminal (or a • Set productivity targets and monitor the terminal aggregating more than a certain Operator’s performance against set parameters (as per Annex [number]). capacity) in a nearby port area. If, unexpectedly, The Authority hereby undertakes and binds new capacity were to be created, the feasibility itself to: of a project might well be in jeopardy. There is • Provide and maintain the necessary basic often, especially in smaller ports, room only for infrastructure such as maritime approaches, one or two terminals handling a specific com- canals, turning circles, breakwaters, aids to modity. If the port authority is too preoccupied navigation, access roads, and so forth. with intraport competition, terminal operators • Provide marine services including vessel might end up in cutthroat competition, resulting traffic management, pilotage, towage, in the bankruptcy of some of them at a time berthing, unberthing, and shifting of vessels. when the government’s goal is to encourage • Ensure safe, orderly, and timely movement of vehicles and pedestrian traffic along the sound private sector participation in the port access roads. sector (see Box 28). • Maintain the security of all land and sea In many concession agreements, the port author- entrances to the port area (those existing presently and in the future). ity constructs a list of activities that are permit- • Provide and maintain all perimeter fencing ted to be performed at the site. These activities around the port area. should be construed as broadly as possible so • Provide any services not listed herein and the operator has maximum flexibility to develop on which both parties will agree by this the business and generate revenue (see Box 29). Agreement or by any other subsequent agreement. 6.7. Transfer of Rights, When providing services listed above, the Obligations, and Assets Authority, in line with the operational plans and work schedule of the Operator, will When an operator acquires an existing (former ensure that all such services are provided in a public) port facility, rights and obligations of nondiscriminatory way and in accordance the public sector owner transfer, along with the with the Operator’s needs to enable him to use (but not ownership) of the assets, to the pri- meet the performance targets and other objectives to be achieved. vate sector operator. When a new facility is constructed under a BOT arrangement, the new Source: Author. operator commissions the facility after successful commissioning tests or surveys have been When taking over an existing facility, the conducted by an independent expert, usually a following rights and obligations of the operator test certifier, who issues a commissioning certifi- are usually included in the concession cate (see Box 30). agreement.

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Box 29: Reference Clauses on Permitted Box 30: Reference Clauses on Newly Built Activities Assets in the Concession Area (BOT ithout a written consent from the arrangement)

Authority, which refers to this provi- perational infrastructure constructed MODULE 4 Wsion, the site may only be used for/as: by the Concessionaire/Operator in the • Loading and discharging of general cargo, OConcession area, in furtherance of its dry bulk/liquid cargo, or containers. business, shall be and shall remain the • Transport and storing of general cargo, dry property of the port authority, without bulk/liquid cargo, or containers. any claim for or reimbursement from the Port Authority/Lessor for the cost of value • Handling of other cargoes, only if necessary thereof. and on a limited basis. Port superstructure and movable assets • Stuffing and stripping. constructed and/or installed by the • Controlling and guarding of general cargo, Concessionaire/Operator, in furtherance of its dry bulk/liquid cargo, or containers. business, shall remain owned by the • Operating equipment necessary for the Concessionaire/Operator. At the end of the above. Concession period, the aforementioned assets shall either be transferred to the Port • Repair and maintenance of containers. Authority after payment to the Concessionaire • Repair and maintenance of equipment. of the written down value of those assets, or • Repair and maintenance of buildings. be demolished or removed from the • Providing accommodation for personnel Concession Area. and administration. Source: Author. • Providing services to vessels. • Providing services to customs and other government agencies. Rights: • Providing services and accommodation to ancillary services such as, pilots, agents, • To succeed to and to carry on the busi- ship handlers, and so forth. ness of the port facility and supporting • All other activities necessary to conduct services of the port authority, as estab- efficient cargo handling operations. lished under the port law. The Operator is obliged to continuously • To succeed to the ownership, rent, or exploit the site during the duration of the Concession Agreement. lease of certain properties, movable and immovable, located on the terminal in A strip of one meter wide alongside the quay wall shall not be planted or built on, the port or used by the port facility and shall not contain roots or foundations, and supporting services. shall only contain cables, pipes, roads, and rails. • To succeed to certain rights, powers, privileges, and interests of the port The Authority may reduce the maximum permitted load(s) if, in its opinion, the condi- authority pertaining to cargo handling tion of the quay wall provides a reason for operations and supporting services on doing so. the terminal. Permitted use shall also be taken to Obligations: include the construction of the necessary buildings and/or installations for the benefit of • To succeed to certain liabilities of the the business of the Operator, with the exception of (service) home(s). The number, nature, port authority pertaining to cargo han- and location of these constructions and/or dling and supporting services carried out installations shall be subject to the approval at the terminal. of the Authority. • To receive and maintain all books, Source: Author. accounts, and documents relating or

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pertaining to the terminal and supporting authority, reasonable requests for changes to the services. program are usually approved. The port authority customarily reserves the right to appoint a con- • To offer employment to officers and struction observer, usually an engineer. employees of the terminal and supporting Commission or transfer of the new assets is services. concluded on the basis of a commissioning • To succeed to contracts and agreements certificate issued by an independent test certifier, entered into for the purposes of and relat- according to the relevant provisions of the ing to the business of the terminal and concession agreement. supporting services; usually, these contracts are specified in a schedule annexed The construction program included in the con-

MODULE 4 to the concession agreement. cession agreement is in principle binding. The completion of relevant parts of the program is • To succeed to all actions and proceedings indicated by the milestone achievement date. instituted by or against or relating to the The construction, however, cannot extend terminal (it is not uncommon for the beyond the milestone sunset date, unless waived operator and port authority to negotiate or extended as a result of a force majeure event. an indemnity for liability incurred as a Such date constitutes a termination event for result of certain proceedings). the port authority; in other words, the port The transfer of assets to the new operator under authority may terminate the concession when a concession agreement requires thorough the operator is not able to finish the construc- inspection and the determination of what tion within the agreed-on time (see Box 31). repairs or backlog maintenance, if any, are expected to be carried out by the port authority 6.8. Performance Parameters prior to the transfer. Existing assets forming Concession agreements often include perform- part of the operator’s leasehold and their atten- ance parameters to measure the success of the dant condition and quality will be reflected in operator in managing the port or terminal. A the concession fee. The highest concession fee port authority may want to highlight perform- (relative to value of assets transferred) is usually ance indicators and incorporate certain ones into accorded in jurisdictions allowing for the own- the concession. These parameters can relate to: ership of superstructures to be transferred to the operator. • Realization of a agreed (minimum) number of ship calls. When building terminal facilities under a BOT arrangement, the operator has to design and • An agreed (minimum) quantity of cargo construct the terminal, including quay walls and passing through the terminal. other infrastructure works. The design has to be • Efficient utilization of the terminal. carried out in accordance with functional • Service quality. requirements and design solutions set out in the approved DPR as well as under the construc- Generally, from the port authority perspective, tion program included in the agreement. Major there may be a tendency to overregulate per- aspects of the construction process will have formance by imposing very detailed and strict been identified for completion by stated times, parameters. This tendency appears to be more and if these milestones are not met the port of a problem in the case of new terminals or authority usually has the right to assess penal- terminals with a low level of current through- ties or terminate the concession. In practice, put. Detailed parameters require extensive con- technical problems should be expected to arise. trol and limit an operator’s flexibility. Also, the Although the operator may not alter the con- port authority must devote resources to their struction program without approval of the administration. Performance parameters that

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incentive should be given to the operator, Box 31: Reference Clauses on Transfer of Assets because extra traffic and throughput results in he present Agreement relates to the extra revenue for the port authority. [name] Terminal at [name] Port with Performance parameters have produced the best associated buildings and storage area, T results when they were established with the idea MODULE 4 as more fully described in Annex [number] to this Agreement, which shall form an integral of not controlling the operator but creating a part of this Agreement, and which may be win-win situation for both parties. modified from time to time by mutual agreement between the Authority and the Operator. There are no standard performance criteria for A list of facilities, buildings, equipment, handling various commodities. Situations differ and others together with a detailed inventory widely from country to country and from termi- of the contents thereof leased/transferred to nal to terminal. Much depends on labor condi- the Operator is shown in Annex [number]. tions, the attitudes of labor unions, and factors A joint survey of the facilities, buildings, such as the size and age of vessels, consignment equipment, and contents thereof shall be size, and timely availability of information. effected before the time of take over, with the objective that the site should be delivered to Therefore, performance criteria ordinarily the Operator in good working condition. reflect local conditions and take into account the Before commissioning, the Operator may reality of all relevant local factors influencing a require major improvements and modifications port. to be effected on infrastructure, superstructure, or facilities concessioned/leased by the author- A vast majority of concession agreements relate ity to the Operator, which he deems to be in an to container terminals. In this field, many items insufficient technical condition. The Operator are standardized, resulting in the development shall submit such requests to the Authority for of internationally accepted, detailed perform- consideration. The Authority is obliged either to ance criteria. carry out the requested improvements and modifications at its own cost or take the insuf- 6.8.1. Productivity Targets ficient technical condition of infrastructure, superstructure, or facilities into account when Productivity targets are usually designed in a negotiating the Concession Fee. phased manner, taking into consideration the All major modifications and improvements, as above, to infrastructure and facilities con- emerging problems that a container terminal cessioned/leased to the Operator under this will face during the first years of its operation. Agreement, which the Operator deems to be For the purpose of the concession or lease necessary to improve its services, shall be agreement, two phases are usually defined. subject to written approval of the Authority Phase 1 constitutes the start-up period, from and the costs thereof shall either be borne by the date operations commence to a later point the Operator or be reflected through a read- justment of the Concession Fee. one to two years later. During this time, the In cases where repairs or other works may new management and the workforce have an have to be performed by the authority, prior opportunity to structure operations, develop to the start of operations, the Authority shall commercial policies, and engage in training be responsible to meet the costs of repairs or various categories of personnel. Phase 2 is other works, unless these are due to the when the terminal is expected to work at peak negligence of the Operator. efficiency, with professional management and a Source: Author. well-trained workforce in place. The following types of productivity targets can be included in the concession agreement’s performance are most likely to succeed are those set at a provisions. level that a port authority believes will result in the agreed-on concession fee being paid. When Crane productivity: Crane productivity measures required levels are exceeded, a positive financial the number of equivalent container movements

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per crane working hour. It is calculated by divid- equivalent container moves by the time ing the number of equivalent container move- the vessel spent alongside the berth, ments handled by a crane by the number of hours measured in hours). the crane operated. Crane productivity is usually • Equivalent container moves per gross expressed as either the equivalent container working hour (calculated by dividing the moves per gross crane working hour or the equiv- total equivalent container moves by the alent container moves per net crane working hour time the vessel is worked, measured from (deducting all nonoperational and idle time expe- the start of the work to the termination rienced by each crane). Equivalent container of the work). moves are usually calculated as the sum of: • Equivalent container moves per net ship

MODULE 4 • Each container discharged. working hour (calculated by dividing the • Each container loaded. total equivalent container moves by the gross working time, minus the nonopera- • Each container shifted to gain access to tional time and the idle time). another container—counted as one move if the container is shifted within the Two other categories are nonoperational time, vessel, but as two moves when it is the period when the berth is not scheduled to shifted via the quay. be worked (for example, meal breaks) and idle time, the period when work has stopped for • Each container moved to another posi- unexpected and unscheduled reasons (for exam- tion on the request of the ship operator ple, equipment breakdown). (a restow)—counted as one move if it is restowed directly to another location in Quay productivity: Quay productivity measures the vessel and as two moves when the the throughput in equivalent container moves restow involves discharging to the quay per unit of time per meter of quay length. This and later reloading to a new position on criterion is included to encourage the operator board the vessel. to successfully promote and market the terminal facilities and to increase traffic. The targets may • Each container lifted in error and be different for each applicable phase of the returned to the ship—counted twice. project. • Each hatch cover lifted to the quay and replaced by the quayside gantry cranes Terminal productivity: Terminal productivity (or ship mounted cranes)—two moves for expresses activity in terms of the number of every cover removed. containers handled per square meter or hectare of terminal area per time unit. It is calculated Ship productivity: Ship productivity is the out- by dividing terminal traffic, measured in TEUs, put achieved per ship working hour and is used by the total terminal area in square meters or to measure the efficiency of ship operations. It hectares. The targets may be different for each is the most important indicator to ship opera- applicable phase of a project. tors and a valuable means for measuring year- round terminal performance. It is recorded and Dwell time: Dwell time is a measure of the time expressed in four categories: spent by containers in the terminal. It is a major indicator of the efficient use of the terminal • Equivalent container moves per ship-hour area. It measures the period from the time a in port (calculated by dividing the total container is lifted off the ship to the time it equivalent container moves by the time departs the container yard. An appropriate indi- spent in port, measured in hours). cator of quality of service is also the truck turn- • Equivalent container moves per ship hour around time from entry to exit in the terminal at berth (calculated by dividing the total area when delivering or picking up a box, with

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15–20 minutes being the common efficiency benchmark. Box 32: Reference Clause on Productivity Targets Labor productivity: Labor productivity figures The operator binds itself to: relate traffic and terminal throughput to the • Use its best efforts to reach or exceed the MODULE 4 total number of people employed by the termi- minimum productivity targets specified in nal operator. This indicator is included to Annex [number], which is an integral part of enable the operator and the port authority to this Agreement and which may be modified monitor labor productivity and, indirectly, ter- from time to time by agreement between the parties. minal operating costs. Labor productivity indi- • Participate in a Monitoring Committee, to cators may be based on the total number of be jointly established by the authority and hours worked by the total number of or certain the Operator. categories of employees in the terminal. • Provide the authority with monthly reports Utilization measures: This category of indica- on performance and productivity in a format to be agreed between the authority tors measures the intensity of the use of termi- and the Operator, and provide the authority nal resources by the operator. It includes two with any special report that, in exceptional important indicators, the berth working index circumstances, the authority may reason- and the yard utilization index. The berth work- ably request. ing index compares the total time vessels were In the event that the Operator fails to meet worked at the quay with the total time that the performance targets as set out in Annex such vessels were berthed. The yard utilization [number] (one) year after commencement of operations, the authority may levy a penalty index compares the number of storage slots on the Operator at a rate of $ [amount]. occupied to the total number of available slots, Source: Author. and is typically calculated daily.

Performance parameters are best included in an annex to the concession agreement, with a sec- any change that they feared could have endan- tion in the agreement referring to the detailed gered the continued employment of the work- annex (see Box 32). force. New operators taking over an existing terminal must therefore anticipate a start-up 6.9. Transfer of Employees period for motivation of new workers as well as When concluding a concession agreement for an for retraining. Otherwise they may face the existing terminal, it is common practice to inefficiencies of an underemployed workforce. engage all or part of the employees already The reference clauses should be considered only working in the terminal or to extend an offer to as an indication of how to approach the issue. join the new venture. This area is highly sensi- Whether existing employees should transfer into tive and should be handled with great care even a new operator’s service on terms and condi- before the concession is awarded. Module 7 tions no less favorable than those enjoyed by deals with labor issues in greater detail. Another them immediately prior to their transfer is a useful resource on this topic is the World Bank’s matter of negotiations among labor, the new Labor Issues in Infrastructure Reform: A operator, and the government (see Box 33). Toolkit. 6.10. Force Majeure Often, as a result of years of neglect, unfavor- An operator cannot be held responsible for able working conditions, and outdated equip- fully achieving performance goals when unfore- ment, workers lack the motivation to perform seen and uncontrollable events intervene (force at an acceptable level. Often, they were mem- majeure). However, such events should not bers of unions that fought aggressively for the automatically excuse the concessionaire from preservation of their jobs, sometimes resisting its financial obligations payable under a

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Box 33: Reference Clauses on Selection and Box 34: Reference Clauses on Force Majeure Transfer of Personnel pon the occurrence of a Force Majeure he Operator shall engage professional event, the party so affected is relieved management personnel (including top Uof performance under this Agreement Tmanagement) for the efficient and effec- for the duration of the event. Notwithstanding tive operation of the Terminal Area. The this, the occurrence of a Force Majeure event management personnel shall be selected from shall not excuse the Operator from making amongst persons presently in the service of payments due hereunder in a timely manner. [name of present terminal]. In the event that Parties agree to use all reasonable endeav- the Operator is unable to select sufficient man- ors to mitigate the effects of any Force agement personnel from amongst the [termi- Majeure event. nal’s] staff, the Operator is allowed to appoint MODULE 4 Source: Author. suitable management personnel selected from outside the [terminal’s] organization. When for certain functions no suitable candidates can be found in [the relevant country], the Authority A force majeure event is any event or circum- will allow the Operator to select expatriate stance or combination of events that: personnel. (Sometimes the provision of expatriate staff is an obligation—this is particu- • Is outside the control of and unexpected larly the case when a transfer of expertise is a by the affected party. major objective of the concession agreement). • Could not be avoided, prevented, over- The Port Authority shall use all reasonable endeavors, upon request of the Operator, to come, or mitigated with reasonable fore- obtain work permits, long-term nonimmigrant sight, prudence, diligence, or otherwise visas, and tax clearance certificates for all taking action according to good interna- expatriate personnel appointed by the Operator. tional practice. The Operator shall select its labor force from amongst persons presently employed by • Results in the temporal or permanent the [terminal]. These persons will be selected termination of operations. by the Operator based on their skills and suitability in the discharge of their duties. • Materially prevents, hinders, or delays Selected persons will have the option to enter performance of a party’s obligations into the fixed service of the Operator. under the concession. Notwithstanding the foregoing provisions, In most concessions, the main force majeure in the event any persons appointed from among the [terminal’s] personnel are found to events are the following: be incompetent, unsuitable, or unfit in dis- • Acts of God. charging their duties within a period of one year, the Operator shall be entitled to termi- • Nuclear explosion and radioactive, bio- nate the services of that person, subject to logical, or chemical contamination. the provisions of any employment contract. The terms and conditions to be drawn up by • Landslides, earthquakes, tsunamis, and the Operator shall take into account the salaries severe weather such as hurricanes or and terms and conditions of service, including typhoons that result in closure of the port. any accrued rights to leave, enjoyed by the persons transferred to the service of the Operator. • Epidemic, plague, or quarantine. Source: Author. • Blockade or closure of the port. • Curfews or restrictions on travel within the port’s country resulting from any of concession agreement. The operator should be the matters mentioned in this list. encouraged to obtain insurance to cover the risks of such events as much as possible • War (whether declared or not), civil (see Box 34). war, invasion, embargo, military coup,

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revolution, or armed conflict on a national scale. Box 36: Reference Clauses on Site Conditions • Sabotage, criminal damage, terrorism, The following conditions are applicable: but only when the terminal is affected. • The site is determined to be [number] MODULE 4 • Riot, civil commotion, or insurrection square meters. with effect on a massive or national scale. • The site is unencumbered by other limiting rights or claims, nor by other qualitative The occurrence of a force majeure event may obligations and/or perpetual clauses other result in the extension of the term of the conces- than those mentioned in this Agreement. sion or the extension of the construction period • The site is accepted by the Operator in the after the force majeure event has subsisted. state in which it is found on the date the lease commences. 6.11. Lease of Facilities • Cables, pipes, and pipelines of third parties At many ports (for example, Antwerp, that are situated on the ground are not included in the lease. Rotterdam, and Hamburg) the operator may be • The authority is not liable for damages as a best able to perform under a straightforward result of defects in cables, pipes, pipelines, lease contract. In a concession, with or without and so forth. a BOT arrangement, lease conditions form part • The Operator is liable for damages that of the overall concession. The reference clauses have been caused to cables, pipes, contained in Box 35 and Box 36 can therefore pipelines, and so forth as a result of any be used under both types of contracts. Lease use of the ground. arrangements present a number of strategic • The Operator shall at all times allow access for the benefit of the owners to the cables, pipes, pipelines, and so forth in the leased property for maintenance and repair work. Box 35: Reference Clauses on Lease of • The site includes quay walls and banks with Facilities foundations and piles, constructed by the Authority. The Authority is not liable for the he lease refers to allotment(s) of land present suitability of the quay wall con- marked Lot [number], and Lot [number], struction. Tdemarcated in red and depicted in Plan • The Authority is not liable for damages of No: [number], dated [date], made by the Chief whatever nature, which might arise for the Hydrographic Surveyor and belonging to the Operator from the condition of the leased Authority, situated at [location] within the property, especially not for damages Municipal limits of [city name] and bounded caused by basic structures, pieces of on the North by [area], on the East by [area], stone, foundation remnants, poles, pipes, on the South by [area] and on the West by cables, anchors, sunken vessels, or any [area], containing in extent [number] hectares, object whatsoever that may be present on [number] acres. or in the leased property or in the surround- The quay walls and the banks below the ing area, and/or works and/or materials or ground level (yet not underground), as well as substances on or in the leased property or in the case of the banks, the body of water in the surrounding area. The ground is above it, are not included in the right of lease, leased with a bottom level alongside the but remain in the ownership of the Authority. quay wall being part of the main yard of The Operator is entitled to sublet the build- [number] meters below [reference] level and ings and the ground in whole or in part to a alongside the quay wall of the [name or third party, or to give these in use in any other number] pier of [number] meters below [ref- manner, only after having obtained prior con- erence] level. The Authority will ensure that ditional or unconditional permission from the the water depth along the quay walls will Authority. remain at the agreed level. In the event that the water depth is less than the agreed Source: Author.

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operators and their investors. If the assets Box 36: Reference Clauses on Site revert to the port authority at the end of Conditions (Continued) the lease period, maintenance standards depth, the Authority will not be liable for should be set by the port authority to damages as a result of this situation. The avoid deterioration during the final part Operator cannot invoke the right to of the period. Maintenance of operational redredging as long as the bottom has not risen to [number] below [reference] level at infrastructure is usually the responsibility a certain location along quay wall(s). The of the port authority. Such infrastructure Authority is obliged to carry out redredging is a strategic asset and should not be within a reasonable period (but not longer allowed to deteriorate. That risk exists, than three weeks) after the Lessee has sub- however, especially if an operator is in mitted a request to that purpose. If the MODULE 4 Authority fails to do so, it shall be liable for financial difficulty, since maintenance all damages resulting from the insufficient often becomes the first victim of an oper- water depth along the quay wall(s). ator trying to cut costs. However, in Source: Author. many concession agreements provisions have been included obliging the operator to maintain all assets of the terminal, issues for consideration, the most important of including the operational infrastructure. which are: This requires the port authority to set maintenance standards, which are usually • Ownership of assets: Generally, a new included in one of the schedules. operator will invest in superstructure and • Level of control by the port authority: equipment. Under a BOT arrangement, Even if legal title over assets remains with operational infrastructure, such as quay the port authority, full use and easy walls, also forms part of the investment. adaptability of the assets should be guar- If the relevant legal system allows private anteed. While the port authority should ownership of such assets, which is not exercise some form of control, such con- always the case, their transferability trol should be based on clear standards becomes a critical issue. If private owner- and be flexible to permit the operator to ship is not allowed, an agreement should quickly respond to market requirements. be reached on how to compensate, at the Prompt modification and extension of the end of the period, the operator for invest- site and the superstructure may be possi- ments made. If it is legally impossible to ble based on a previously agreed-on compensate the operator or the transfer procedures. Moreover, control standards the assets to a third party, the duration of could be uniform for the entire port area the agreement remains the only vehicle to create a level playing field for all port available for creating a bankable arrange- operators. ment. Within the framework of a balanced public-private partnership, the port • Subletting: To allow flexible port authority may allow the operator to own development, the port authority should superstructure on the site, as well as allow the subletting of ground and assets grant the right to transfer such assets to under specified conditions. third parties under certain previously The specific content of any lease is very depend- agreed-on conditions, regardless of the ent on the site conditions and local factors. The inalienability of other port property. lease usually presents in detail the responsibili- • Maintenance: Concession terms applicable ties and liabilities allocated to each party. When to maintenance of assets, especially infra- an existing site is leased or concessioned, condi- structure, are considered very carefully by tions should be enumerated clearly to give

174 Legal Tools for Port Reform lenders certainty of outcomes under particular “what if” scenarios. Box 38: Reference Clause on Governing Law he Agreement shall be construed and 6.12. Site Access governed by the law of the Republic/Kingdom of [name]. T MODULE 4 Clauses should be included in the concession Source: Author. agreement to fence off the site, while still allowing sufficient, unimpeded access to the site to enable the port authority to perform inspections (see Box 37). The port authority usually takes and dispute resolution should be addressed at responsibility for all common areas, including an early stage of the negotiation between the road connections and pedestrian areas. An port authority and the operator, particularly in operator will seek to hold the port authority the case of a concession involving a BOT agree- liable for all undue delays in road traffic ment (see Box 38). destined for the terminal. 6.14. Freedom to Set Tariffs 6.13. Governing Law To respond to market competition, operators Most often, the governing law of the concession should have the freedom to set their own agreement is the national law of the country prices. The operator should be expected to where the terminal is located. Some foreign negotiate periodically with its customers and lenders, however, require that documentation be may provide quantum rebates in return for governed by U.K.[BCJ7] or U.S. law. Issues relat- increased throughput. Only in a situation when ing to governing law, submission to jurisdiction, the operator is in a monopoly position might there be a reason for government interference in tariff setting. To avoid conflicts of interest Box 37: Reference Clauses on Access to the with the port authority, an independent port Site regulator is usually given authority to oversee tariff regulation (see Module 6 for a full discus- ree access to the site and the buildings on the site shall have to be granted at all sion on economic regulation). The mere fact Ftimes to the officers and employees of the that competing ports in the country offer lower authority, including police officers and/or other tariffs may not be a reason for regulation of persons who are authorized by the Authority, tariffs. When it can be proven that competing who may have been or may be appointed for ports offer lower prices as a result of distorting the supervision of compliance with regulations government subsidies, the competent authori- and the lease conditions, or for carrying out repairs. The Authority’s representatives shall ties should take measures to eliminate such have access to any of the facilities and subsidies, such as through a complaint to a premises to inspect and examine their competition authority. Thus, prices should only condition, provided that, unless in cases of be regulated in case of abuse of a monopolistic emergency or when circumstances so justify, position by an operator, such as in predatory the Operator will be informed of such inspection and that such inspection, whenever possible, pricing (see Box 39). shall not disturb the Operator’s operations. 6.15. Taxes Free mooring opportunity must be allowed along leased quays, berths, and other moor- National or local taxes for the leased site(s) are ing places for service and dredging vessels usually paid by the operator. At times, to used by Port Authority employees or persons encourage port development, certain promo- authorized by the Authority in the execution of tional rates or tax holidays are extended to the their duties. Mooring of such vessels should not unduly disturb cargo operations. operator during the initial phases of operation. Source: Author. Such incentives are a function of national fiscal policy (see Box 40).

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function of the market position of the port Box 39: Reference Clause on Price overall (that is, what the market can bear) and Discrimination other considerations, such as the creation of a he Operator agrees that the charges for fund for excess port workers. An important his services rendered in connection with issue is the indexation of the concession fee his operations on the concessioned T (TEU fee). This fee is usually expressed in U.S. premises shall be competitive within the port and with other competing ports having such dollars, euros, or other hard currency. Since the facilities and services. The Operator shall, term of the concession might well be more than however, at all times have the right to increase 30 years, it is evident that there is a serious or decrease such charges and modify the inflation risk. A concession agreement should relevant rules and regulations, in accordance therefore include a specific clause on indexa- with sound business practices. MODULE 4 tion. Indexation should be applied to both In the event the Port Authority (or port reg- fixed and variable fees. The easiest option is ulator, if applicable) receives a complaint or complaints of discrimination on the part of the adjusting the fee periodically on the basis of a Operator of the concessioned premises and basket of currencies, such as a combination of the Port Authority (port regulator) concludes the U.S. dollar, the euro, and the yen; the after thorough investigation that there are rea- example in Box 41 is somewhat more compli- sonable grounds to believe that discrimination cated. Sponsors and operators are often not has been practiced by the Operator, then the Operator, upon written notice to him by the willing to provide for total compensation of Port Authority (port regulator) shall cease and inflation and try to put the risks as much as desist from such practices. possible on the port authority. Source: Author. 6.17. Insurance and Indemnity Insurance for employees, equipment, and vessels covering injury and damage within the conces- Box 40: Reference Clause on Taxes sion area is typically specified in a concession he Operator shall reimburse the Port agreement. Moreover, the operator is expected Authority for all taxes, dues, concession to indemnify the port authority against a variety Tfees, and public levies under whatever name, including the surcharges, which the of incidents pertaining to port operations and Port Authority has to pay because of the other events (see Box 42). leased property or the buildings thereon. Source: Author. 6.18. Physical Security A concession agreement usually contains clauses pertaining to security in the port area. 6.16. Concession Fee Generally, these issues fall under a port author- There is no generally accepted standard for a ity’s jurisdiction, although a terminal operator concession fee. This fee is usually determined also bears part of the responsibility. Since the as the sum of a fixed fee for the use of the ratification of the ISPS Code (International areas under administration of the authority and Ship and Port Facilities Security Code) by most or a variable fee in the form of a throughput maritime countries, security has improved con- royalty for the right to perform cargo handling siderably. The code applies to all commercial services. The fee amount is a function of local vessels undertaking international voyages as circumstances. The fixed portion may represent well as all port facilities. The concession should the infrastructure costs (and superstructure oblige the operator to apply the relevant provi- costs, if applicable) of the terminal, including sions of the code and to cooperate with the financing costs. The structure and level of the port authority and the harbormaster within the concession fee is a primary element for analysis framework of the required port security plan by project lenders. The variable fee is often a (see Box 43).

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Box 41: Reference Clauses on Concession Fee The concession fee exists of two elements: published in the seventh calendar month • A Lease Rent, related to the amount of square preceding the time of adjustment.

meters of port area leased by the Operator. • The denominator of which is formed by the MODULE 4 • A Throughput Royalty (or TEU Fee), related to same price index figure, which applied in the the amount of cargo/number of containers han- same month a year earlier. dled on the concession area by the operator. Should the details referred to in the previous A fixed sum of $ [amount] per annum shall be paragraph cease to be available, then the paid by the Operator as the Lease Rent. This authority is entitled to calculate the Lease Rent rent shall be paid in advance in four equal adjustment on the basis of any other similar installments on January 1, April 1, July 1, and index or methodology. This adjustment October 1 into account number [number] with requires mutual agreement. If such agreement [name] Bank in [place] in the name of [name] cannot be reached, then this shall be deter- Port Authority. If the period for which the right to mined in the manner given in Section [number] lease is granted does not commence on one of on the basis of the advice of three experts. these dates, then the Lease funds incurred over The Operator will pay to the Port Authority the period between the commencement and the an annual Throughput Royalty in the amount of beginning of the next quarter will be paid on the $ [amount] per ton cargo throughput/Twenty first upcoming date mentioned above. Feet Equivalent Unit (TEU) container handled in The amount owed to the Authority in accor- the concession area, regardless the manner in dance with the right to lease shall be paid in which it is handled or which mode of transport full and without any discount or debt compen- is used, payable in two installments after every sation, regardless of nature. six months (within 30 days after the end of each period). The Throughput Royalty will All adjustments shall be calculated by multi- increase every year in accordance with the plying the rent sum, which applied most price index figure given by [name of agency] recently by a fraction of which: (or any other mutually agreed index). • The numerator is formed by the price index Source: Author. figure as given by [name of agency], which is

Box 42: Reference Clauses on Insurance and Indemnity he Operator undertakes to provide the The Port Authority hereby holds the necessary and relevant insurance covers, Operator free and harmless from any and all Tin respect of its employees, equipment, liabilities and claims for damages and suits and vessels being serviced for injury, damage for or by reason of any death or injury to any to the terminal, vessels, and/or cargo when person or damages to property of any kind, they are, at all material times, considered to be whether the person or property of the Port under control of the Operator. Authority, its subcontractors, agents or The Operator hereby holds the Port Authority employees, or third persons, arising out of free and harmless from any and all liabilities and negligent or intentional act or omission of the claims for damages and suits for or by reason Port Authority in connection with this of any death or injury to any person or damages Agreement, and the Authority shall indemnify, to property of any kind, whether the person or save, and hold harmless the Operator from all property of the Operator, its subcontractors, liabilities, charges, expenses (including reason- agents or employees, or third persons, arising able attorneys’ fees), and costs on account of out of negligent or intentional act or omission of claims, suits, and losses arising there from. the Operator in connection with this Agreement, The Operator indemnifies the Port Authority and the Operator shall indemnify, save, and against all claims due to noncompliance by the hold harmless the Port Authority from all liabili- Operator with the provisions relating to the ties, charges, expenses (including reasonable site, which have been given by the competent attorneys’ fees), and costs on account of public bodies. claims, suits, and losses arising therefrom. Source: Author.

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Box 43: Reference Clauses for Security he Port Authority confirms that unless Authority’s actions or the actions of any other otherwise agreed under this Agreement, organization authorized under the ISPS Code Tit shall, at its own cost and expense, pro- other than those resulting from its willful or vide security at the Port, generally for the pre- grossly negligent acts or omissions. vention of terrorism, hijackings, sabotage, Subject to the rights granted to the Operator, and/or similar acts or occurrences. the Port Authority shall be entitled to inspect The Port Authority shall be responsible for and search all vehicles and other modes of the provisions and maintenance of all perime- transportation including vessels entering the ter fencing around the Port and the general Concession Area or departing there from and security within the Port, having full regard to similarly to search or question any person enter-

MODULE 4 the provisions of the ISPS Code and the law. ing the Concession Area or departing there The Operator shall be responsible for the pro- from, without unduly or unreasonably disrupting vision and maintenance of perimeter fencing the operations of the Terminals. around the Concession Area and for its own The Parties agree to establish, review, and security arrangements within the Area in order to implement procedures as may be required maintain the proper and orderly conduct of its from time to time under the ISPS Code. business and the general security thereof. The government agrees that it shall, at the Furthermore, the Operator shall abide by and request of the Operator, provide and procure implement any instruction issued by the Port the services of security forces of the relevant Authority aiming at enhancing the security meas- authority as may be necessary to prosecute ures within and around the Concession Area. persons for any offense committed within the Subject to the rights granted to the Concession Area. Operator above, all organizations authorized Any security forces ordered into the under the ISPS Code shall be entitled, if and Concession Area for the purpose of protection when deemed necessary by the Port Authority of the persons and the property and vessels and/or the authorized organization, to deploy present in the Area, shall be allowed by the their security personnel in the Concession Area Operator to perform their task and duties under and the Operator shall not be entitled to any the supervision of the competent authority. compensation for any disruption of its opera- Source: Author. tions or loss or damage resulting from the Port

6.19. Unclaimed Cargo and Carriers Often, cargo at the port is not claimed by the Box 44: Reference Clauses on Unclaimed rightful owners. In cases of complex customs Cargoes legislation or port bylaws, warehouses filled ll containers, packages, and cargo with unclaimed cargoes may burden the opera- deposited in the terminal and not tor’s ability to manage the terminal and meet Aremoved at the expiry of a period of [number] days or [number] days in case of performance targets. Therefore, the operator transshipment containers, may be disposed will expect to set clear rules with respect to of by public auction, in conformity with such cargoes and who bears removal responsi- Section [number] of the [name] Act, No. bility and costs in conformity with custom’s reg- [number] of [year]. ulations (see Box 44). As regards to unclaimed containers containing perishable or hazardous goods, 6.20. Information and the operator shall dispose of such goods Communication according to the requirements set down by the relevant authorities and as per national It is essential that a port authority is able to gain regulations in force. access to recent, relevant, and direct information Source: Author. on all aspects of port operations, including

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where the fortunes of one directly bears upon Box 45: Reference Clauses on Information the results obtained by the other. That contrac- and Communication tual relation, therefore, should not be terminat- he Operator shall install and maintain an ed without good cause.

efficient information and communication MODULE 4 Tsystem and shall provide online informa- The way termination clauses are conceived tion to the authority on all aspects of opera- reflects the power balance between the two par- tions necessary for providing marine services ties. An operator with alternative port locations and for monitoring. available will not easily accept harsh termina- The authority and the Operator will agree, in writing, on the type and flow of extra infor- tion clauses. On the other hand, a port authori- mation that may be communicated to the ty should be aware that an operator might fail authority on request. in the market, and valuable port land may lay The Authority and the Operator shall unused for years if the right to terminate the immediately inform each other of any matter concession is not clearly defined. Finally, lenders that may affect the operational performance to the operator should be very careful in their of the Operator under this Agreement, includ- analysis of these provisions to ensure their ing but not limited to: interests are protected (see Box 46 and Box 47). • Fire within the terminal or within the Authority’s area of responsibility. 6.21.1. Termination Due to Noncompliance • Damages/stoppages caused by severe weather conditions. In the event the operator fails to comply with • Industrial disputes with risks of work stop- its obligations, a port authority will ordinarily pages. have the option to terminate the agreement. • Major damage to facilities, premises, and/or Termination for cause is very serious, especially equipment. for financing parties, and should be avoided as • Pollution of the environment within the much as reasonably possible. The operator Authority’s area of responsibility. should be given a reasonable period to demon- Source: Author. strate compliance with the terms of the agreement and resolve noncompliance events. However, an operator may be in financial marine operations and cargo throughput. The distress, for example, and unable to pay the port authority should be informed promptly concession fee. In this case, the port authority about all incidents occurring in the port area so may not directly terminate the agreement, but that it can undertake appropriate measures in consider the seriousness and likely duration of response. The agreement includes a requirement the problem. If it is determined to be temporary, for the operator to provide such information the port authority, perhaps in concert with the (see Box 45). operator’s lenders, may come to an understanding with the operator (for example, a deferred 6.21. Termination and Prolongation payment scheme) that avoids termination of the agreement (see Box 48). Termination clauses of a concession agreement are of prime importance for the relationship 6.21.2. Termination Compensation between the port authority and the operator, especially under a BOT arrangement. The conces- As discussed above, every concession includes sion agreement represents a negotiated balance clauses on termination compensation, irrespective between the interests of the port authority (an of the reason. The port authority or the operator efficient and economic use of the port land) and may terminate the concession before expiration the operator (provision of cargo handling services in the event that the other party is in material on a profitable basis). Both parties are tied default of the agreement. Moreover, a concession together in a long-term symbiotic relationship may be terminated by mutual agreement after a

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Box 46: Reference Clause on Termination by Box 47: Reference Clause on Termination by the Port Authority the Operator he following (unless as a result of a he following (unless as a result of a Force Majeure or change in law that Force Majeure or change in law that T results in consequences set out in Article Tresults in consequences set out in [number] or a default of the Port Authority) Article [number] or a Default of the Operator) shall constitute Operator Events of Default: shall constitute Authority Events of Default: • A material breach of a material provision of • Commission of a material breach of a this Agreement by the Operator. material provision of this Agreement by the • Repudiation of this agreement by the Port Authority. Operator or the evidencing of the intention • Repudiation of this Agreement by the Port

MODULE 4 by the Operator not to be bound by the Authority or the evidencing of the intention terms of this Agreement. by the Operator not to be bound by the • Appointment of a provisional liquidator pro- terms of this Agreement. viding for winding up of the Operator, after • Dissolution of the Port Authority and occur- notice to the Port Authority and due hear- rence of any structural changes within the ing, unless such appointment has been set present constitution of the Authority that aside within [number] days. have a material adverse effect on the rights • The Operator is ordered to be wound up by and obligations of the Operator under this a court or files a petition for voluntary wind- Agreement, or the transfer of the Port ing up except for the purpose of amalga- Authority’s undertaking and statutory pow- mation or reconstruction provided that the ers or any material part thereof, unless such property, assets and undertakings of the dissolution or structural change or transfer Operator are transferred to its successor. is in connection with privatization or other restructuring of all or any substantial part of • The Operator abandons the construction or the Port Authority, and the Port Authority’s operation of the terminal/port and the facili- successor is able to perform the Port ties for a continuous period of [number] days. Authority’s obligations under this • Persistent failure on the part of the Agreement. Operator to operate and promote activities Source: Author. at the terminal/port and provide terminal users with services in accordance with good industry practice and in accordance with the provisions of this Agreement. becomes more important in concessions with • Failure to pay the concession fee for a con- shorter terms. One may expect that concession secutive period of 6 months. agreements with a duration of 10 years or • Failure to comply with lawful directive given shorter will not generate significant investment. by a statutory authority connected with ports. When there is an option to continue under bal- Source: Author. anced conditions, an operator might be tempted to take more investment risks. It is therefore in the interest of the port authority to include force majeure event such as a tsunami or earth- options to continue the agreement. quake. In either case, the port authority is liable to pay a termination compensation to the oper- Generally, the port authority, when there is a ator since all fixed and movable assets of the mutually beneficial relationship between the terminal are transferred back to the authority. parties, may favor extending an agreement The main issue, however, is how to assess the under new conditions. Significant time and value of the assets. expertise may be lost if a new operator has to 6.21.3. Option to Continue be found and terminal operations have to be restarted under new management. Judgments Many concession agreements provide an option about agreement extensions depend on, among to extend the term of the concession. This feature other things, the position of the port in the

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Box 48: Reference Clauses on Termination Box 49: Reference Clauses on Prolongation Due to Noncompliance t least two years before the expiration ithout prejudice to the conditions of of the concession, the Operator may require the Port Authority to take a Subsection [number], the A MODULE 4 WConcession Agreement may be ter- decision concerning the extension of the minated by the Port Authority on the grounds period for which the concession is granted, of noncompliance by the Operator with one or as well as concerning the concession fee and more obligations under this Agreement. The the provisions, which shall apply for the dura- Port Authority shall send a notice of termination of its renewal or extension. The Operator tion to the Operator by registered mail, indi- shall approach this in the manner stipulated in cating the date of termination and the reasons the following paragraphs. thereof. There must be at least [number] of The Operator shall send a written request months between the day of sending the letter to the Port Authority by registered mail. The and the termination date. request shall indicate the number of years for If the Operator complies with the terms of which the extension is requested, with a this Agreement before the termination date, maximum period of 10 years, and the the decision of the Authority to terminate the proposed concession fee. The Port Authority Concession/lease shall become ineffective will inform the Operator in writing of its and shall be deemed not to have been taken. decision and the reasons thereof within six If the Concession is terminated on the months after receiving the request. grounds of the provisions given in this Article, The request of the Operator shall expire if the Operator shall, as are result of the mere he has not reached agreement with the Port fact of the termination, forfeit a fine amount- Authority with regard to the extension, the ing to [number] times the sum of the annual amount of the concession fee, and the provi- Concession Fee owed by virtue of the provisions within three months after receiving a sions of Section [number], which applied response mentioned in the previous subsec- most recently, and all rights of whatever tion. In that case, the Operator has the option nature to everything which is built on or either to have the concession agreement placed in the site shall pass over to the expire or to revert to arbitration as mentioned Authority, without compensation for damages, in Section [number]. and without prejudice to legal proceedings for (optional) In determining the Concession compensation of damages. Fee for the duration of the extension, no Source: Author. consideration shall be given to the value of the buildings or structures in the Concession Area constructed by the Operator. overall market and the alternatives available to Source: Author. the operator (see Box 49).

6.21.4. Bankruptcy

The port authority will usually insist on the right to terminate the agreement in case of the Box 50: Reference Clauses on Bankruptcy bankruptcy or insolvency of the operator. f the Operator is declared bankrupt, applies Sometimes an operator will be provided an for a moratorium, or loses his status as a Ilegal entity during the concession period, opportunity to resolve such insolvency petitions the Port Authority may summarily terminate within a limited period of time (see Box 50). the Concession Agreement. In the event that more than one legal entity There are various methods, but in general the acts as Operator, each of them shall be sepa- basic principle for assessing termination com- rately liable for fulfilling all obligations arising pensation is the fair value of all the assets from this Agreement. brought into, created, or installed at the conces- Source: Author. sion area, including:

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• The movable assets and facilities trans- 6.22. Expiration of Concession ferred to the operator (whether renewed Upon expiration of the concession period, the or replaced). facilities built on the site and any title that • All other movable assets, (including intan- passed to the operator as part of a B(O)OT gible assets such as software and terminal arrangement will be transferred back to the port management systems, subject to the terms authority. In some contracts, the site may have on which they have been licensed, whether to be restored to its original state, which could renewed or replaced, whether fixed or mean that the operator must demolish struc- attached to the ground, created, installed, tures and installations that were built on the or provided by the operator at the termi- site during the concession period. Equipment nals, including at the extension works. would be transferred or retained as a matter of MODULE 4 contractual obligations; it may be compensated • All related documentation and manuals at book or market value, or it might be (such as the maintenance manuals, removed from the site by the operator for sale operation and management manuals, and or for use elsewhere. An obligatory free transfer so forth). of equipment to the port authority is not rec- • All quays and storage infrastructure that ommended due to the maintenance require- have been created or brought into the ments for such equipment. If an operator knows concession area and all other opera- that it may have to transfer equipment at the tional port infrastructure and super- end of the concession period, the operator may structure created and constructed at the cut back on maintenance as much as possible to terminal. save money toward the end of the period.

The fair value is usually determined by an inde- The concession agreement should specify the pendent appraiser who acts as an expert, not as condition of the basic and operational infra- an arbitrator, and should have the power to structure at the time of transfer. The port obtain relevant information from the parties to authority should monitor thoroughly the infra- make an independent assessment. In no circum- structure maintenance (life cycle maintenance, stances shall the appraiser apply any earnings- routine maintenance, and reactive mainte- based valuation methodology, or take into nance), and, if applicable, the superstructure account any goodwill in the business of the throughout the concession period. Any deficien- operator for determining the fair value of the cies found during the joint inspection prior to assets at the concession area. The fair value hand-back should be corrected by the operator. would normally be subject to addition or The authority should expect to receive all con- deduction depending on which party was in struction documentation for installations, power default. and water lines, sewerage systems, and any other There are many methodologies for determining systems that have been constructed underground fair value. Examples include the basis of book at the site during the concession period. The oper- value of the assets minus depreciation or ator should also remove all remnants of piles, replacement value or using the going concern foundations, and similar civil works before leav- method of calculating lost future cash flow of ing the site. When the site is to be handed over in the entity. Obviously, the contractual clauses on its “original condition,” all later restoration costs fair value are an important issue for negotiation should be borne by the operator (see Box 51). between the port authority and the prospective operator when concluding a concession agree- 6.23. Arbitration ment. The methodology of determining fair Many concession agreements include a provi- market value should be agreed on and included sion for arbitration. Sometimes, reference is in the concession agreement. made to International Chamber of Commerce

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Box 51: Reference Clauses on Expiration of Concession ot less than [number] months prior to • All documents, manuals, records, and so the date of expiration of this agreement, forth as may be required for the efficient the Port Authority and the Operator shall operation of the terminal/port. N MODULE 4 conduct a joint inspection of the facilities. The hand-back (and compensation) shall relate Such inspection shall be in accordance with only to tangible assets and such intangibles the requirements of the hand-back scheme (such as capital dredging) identified for the included in Annex [number]. purpose of the Article in the Approved DPR. The Operator shall ensure that on the date of If there are piles in the site that have been expiration of the Agreement, each element of the placed there by the Operator and/or by other facilities complies with the requirements of the parties, the Operator shall submit a full and hand-back scheme included in Annex [number]. clearly specified drawing thereof to the The Operator shall at the expiration of the Authority. The Authority shall decide how these lease period peacefully and quietly leave, sur- piles should be removed and to which depth. render, and yield up the site to the Port The Operator shall strictly comply with the Authority or to its agents without any claim for instructions that are given by the Port compensation in respect to any improvement Authority. The Port Authority is entitled thereby effected by the Operator on the site and shall to prescribe that one or more piles are left before leaving, demolish, at the request of the behind in a good condition, without the Port Authority, some or all buildings constructed Operator being able to claim any form of com- by the Operator and remove any equipment, pensation for the piles that will be left behind. machinery, or appliances installed therein, In the absence of clearance within three which otherwise will be vested in the Port months after the end of the lease period the Authority without compensation. Moreover, fences, buildings, mooring sites, installations, other items have to be removed such as and in general everything that is still situated stumps of piles, piles, foundations, materials, on or in the site, shall revert to the Authority. substances, and the like. If the site is not handed over in its original The scope of the hand-back of assets shall condition, after removal of everything that has include all assets prevailing at the site as at been built thereon, placed therein, or brought the date of transfer, and shall, inter alia, thereto by the Operator and/or his predeces- include: sor(s) and leveled at the proper height, all • All land and buildings. costs that the Authority will incur in order to • Plant and machinery. restore the site to its original condition shall be refunded by the Operator. • Spare parts. (optional) The Operator shall, at the expira- • Such deeds and documents as may be nec- tion of the lease period, sell back to the essary for effectively transferring rights, title, Authority the existing quay walls and all other and other interests under this Agreement in new mooring facilities constructed during the favor of the Port Authority free of all encum- Concession Period. In the event that parties brances. cannot agree on a price, the price will be deter- • The benefits of all rights and interest in all mined by an Arbitration Commission appointed unexpired insurance, guarantees, and con- in the manner given in Section [number]. tractor warrantees, if so desired by the Port Source: Author. Authority.

(ICC) arbitration (which is the preference of cannot come to an agreement. This type of arbi- most lenders) or to a local arbitration institute. tration can also be applied to other conflicts Often, a specific procedure is presented in the that may arise during the concession period. agreement. Arbitration is often a preferred option in case of a conflict between parties. The 6.24. Costs reference clauses in Box 52 are meant for decid- Costs pertaining to the use of the concessioned ing on increases of the concession fee, if parties site are usually paid by the operator, including

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Box 52: Reference Clause on Arbitration n the event that the parties do not reach • Special circumstances under which the agreement on a new concession fee before Concession Agreement has been concluded Ithe new period commences, the fee shall be with those of other parties in the port area. determined by the parties in the manner given • In the event that within the last two years below on the basis of the advice of an prior to the end of the concession period no Arbitration Commission consisting of three other sites have been issued in concession arbitrators. within the area of the Port Authority, the In that event, the Port Authority and the Commission shall decide on the adjustment Operator shall appoint one arbitrator, and the of the Concession Fee under observance of: two arbitrators thus appointed shall appoint the ~ The situation and the condition of the site.

MODULE 4 third arbitrator; if a party fails to appoint the ~ The conditions under which the site was arbitrator within [number] days of receipt of a concessioned. request to do so from the other party, or if the two arbitrators fail to agree on the third arbitra- ~ The special circumstances under which tor within [number] days of their appointment, the site was concessioned. the appointment shall be made, upon applica- ~ The increase or decrease of the user tion of a party, by the [name] Court. The arbi- value of the site concerned as a result of trators shall be notified of the provisions of this external circumstances. agreement, to the extent that these are impor- ~ The increase or decrease of the value of tant for them, by the parties who appoint them. money. By accepting his appointment, an expert sub- If all three experts, or two of them, agree on a jects himself to the aforesaid condition. new Concession Fee, the Commission shall The third arbitrator will act as Chairman of inform parties in accordance therewith in writ- the Arbitration Commission. The Arbitration ing. If all three differ in opinion, then the new Commission shall, together with a well-moti- fee shall be established by the Commission at vated statement of their considerations and half of the total of the two estimates, which arguments, give its decision as to the extent to have the smallest difference between them. If which the Concession Fee must be reviewed the difference between the lowest and the in relation to the Fee, which was charged dur- middle estimate is the same as the difference ing the last year of the concession period. between the middle and the highest estimate, In doing so, the Commission shall compare: then the fee shall established by the • The situation and the condition of the area Commission in accordance with the middle with that of the other port areas, without tak- estimate. ing into account the nature of the use or the A change in the fee by virtue of the provi- fact that they are built on. sions in this article shall, if one of the parties • The conditions under which Concession expresses the desire thereto, be laid down in a Agreement(s) concluded with other parties in separate deed. the port area. Source: Author.

the case in which the port authority holds legal that are logically interrelated and lead to con- title over the port land (see Box 53). cessioning of terminal activities under the best possible conditions for the government and port 6.25. The Tender Process and authority. The steps are explained below. Transaction Preparation Under a concession, the long-term use and Marketing strategy: The first step is to ensure exploitation of port land and assets are trans- that a company profile reaches a reasonable ferred to private parties through tender. The number of relevant bidders (“reasonable” refer- process to achieve this transfer in an optimal ring to both creating sufficient competition and manner has to be both effective and transpar- avoiding large costs). The company profile com- ent. This requires taking a sequence of steps prises the most relevant information on such

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Managing the transaction to its conclusion Box 53: Reference Clause on Costs (bidding stage): After short listing, the here this Agreement determines that candidates are obliged to carefully review the costs, damages, taxes, and other information memorandum, which shall contain levies by public bodies and the like W information on an array of issues. These issues MODULE 4 are for the account of the Operator, the latter shall pay the amount stated by or on behalf of are listed in the relevant task sheet. The infor- the Port Authority and shall at the same time mation memorandum will then be sent to those state the reason for the payment, immediately requesting it and prequalifying. They are invited upon the first request, without awaiting notice to respond to it in a prescribed standard in default or court intervention. manner. Standardizing the bids ensures rational All costs incurred for this Agreement and comparison, scoring, and ranking, and also makes supplementary agreements shall be for the the whole process transparent and defendable. account of the Operator. Source: Author. After the bids have been submitted, comparing, scoring, and ranking sessions should be held under the advisory guidance of a professional issues as core activities of the offered prospect port consultant. At this stage, bid standardiza- and future perspective of these activities. At the tion achieved by the identical information same time, the financial, operational, strategic, memoranda sent to the bidders will prove to be and other contributions expected from the bid- crucial to finalizing the selection process in a ders are specified (prequalification criteria). transparent and effective manner, leading to Further, the profile refers to the existence of an best results for the port authority. The selection information memorandum that is available to process includes several phases: parties that are interested in making a serious bid and are able to comply with selection criteria to • Formation of an evaluation team: This qualify for negotiations. The information team might comprise representatives of memorandum should include strategic, economic, several relevant ministries and the port and financial information on the relevant port authority. The evaluation team should be or terminal, the main provisions of the conces- assisted by a professional port consultant. sion agreement to give prospective bidders information on the institutional and legal • Arranging the evaluation session: background of the port sector, as well as the Experience suggests that a thorough eval- selection criteria. uation session of the bids will take at least two weeks, depending on the num- Selection (prequalification): Reactions to the ber of eligible bids received. The bidding profile are screened in accordance with the pre- envelopes should be opened in the pres- qualification criteria. The obtained “long list” ence of the press and their contents veri- will then be put to a further test and probably fied. The documents should then be narrowed down to a “short list,” to ensure that copied and distributed. only serious bidders submit proposals. • Evaluating the bid: First step in the scor- Interfacing: The short listing process, with its ing process is to design a bid evaluation submission of concise information to a long list chart. On the chart, an unambiguous list of bidders, and the need felt by the latter group of evaluation criteria and a scoring range to know more, will almost certainly invoke inter- will be drawn up, later to be used by the actions between prospective bidders and stake- evaluation team during the scoring holders in the government or port authority. This process. Most importantly, scoring crite- may result in a bidders conference (pretender ria will have to be agreed-on to sort the meeting), workshops, road shows, investor tours, bidding information of the various bids one-on-one meetings, or similar events. into categories. For each of the categories,

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and the subcategories derived from them, a 6.26. Miscellaneous Conditions predetermined number of points or a frac- The concession agreement may contain provi- tion thereof can be awarded, depending on sions to cover a number of miscellaneous condi- whether or not and to what degree the tions and activities in the port, including environ- criteria have been met. mental conditions, construction and maintenance • Scoring process: The scoring process itself of a fence around the site, advertisements, and will consist of filling in one bid evaluation dumping of liquids in port waters (see Box 54). chart per evaluation team member per bid- 7. BOTS AND CONSTRUCTION der. These individual results will then be grouped on a bid evaluation results list, An operator managing a site under a concession showing how many points the evaluation or lease agreement usually obtains the right to MODULE 4 team as a whole has awarded to each bid- reconstruct the site, to erect buildings, and der per category, per subcategory, and as a introduce new equipment. When the site is con- grand total. The ranking of the bidders will structed or reconstructed under a BOT arrange- automatically emerge from this exercise. ment, the operator also has the right to build new quay walls, to dredge channels, and create Negotiations (political approval and contract- new port land. In undertaking these activities, ing): Since concession agreements are usually the operator assumes some duties previously very complicated, particularly when a BOT undertaken by the port authority. arrangement is included, the port authority’s negotiation team should be professional and Every concession agreement contains lease condi- fully authorized to conduct the negotiations and tions when ownership of the site formally remains be assisted by an (external) international port lawyer. In the event that many government departments are involved, it is advised to agree Box 54: Clauses on Miscellaneous Conditions on a mandate for the negotiation team (negotia- f, when carrying on businesses or when tion guidelines), including the (minimum) posi- building, expanding, or changing construction on important issues that constitute the Itions and/or installations, an environmental main part of the concession. These issues usually license or another license is required, not only this (these) license(s), but also a separate per- are: mission from the Authority shall be required • Lease rent and TEU fee, minimum by virtue of this article. guaranteed throughput, and indexation. The Operator shall have to fence off the site to the satisfaction of the Authority and • Term of the concession. keep it fenced off from the public road and from the adjoining land at all times. • Termination compensation (establishment The partitions, buildings, mooring sites, of fair value). and/or installations may only bear advertising, • Lender security and lender’s direct legends, announcements, signs, and the like agreement. relating to the business of the Operator, and also those that are prescribed by or on behalf • Liabilities. of the government. All other advertising and the like, including that which is put up against • Transfer of port workers in case of the the will of the Operator, shall be removed concessioning of an existing terminal. immediately by the Operator. • Construction program, milestone achieve- With the exception of rainwater, dumping of solid substances and liquids into the port is ment dates, and milestone sunset dates in not allowed unless the Authority has given the case of a BOT arrangement. permission in writing to do so. This permission may include conditions. In practice, negotiations may take a long time, ranging from one month to one year. Source: Author.

186 Legal Tools for Port Reform with the port authority. When ownership is tem- provision deals with the granting of exclusivity porary or definitively transferred to the operator rights, guaranteeing that the port authority (under BOOT or BOO arrangements), the con- does not promote or permit any other compet- cession agreement may include a variety of claus- ing facility in the concessionaire’s port area for es pertaining to the use of the site, although such a certain time period (sometimes incorporated MODULE 4 clauses may be based solely on a public license, a into a sponsors direct agreement) (see Box 55). port bylaw, or other enabling authority. 7.2. BOT and BTO Arrangements BOT arrangements in a concession agreement are spelled out in detailed provisions covering BOT and BTO arrangements are frequently inte- construction, quality control, time schedules, gral parts of concession agreements. The differ- milestones, and similar issues. One important ence between these models is the time at which

Box 55: Reference Clauses on Construction and Maintenance (Landlord Port Situation) he maintenance of the site at its present apply to objects, liquids, or materials that origi- level shall be carried out by and for the nate from vessels moored alongside a quay wall Taccount of the Operator. owned by the Operator, which are owned by, or The maintenance, the repair, and the reno- carrying out services on behalf of the Authority. vation of the foundations and piles of the quay The Operator shall further be obliged to take wall, the electricity channel with brush contact such measures as shall be necessary in the groove, and the connection pits for light, water, opinion of the Port Authority to enable dredging and telephone supply and appurtenances and placing and removing any mooring posts thereto, and also of the visible concrete works and the like in the vicinity of the leased proper- of the quay wall, shall be carried out by and for ty, which entails, among other things, the fact the account of the Port Authority. that the Operator shall allow means of anchor- The Operator is obliged to maintain the building, mooring, and dredging vessels to be ings, installations, fences, roadways, mooring installed, used, and maintained by or on behalf sites on the site in a proper manner and, if nec- of the Port Authority in the shore strip of the essary, to renew them in due time. Buildings that site, this at places which shall be indicated by are run down and no longer used for business or on behalf of the Port Authority. operations shall be demolished. All this shall be For that purpose the Operator shall, at his done to the satisfaction of the Port Authority. own expense, carry out such work to its fences, All costs for the construction and mainte- buildings, mooring sites, installations, and the nance of roads, sewers, electricity lines, gas like as shall be deemed necessary in joint con- and water pipes, and lighting on the site are sultation with the Port Authority in order to avoid for the account of the Operator. damages that could arise from the work or provisions which are to be carried out by or on If objects, liquids, or materials are present in behalf of the Port Authority. If, as a result of work the water, or in or on the bottom of the port or or provisions carried out by the Port Authority, in the vicinity of the site, which, in the opinion of damage is inflicted to fences, buildings, mooring the Authority, do not belong there and have sites, installations, and the like of the Operator, originated from the site or from vessels moored such damage shall still be for the account of the alongside a quay wall owned by the Operator, Operator, unless the Port Authority can be held the Operator shall pay the Port Authority the responsible for gross fault or negligence. costs that arise from the removal thereof, unless the Operator proves that the objects, liquids, or Without prejudice to other provisions in this materials originate from another source. agreement, the Operator shall contribute to the costs, to be borne by the Port Authority, of The Operator shall indemnify the Port Authority cleaning the surface water in the harbors and for all claims of third parties in respect of dam- above the sloping embankments in proportion ages that arise from the presence of the said to the area of the sites bordering the harbor, objects, liquids, or materials, to the extent that and the length of the waterfront. they do not originate from a source other than is referred to above. This indemnification does not Source: Author.

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the operator transfers the newly constructed the port authority at the end of the concession assets to the port authority. BTOs are employed period, the port authority pays the operator in when relevant legislation does not allow for the accordance with the residual value, calculated private ownership of port assets. Transfer is con- on the basis of the established formula. ducted immediately upon the completion of construction and the operator receives the equiva- 7.3. Functional and Technical lent of a management contract. Design under a BOT Arrangement Generally, a port authority presents functional The distinguishing feature of the BOT arrange- specifications for the facility to be constructed ment is the legal form of user rights. The con- under a BOT arrangement. When the authority cession agreement always sets out clauses that specifies detailed construction works, it becomes

MODULE 4 clearly define such rights. The concession enti- vulnerable to delays, construction errors, and, tles the operator to a right to use and exploit perhaps, the application of wrong technology or port infrastructure and, in the case of an exist- processes relative to expected port functions. ing terminal, also to use the superstructure and Many ports simply lack the required expertise to available port equipment. prepare detailed technical specifications for The scope of the concession agreement appears modern port construction works. in its preamble. The preamble typically consists Since new facilities are to be transferred to the of three main elements: port authority in due time, it is useful to engage • The right to construct new port infra- a technical consultant who represents the port structure and superstructure. authority and reports on the progress of the work. The technical consultant can also observe • The right to use of the subject assets. the way in which the project is being construct- • The right to exploit the site during the ed to meet the functional specifications and the tenure of the concession (see Box 56). requirement to use best practices for design, materials, and workmanship. The consultant Most concessions have a term of 30 years or may also assist in evaluating alternative techni- more. Extension of the concession can usually cal solutions and advise on the best technical be renegotiated at any time during its lifetime in and cost-effective solutions. case the operator plans a major investment in the port’s infrastructure in return for an adjust- A crucial point in the design phase is obtaining ed tariff rate reflecting changes that may have agreement on a timetable for completion of the been introduced pursuant to the extension. In detailed technical design. The design should case no agreement for extension is reached by include an interface element to integrate the ter- the end of the 30-year term, the concession ends minal into an existing port area. The interface and the right to use and exploit the port’s infra- element takes into consideration paving levels, structure and other assets reverts to the port drainage, fencing, design and routing of under- authority (or another government agency), ground facilities, reconstruction of existing preferably under a fixed-price formula. infrastructure within the concession area, and access through neighboring port areas and ter- 7.2. BOOT Arrangements minals. Under a BOOT scheme, sometimes an operator is allowed to own the site on which improve- Finally, the operator is obliged to provide the ments are to be constructed until the end of the port authority with sufficient detailed bench- concession period. Usually, the concession mark data to allow for evaluating and monitor- agreement specifies the value of the assets under ing the development of the concession area as a predefined formula (including an agreed-on part of the approved DPR and the agreed-on depreciation table). At the time of transfer to construction program (see Box 57).

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Box 56: Reference Clauses on Scope of a Concession Agreement (including a BOT arrangement) HEREAS Article [number] of the Ports the Site and the assets thereon to the Act of [date] gives the port authority Authority on termination of the Concession of [name] the exclusive right to Agreement. W MODULE 4 develop, construct, and maintain basic and WHEREAS a Detailed Project Report (DPR) operational infrastructure in its port area. has been prepared and submitted by the WHEREAS it is the policy of the govern- Operator, in accordance with the terms of the ment/Port Authority to have the new terminal LOI, to the Authority on [date], [year], and has constructed and operated by a commercial been approved by the Authority. The DPR with operator (or have the existing terminal known such modifications shall be referred to as the as [name] be reconstructed and operated by a Approved DPR (annexed hereto as Annex commercial operator) under a [BOT, BOOT, [number]), and shall be treated as a part of this BTO] arrangement. Agreement. WHEREAS the Authority has invited bids in WHEREAS the Concession Area required [month] [year] for the Project, and through a for the development of the terminal/port process of competitive bidding selected in [name] and the minimum area of land required [month] [year] the Consortium of [name] as to be leased to the Operator for the com- Sponsors, hereinafter referred to as the mencement of the construction have been “Operator,” led by [name], a company whose identified in the Approved DPR. The Operator registered office is at [location], (the “Lead has agreed to construct the Contracted Assets Sponsor”), as identified in the Joint on the Site in accordance with Annex [number] Development Agreement for developing the of the approved DPR. terminal/port of [name]. WHEREAS on the signing of the LOI, the WHEREAS, subject to the provisions of this Operator provided a Development Guarantee Agreement, the Sponsors and its designated in favor of the Authority for $ [amount], which Operator shall have the right and the obligation unless otherwise agreed to, shall remain in to finance, design, construct, equip, test, com- force and effect until the Zero Date. mission, operate, and maintain the WHEREAS at the signing of the LOI, the terminal/port known as [name]. Sponsors provided a Development Guarantee WHEREAS the Authority awarded a Letter in favor of the Authority for $ [amount], which of Intent (LOI) dated [date], [year], to the unless otherwise agreed, to shall remain in Sponsors to finance, design, construct, equip, force and effect until the Zero Date. test, commission, operate, and maintain the WHEREAS the parties hereto have agreed terminal/port [name] on [BOT, BOOT, BTO, and to render all necessary cooperation and assis- so forth] basis, (and has agreed to grant a tance and take appropriate action for giving license to the Sponsors under the [name] Act, effect to the terms of this Concession No. [number], dated [date], for financing, Agreement. designing, constructing, equipping, testing, WHEREAS the Operator, being duly commissioning, operating, and maintaining the licensed to operate in the port, has applied for terminal/port [name]). appointment to start container/general (optional) WHEREAS the Authority has been cargo/bulk services at the above mentioned reimbursed by the Sponsors for the cost asso- terminal on the Date of Commencement of ciated with site specific technical studies that Operations. were undertaken by the Authority [at the time WHEREAS the Authority is satisfied that the of approval of the Detailed Project Report] [at Operator is qualified in this field. the time of International Competitive Bidding]. WHEREAS the Authority grants the WHEREAS the Sponsors have executed a Operator the right of usufruct[BCJ11]a over Joint Development Agreement dated [date], operational infrastructure, superstructure, and [year], allocating project responsibilities among other assets by way of this Concession for the Sponsors, pursuant to which the Sponsors period of (30) years. promoted the Operator to finance, design, Source: Author. construct, equip, test, commission, operate, a and maintain the terminal/port [name] on [BOT, A legal term describing a situation wherein a person or company has a temporary right to use and derive income BOOT, BTO, and so forth] basis and transfer from someone else’s property.

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Box 57: Reference Clauses on Construction Program he Construction Program is set out in reasonably satisfactory to the Port Authority Schedule [Number] in detail for all that the Milestone Sunset Dates shall still be T phases of the Extension Works. These achieved and any such approval shall be with- phases comprise the following: out prejudice to the rights of the Port Authority • Phase 1 comprises the upgrading of the cur- to terminate this Agreement for failure to rent Operational Infrastructure and Facilities achieve the Milestone Sunset Date. as to enable the Operator to handle an If the actual progress of the Extension Annual Throughput of [Number] million TEU. Works does not comply with the Construction • Phase 2 comprises the construction of an Program, then the Port Authority shall be enti- additional quay structure with a total length tled to require the Operator either:

MODULE 4 of [number] meters and the construction of • To submit to the government a report identi- Operational Infrastructure and Facilities as to fying the reasons for the delay. enable the Operator to handle an Annual • To prepare and submit to the government its Throughput of [number] million TEU. proposals for a revised Construction • Phase 3 comprises the construction of Program, showing the manner in which the Operational Infrastructure and Facilities as to Extension Works shall be carried out to enable the Operator to handle an Annual ensure each Milestone Achievement Date Throughput of [Number] million TEU. shall be achieved by the relevant Milestone Subject to Article [number] and [number], the Sunset Date. Operator shall ensure that the Extension Works The government shall give written notice to the are carried out: Operator from time to time giving details of the • According to the Construction Program, person appointed from time to time by the subject to compliance by the Port Authority government to be the Construction Observer. with the Dredging Program. The Construction Observer shall at all times • So that the Milestone Achievement Date for have the right to visit the Concession Area each Milestone shall occur by the relevant without prior notice. The Operator shall have Milestone Sunset Date. the right to accompany the Construction Observer during his attendance in the The Construction Program may not be materi- Concession Area. The Construction Observer ally varied without prior approval of the Port shall have no authority to delay or hinder any Authority such approval not unreasonably work taking place in the Concession Area. withheld, provided always that the Operator shall provide the Port Authority with evidence Source: Author.

7.4. Design and Construction time and cost of any redesigned element(s) Flaws should be ascertained by the port authority, which should also ensure that the operator During every major construction job, design adheres to overall functional specifications (see and technical problems will inevitably occur. Box 58 and Box 59). Some of these issues can be easily resolved, but others might influence the construction 7.5. Building Conditions timetable or quality of the work. It is important The construction company carrying out the that design and construction flaws be resolved work on behalf of the operator should be in good faith consultation with the operator required in most cases to inspect the building and its construction firm. The port authority site and the adjacent water area thoroughly should be ready to demonstrate flexibility with- before starting construction. Any obstacles in out compromising the requirement that work be the subsoil affecting the construction should be performed at a predetermined quality level. reported and taken into consideration when In some instances, part of the work may have executing the technical designs and obtaining to be redesigned. The effects on construction permits. It is customary for the port authority

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Box 58: Reference Clauses on Infrastructure Box 59: Reference Clauses on Technical Design Design and Construction Problems he Operator shall design and construct f the Operator and/or the construction firm

the terminal/port facilities in accordance responsible for carrying out the work MODULE 4 Twith the functional design set out in Ibecome aware of any failure to comply with Annex [number] to this Agreement. the Functional Design and/or other provisions Without affecting the obligations under the concerning design and construction of the preceding provision, the Operator shall com- facilities, they shall: ply with the design and construction methods • Immediately notify the Authority of the situ- set out in Annex [number] to this Agreement. ation and provide details of the problem. The Operator represents, warrants, and • As soon as possible provide the Authority undertakes that: with a written statement giving a full state- • The technical design solution satisfies the ment for the reasons of the problem. functional design. • Describe in full the measures taken or to be • Each item of the facilities (quay wall, termi- taken to cure the problem and/or to miti- nal area, superstructure, and other assets) gate the consequences. will be fit for its respective purposes. • Assess the effect(s) of the problem on the The Operator shall complete the detailed Construction Program. technical design of the facilities so as to com- In case the Operator is not able to comply ply with the Construction Program as set out with the Functional Design and/or the provi- in the time table for design completion (Annex sions concerning the technical design and [number]). construction of the facilities, a full statement The Operator shall submit to the Authority all of the proposed changes including cost esti- interface design data, including all calculations, mates and effects on the Construction designs, design information, specifications, Program shall be submitted to the Authority. plans, programs, computer software, drawings, Source: Author. graphs, sketches, models, and samples. If in the opinion of the Authority any inter- 7.6. Construction Program face design data does not comply with the requirements of the Agreement, it shall be Construction is based on a construction pro- entitled to require the Operator to amend the gram that outlines completion dates for the var- relevant interface design data so as to comply ious construction phases (milestones) as part of with these requirements. the approved DPR. This DPR is almost always The Authority shall be entitled to monitor incorporated into the concession agreement. the development and other aspects of the technical design and the Operator shall pro- The port authority ordinarily requires that it be vide it with all relevant data promptly. The notified promptly of every delay that occurs at Operator shall not be obliged to adhere to the construction site, as well as the resulting possible comments of the Authority, but shall contingency plan devised to remedy the delay give due consideration to such comments (see Boxes 60 and 61). made by or on behalf of the Authority. Any comment or approval of the Authority shall not be construed as transfer of responsibility 7.7. Zero Date for compliance with the Functional Design The zero date is an important event that marks from the Operator Company to the Authority. the start of construction work. By this date, all Source: Author. conditions precedent are fulfilled by both the port authority and the operator. Generally, the port authority fulfills all conditions necessary to agree to provide its cooperation in obtaining for the operator to commence work, while the construction permits and approvals from gov- operator concludes all financial arrangements ernmental authorities, including environmental and engages a construction firm to begin oversight authorities. construction (see Box 62).

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Box 60: Reference Clauses on Site Box 61: Reference Clauses on Construction Conditions hroughout the period from the effective he Operator shall be deemed to have date of this Agreement until the actual thoroughly inspected the Concession Tcommissioning date for the last of the T Area and its surroundings, and have planned facilities, the Operator shall keep the satisfied itself as to: Authority fully informed about the progress of • The nature and extent of the conditions of the works. In that regard, the operator shall: or affecting the Concession Area, including • Provide the Authority with monthly progress climatic, hydrological, ecological, environ- reports, in such form and containing such mental, geotechnical, seismic, and archeo- information as the Authority may reason- logical conditions. ably require from time to time.

MODULE 4 • The adequacy of the rights of access and • Hold regular progress meetings to review egress to and from the Concession Area. performance of the work and discuss any • The possibility of interference by persons of coordination issues. any description whatsoever (other than the • Fully cooperate with the Authority’s Authority) with access to, use of, or rights Observer, who shall be entitled to be pres- concerning the Concession Area and its sur- ent at any time during the performance of roundings, including adjacent landowners. the work and to have reasonable access to • The precautions, times, and work methods all parts of the concession area and to all necessary to prevent any nuisance or inter- records and materials of the Operator conference, whether public or private, being cerning the work including attendance at caused by persons whose interests may be the progress meetings of the work. The affected by the performance of the Observer shall be entitled to disclose all Operator’s/Vehicle Company’s obligations such information to the Authority and its under this Agreement. advisers. Source: Author. Source: Author.

7.8. Drop Dead Date dates and compensation paid by the operator During the preparation phase, events may occur when an extension event occurs (see Box 64). that result in delays or even cancellation of a project. The port authority as well as the opera- 7.10. Completion Tests and tor may include provisions for termination of the Take-Over concession agreement once it becomes clear that BOT schemes are mainly employed for the con- the project will fail. Therefore, a drop dead date struction of new port infrastructure and super- is included in the agreement. In drafting such a structure. When newly built facilities are com- clause, it is important to specify if any perform- pleted, completion tests are carried out and a ance guarantees will be drawn or canceled as a take-over certificate issued by a competent result of the drop dead date (see Box 63). expert or authority on the port authority’s behalf. While verification of the civil works is 7.9. Extension Events required throughout the production process, it In practice, construction of a major work rarely will not be possible to verify solely at the con- proceeds according to the original plan. In case clusion whether all work was completed in a a delay is caused by action (or inaction) of the professional manner and that proper materials port authority itself, the operator is usually enti- were used during the process. The port authori- tled to claim liquidated damages. A force ty should use its expert to inspect all work at majeure might also occur, causing delays in the completion and to prepare a punch list of defi- construction process. Such possibilities are ciencies. The construction company then has a acknowledged in the concession agreement and certain period to rectify all deficiencies. The procedures included to change the milestone final take-over is based on a test certificate

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Box 62: Reference Clauses on Zero Date Box 64: Reference Clauses on Extension he Zero Date shall mean the date on Events which all the conditions precedent set In the event that the Operator fails to: out in Article [number] have been satis- T • Complete construction (or cause construc- MODULE 4 fied and the following conditions have been tion to be completed) within the scheduled fulfilled: construction period. • The environmental permit of the Ministry of • Achieve any intermediary milestones as [name] has been received. may have been agreed to between the par- • The following milestones necessary for the ties, subject in both cases to agreed exten- commencement of construction stated in sion. the Approved DPR are complete: [mile- The Operator shall pay the authority liquidat- stones to be identified]. ed damages of $ [amount] for each day of • Financial Closing has been achieved. delay up to a maximum period of [number] The Zero Date shall be achieved within [num- months. The amount of such liquidated dam- ber] months from the Effective Date (namely, ages will be linked to the Concession Fee signing of this Agreement). payable by the Operator to the Authority based on an annual cargo projection in the Source: Author. Approved DPR, and shall, if so required, be realized by invoking the Construction Guarantee. issued by the certifier. After this, there is still a Source: Author. defect liability period during which the operator has the obligation to repair all deficiencies.

Take-overs of mechanical and electrical installa- Box 65: Reference Clause on Take-Over tions are more complicated and require a vari- Tests ety of tests including operational, safety, relia- n actual commissioning date shall occur when the “Test Certifier” issues a Acertificate that completion tests for civil works and installations (if any) have been suc- Box 63: Reference Clauses on Drop Dead cessfully carried out. Date Source: Author. n the event Zero Date is not achieved within [number] months from the Effective Date, Ithis Agreement shall stand terminated and the parties to the Agreement shall have no liability, interoperability, and endurance tests bility of any nature whatsoever, subject to the (see Box 65). clauses below. If Zero Date is not achieved on account of 7.11. Hand-Back and Transfer failure to achieve Financial Closing, the of Facilities Development Guarantee may be invoked by the Authority. Under a BOT arrangement, the facilities are In the event the Authority has not fulfilled transferred to the port authority at the end of the covenant set forth in Article [number] the concession period, usually with (under a within a period of [number] months after com- BOOT arrangement) or without (under a completion of inspection of facilities as per Article mon BOT arrangement) compensation. The [number], the Operator shall be entitled to hand-back is concluded after a joint inspection terminate this Agreement in accordance with Article [number] and the Development and assessment of any renovation works Guarantee shall stand discharged and shall (if applicable). Hand-back requirements and be returned to the Operator. procedures depend on local practices. The most Source: Author. sensitive issue is in the level of compensation to be paid by the port authority (see Box 66).

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attract financing for the construction work. Box 66: Reference Clauses on Hand-Back of This issue is reviewed in greater detail in Facilities Module 3 and Module 5. In many cases, lenders [Number] months prior to the expected date have recourse only to certain assets or income of expiry of this Agreement the Hand-Back streams to secure repayment of their loans. Expert shall conduct an inspection of all ele- Sometimes there are legal considerations that ments of the Terminals including the Extension Works (the “Initial Inspection”). should be addressed, particularly with respect Such inspection shall comply with the to the creation and enforcement of security requirements set out in the Hand-Back interests in the host country that limit or even Requirements applicable to the respective prohibit the granting of a lien over port assets. elements of the Terminals. Such limitations present a significant stumbling

MODULE 4 Within [number] Business Days after the block for attracting private capital to port completion of the Initial Inspection, the Hand- development. Back Expert shall provide the Operator and the Port Authority with a notice (the “Hand- As described in Box 67, legislation restrictions Back Proposals”) setting out: may also impede investors and lenders because • A schedule of major dilapidations on the condition of the Terminals including the of a lack of definition of property rights. The Extension Works, normal wear and tear situation on St. Maarten is very different. As excepted. noted in Box 68, care has been taken to maxi- • Determination as to the maintenance works mize the lender’s security. or repair required to be carried out in respect of the Terminals including the In a concession contract with BOT arrange- Extension Works, in order to procure that, ments, it is generally necessary to explicitly estab- on expiry of the Term of the Concession, lish the lender’s rights with respect to the affected the Terminals including the Extension assets. Providing for the lender’s rights entirely in Works shall comply with the Hand-Back Requirements (the “Renewal Works”). the concession agreement is difficult because of the variety of financial structure options avail- • Determination as to the Program (the “Renewal Construction Program”) for carry- able to operators. Most BOT arrangements ing out the Renewal Works over the remain- require debt financing by lenders (commercial der of the Term of the Concession. banks). To facilitate the lending process, the port • Determination as to the cost of carrying out authority may enter into a direct agreement with the Renewal Works (the “Renewal the lenders; however, only one direct agreement Amount”). shall be effective at any time. In such a case, the • The Operator shall ensure that the Renewal concession includes a clause obliging the port Works are carried out in accordance with authority to negotiate in good faith during the the Renewal Construction Program. period commencing on the date of concession On the day on which this Agreement expires, and the effective date regarding the terms of the the Hand-Back Expert shall conduct a further inspection of the Terminals including the direct agreement as may be reasonably required Extension Works (the Expiry Date Inspection). by the lenders in connection with the debt The inspection shall comply with the require- financing, including terms to enable the lenders ments set out in Schedule [number] applica- to exercise their rights and remedies under the ble to the relevant element of the Terminals financing documents (see Box 69). including the Extension Works. Source: Author. 7.13. Change in Law Operators under a BOT arrangement run a considerable risk of applicable legislation 7.12. Lender Security changing during the concession period. Such The success of BOT arrangements is highly change may affect operating profits and alter dependent on the ability of the operator to or negate the original exploitation conditions.

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Box 67: A Case of Legal Limitations Adversely Affecting a Port Concession The main elements of recent ports legislation • The national port management system is in a European country included the following: fully enumerated in the Seaports Law, 1995 (SL). The law sets out further rules for issu- • Ports are part of the maritime domain as men- MODULE 4 tioned in Article 49 of the Maritime Code (MC) ing concessions. Concessions for a period of the country. According to the same law, a longer than 10 years shall be granted by the main characteristic of the maritime domain is cabinet of ministers, while concessions for a that within this domain there are no property or period of longer than 33 years can be grant- proprietary rights whatsoever (Article 51 MC). ed by the parliament. Concessions with a In the law, the definition of a port is as follows duration of not longer than 10 years can be (Article 5 MC): A port is a water area, and with granted by a port authority. All concessions water directly connected to a land area with must be publicly tendered. The former built-up and non-built-up wharf structures, socially owned enterprises acting both as breakwaters, equipment, installations, and port authorities and port operators in the other facilities intended or designed for previous period have the right to be issued a berthing, mooring, and sheltering sea-going priority concession with a duration of 12 ships; loading and discharging of materials; years (Article 63 SL). There is no freedom to embarkation and disembarkation of materials set tariffs. Port construction is primarily a and passengers; warehousing and other cargo task of the parliament. Moreover, the law handling operations; production, refinement, lays down a very detailed planning system. and processing of goods; and other economic The above outlined port management system activities in connection therewith, concerning had a disastrous effect on the development of matters of business, traffic, or technology. the country’s ports. Main competence prob- • Since no property rights exist within the mari- lems arose between the new port authorities time domain and subsequently within the port and the former socially owned enterprises. areas, all economic exploitation has to be Throughput of the country’s main port fell based on a system of concessions (Article 51 from some 7 million tons per annum to a MC) granted to companies. The MC contains mere 2 million tons. No major investors were detailed rules with respect to such conces- willing to risk their money under the above sions (Articles 59–72). It should be mentioned institutional conditions. Presently, proposals that this system is not only applicable to port are being developed to make the Seaports operations such as stevedoring activities, but Law more market oriented to attract foreign also to industrial activities in the port areas investors. (refineries, chemical plants, and so forth). Source: Author.

Therefore, it should be expected that detailed provisions in the concession agreement will be negotiated to minimize the effects of such changes (see Box 70).

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Box 68: The Case of St. Maarten he island’s bay has sufficient depth to construction firm (Ballast Nedam Caribbean accommodate cruise ships, which visit NV). Its Dutch parent company (one of the T the island in vast numbers. Tourism (and largest in the Netherlands) acted as main especially cruise tourism) constitutes a major sponsor and provided a subordinated stand- source of income for the island. Economic by facility during the construction period. It benefits are estimated at $200 million per year. also acted as a guarantor of the obligations Some one million cruise tourists visit the island of the construction firm under a fixed-price annually. construction contract. In September 1995, the island was hit by hurri- • No political risk: Elimination of political risks canes that seriously damaged the port’s facili- was achieved through extended political

MODULE 4 ties. This resulted in cruise ships having to risk cover of the Netherlands Credit anchor in the bay and transport their passenger Company (NCM) (95 percent, covering ashore with small tenders. This solution was among other things, breach of contract by only accepted by the cruise lines on a tempo- the St. Maarten government and force rary basis. In 1997, the government concluded majeure events). an agreement with the lines charging $5 per pas- • No hurricane risk: This risk is covered under senger to (partially) finance a new cruise terminal. the commercial insurance policy of NCM. Plans were made to expand the terminal and • Proven cash flow: Financing is based upon dredge the bay up to a depth of 10 meters. an already existing cash flow and a no- Reconstruction of the cruise terminal l became growth scenario. After completion, the debt part of a corporatization scheme. The service reserve and the maintenance reserve St. Maarten Cruise Terminal N.V. (joint stock accounts will be funded up front, guaranteed company) was established as a subsidiary of the by the St. Maarten government and covered St. Maarten Holding Company N.V., jointly owned by NCM. Direct payment from the cruise by the government of St. Maarten and the Dutch lines is facilitated by an offshore escrow government via the Participation Company for account of the St. Maarten Cruise Terminal the Netherlands Antilles NV. (NPMNA). N.V. Payment is approved only by the agent The main features of the concession agree- bank pursuant to a cash flow waterfall. ment between the island government and the There is also significant involvement by the St. Maarten Cruise Terminal N.V., which has a Dutch government, including providing equi- BOO character, are: ty and a subordinated loan as well as • Limited construction risk: A turnkey contract appointing a board member. has been concluded with an experienced Source: Author.

ANNEX I—CHECKLIST OF the port authority before the main provisions CONCESSION/BOT of the concession take effect. AGREEMENT PROVISIONS 4. Grant of concession: This provision sets out the exclusive right of the concessionaire to enter (Related to a concession for the management and upon, occupy, possess, enjoy the benefits of, operation of an existing terminal and possible and use of the terminal. extension) 5. Term of the agreement: The term of the conces- 1. Introduction and recitals: Parties to the agree- sion is usually between 30 and 35 years for a ment, general considerations. BOT agreement. In case of a concession with- 2. Definitions: Definitions are important and out BOT, the term may be in the order of 10 to should be thorough. Usually they are included 15 years. in a schedule to the agreement. 6. Employment: Provisions regulating the position 3. Conditions precedent: Those conditions that of employees of the port authority who will have to be fulfilled by the concessionaire and be taken over by the new terminal operator,

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7. Transfer of assets: This applies to the transfer Box 69: Reference Clause on Lender’s of full rights and ownership, as well as lease- Security hold or license interests (if any) in all the movable assets and facilities in the case of the or the sole purpose of financing its concessioning of an existing terminal.

implementation of the Project and the MODULE 4 Ffulfillment of its obligations under the 8. Hand-over of the terminal: The port authority Project Documents, the Operator may assign, shall hand-over the concession area, the opera- by way of security, the benefit of, or its inter- tional port infrastructure and movable assets est in, this Agreement and any of the other and facilities, and books and records in relation Project Documents according to the require- to the operations of the terminal (if any) by ments of any of the Financing Documents giving the sole, exclusive, and vacant posses- and create other forms of security over any sion thereof to the concessionaire. movable assets or facilities, owned by the Operator, Collateral Warranty, or other proper- 9. Exclusivity: After the completion of the con- ty rights, forming part of its interest in the struction of a new terminal under a BOT, the Project in favor of any Lender for the duration new operator may be granted exclusivity rights of the Debt financing, only, provided that: for a limited period, usually three to five years. (a) The Lenders shall rank ahead of conces- These rights allow the concessionaire to build sion fee and lease rental payments in case up business without being directly confronted of Force Majeure under Article [Number] by a competing facility. (political events and omissions of the Port Authority). 10. Project: This provision gives a general description of the project. This might be the manage- (b) The Lenders and the Port Authority shall ment and operation of an existing terminal as rank equally in all other cases. well as a possible extension. The Operator shall be entitled to create over its assets: 11. Project document compliance: The concession- (a) An encumbrance that (i) arises out of title aire is not allowed to materially vary the retention provisions in a supplier’s stan- project documents. Project documents are the dard conditions of supply of goods that concession agreement, the site lease, the port are acquired by the Operator in the ordi- services agreement, the financing documents, nary course of its business and (ii) applies the design contract, and the building contract. only to the goods so supplied. The concessionaire may vary the building contract under certain conditions. (b) Rights of set off or liens arising solely by operation of law in the ordinary course of 12. Project finance: The government or port business. authority acknowledge the necessary financing (c) Any security interest for the purpose of or in of the project by lenders such as commercial connection with the securing of working cap- banks or the IFC. The government or port ital facilities provided to the Operator in the authority usually conclude with the lenders a ordinary course of its business provided that lenders direct agreement. This agreement regu- the total extent of liability arising upon such lates the rights and obligation between the security shall not exceed the lower of the government or port authority and the lenders Termination Compensation payable to the in the event that the concession is terminated Operator or [ % ] of the net book value of the by the government or the lenders exercise their assets of the Operator. The Operator shall rights under the security documents. always procure the discharge of Security Interests upon termination of this Agreement. 13. Lenders security: The concessionaire is allowed to create forms of security over any movable Source: Author. assets or facilities owned or leased by the concessionaire, or other property rights forming part of its interest in the project in favor of any especially with respect to salaries, pension lender for the duration of the debt financing. rights, and retrenchment (if any). This provision obviously only applies to a situation where 14. Functional requirements: The functional require- an existing port authority owned terminal is ments of the extension works comprise main char- being concessioned. acteristics of the terminal (transshipment/domestic,

197 Legal Tools for Port Reform

Box 70: Reference Clauses on Law Changes hange in law shall mean the occurrence The Operator shall, on the occurrence of a of any of the following events after the Change in law, give notice of such change to CEffective Date of the Agreement: the Authority in accordance with the provisions • The enactment of any new applicable law. of this Article as soon as it may be reasonably practicable. The notice served pursuant to this • The modification, repeal, or reenactment clause shall provide, inter alia, precise details (other than reenactment that merely consoli- of the Change in law and the effect thereof on dates or codifies existing applicable law) of the Operator. any existing applicable law. In the event that a Change in law renders • The commencement of any applicable law impossible the exercise by the Operator of any which had not at the Effective Date yet

MODULE 4 of its material rights or performance by the entered into effect, except to the extent Operator of any of its material rights and obli- such applicable law was enacted prior to the gations—unless such obligation is waived by a Effective Date with a commencement date person having the power to do so under this after the Effective Date and such applicable Agreement, the Operator may serve a notice law takes effect on that commencement for termination of this Agreement (Termination date without material amendment. Notice) provided that, prior to service of the • A change in the interpretation or application Termination Notice, the parties shall consult in of any applicable law by a judicial or other good faith for a period of [number] days to authority (including a court, tribunal, or any mitigate the material adverse impact of the other regulatory authority) having the authority Change in law. In the event that parties are to interpret or apply such applicable law or unable to agree to changes in the Agreement any interpretation of any applicable law by to mitigate the impact of the Change in law such authority that is contrary to the existing during the [number] day period, either party generally accepted interpretation thereof. may refer the matter to dispute resolution, in • The revocation or cancellation (other than for such case the Termination Notice shall stand cause) of any permit. suspended until such matter has been • To the extent that such Change in law has a resolved in accordance with Article [number]. material adverse effect on the rights and obli- The parties hereby acknowledge and agree gations of the Operator under this Agreement, that the Operator shall be entitled to serve a and that such event has not been caused due Termination Notice on the Authority, provided to fault of negligence of the Operator. that the Change in law results in the physical Notwithstanding anything contained in the and legal impossibility of performance of the clause above, Change in law shall not include Operator’s obligations or exercise of its rights any change in tax laws or change in a law of under this Agreement. The parties shall bear general applicability, but which solely has an the respective impact of any economic conse- economic and financial impact on the Operator. quences of the Change in law.

multiuser/dedicated), and the main construction any failure of the design solution or the elements such as quay lengths, types of gantries, design data. depth alongside, and so forth. 18. Applicable permits: The provision includes 15. Design solution: Comprises design and con- the willingness of the government or port struction methods. authority to assist the concessionaire in 16. Design development: The port authority shall obtaining the permits, licenses, and so forth receive all calculations, designs, design infor- to operate or build the terminal or terminal mation, specifications, plans, programs, draw- extension. ings, graphs, and so forth in relation to the extension works and the operations and has 19. Concession area conditions: Before starting the the right of control of such documents. construction, the concessionaire is deemed to have inspected the concession area. The gov- 17. Design flaws: Procedures to be followed ernment or port authority shall reject all liability when the concessionaire becomes aware of for claims.

198 Legal Tools for Port Reform

20. Archaeological items or geological items: All included in a separate port services agreement fossils, minerals, antiquities, wrecks, or struc- with the port authority. tures of particular geological or archaeological interest on or under the concession area shall 29. Berthing priorities: These priorities might be deemed to be the absolute property of the be agreed upon between the port authority government or port authority. (harbormaster) and the concessionaire, but MODULE 4 must be nondiscriminatory and subject always 21. Building contract: The concessionaire shall to such rules and regulations as may be made have the right to and responsibility for selecting from time to time under applicable laws. the designer and the builder and agreeing on the provisions of the design contract and build- 30. Security: Provision with respect to the tasks ing contract, without the approval of the port and obligations of both the concessionaire and authority. the port authority, within the framework of the ISPS code. 22. Construction program: The construction pro- 31. Use of the terminals: The operator has the sole gram is an important part of the concession. A right to carry out the port operations and con- detailed construction program, including mile- struction activities within the concession area. stones and milestone achievement dates, is Also in this article, the issue of multiuser versus included with one of the schedules. Every dedicated use of the terminals should be regu- relevant part of a construction program has a lated. milestone sunset date, which is defined as the latest date to achieve a milestone that is part of 32. Operator’s operational performance standards: a construction program under a concession A port authority may set performance stan- agreement. Nonachievement of a milestone dards such as a minimum number of crane sunset date constitutes a termination event for moves per hour, a minimum berth hour pro- the port authority (see number 25 below). ductivity, or a maximum vessel turn around time, and so forth. 23. Progress reviews: A provision with respect to monthly progress reports. 33. Maintenance of movable assets, facilities, and infrastructure: In view of the fact that the ter- 24. Extension events: An extension event prevents minal will be handed over to the port authority or delays the concessionaire from complying after termination or expiry of the concession, with the obligations of the concession during maintenance standards both for equipment and the design and construction period of the ter- infrastructure maintenance should be included. minal. If an extension event occurs, the construction time will be extended. 34. Operational subcontracting: The concessionaire or sponsor is usually given the right to conclude 25. Sanctions for late completion: The project a management contract with a qualified opera- elements should be completed by the relevant tor, subject to approval of the port authority. milestone achievement dates. Nonachievement of a milestone sunset date constitutes a termi- 35. Tariff regulation: The provision may be neces- nation event for the port authority. sary in case of the requirement to regulate the changes to tariffs for handling of domestic 26. Commissioning of the project phases: An cargoes in the event of a dominant position of appointed test certifier conducts commissioning the concessionaire in a certain port or a series tests during project phases that must be passed of competing ports. to allow the project to continue. 36. Tariff setting: The concessionaire has the right 27. Operator’s operational functions and activities: to freely set tariffs without interference of the All the operational functions and activities government or port authority, subject to possi- allowed under the concession are listed in ble competition regulation detail. 37. Site lease: Main characteristics of the site lease 28. Port authority’s port services: The port services are included in this article, such as price and of the port authority such as pilotage, towage, number of square meters of the area. The site vessel traffic management, mooring and lease itself is a separate document that is part unmooring, provisions of water, and so forth of the concession. The lease rent should be are listed. Details of these services are usually indexed for inflation.

199 Legal Tools for Port Reform

38. TEU fee: The fee is usually expressed in dollars 46. Force majeure: Any event or circumstance or or other hard currency for each TEU (other combination of events, whenever occurring, than restows) handled over the ship’s rail. This that is outside the control of the affected party, article establishes the (variable) price per TEU could not be avoided, prevented, overcome, or per annum the concessionaire pays to the port mitigated with reasonable foresight and materi- authority during the term of the concession. ally prevents, hinders, or delays performance of The TEU fee should be indexed for inflation. a party’s obligations under the concession. The structure of TEU fee payments might Typical force majeure events are tsunamis, include (number of) minimum guaranteed earthquakes, or other acts of God; nuclear throughput levels. explosions; radioactive, biological, or chemical contamination; war, invasion, embargo, mili- 39. Bank guarantee: The port authority may tary coup, or revolution; and so forth. require a bank guarantee of the concessionaire

MODULE 4 with respect to the minimum guaranteed 47. Insurance: Insurance covers required by the throughput levels. port authority to be taken out by the concessionaire both for operations and for construc- 40. Refinancing: The port authority may require tion of new terminal facilities. approval in case of refinancing of the project. Instead of a bank guarantee, the port authority 48. Ownership of assets: This relates to the right of may require a performance bond for the the concessionaire to own mobile assets and throughput guaranteed and the overall obliga- (sometimes) buildings in the concession area. tions within the concession by the concessionaire, which is often based on the business plan submit- 49. Option to continue: The port authority may ted by the concessionaire in the bid proposal. grant an option to continue or a right of first refusal after the expiry of the concession. 41. Release from rents, taxes, levies, and other obligations and dues: Sometimes the govern- 50. (Interim) termination by the government: This ment or port authority grants the concession- article comprises detailed events that may lead aire release from taxes during a certain to termination of the concession by the govern- period. The terminal may also get a free ment, such as a material breach of the conces- zone status, which implies considerable tax sions, nonpayment of fees, and so forth. advantages. 51. Termination by the operator: The concession- 42. Payments to the government: Any payment aire might terminate the concession when a made by the concessionaire to the port authority material breach occurs by the government or shall be considered as a valid settlement of the port authority of their obligations under the operator’s obligations under the concession. concession.

43. Information supply: The concessionaire shall 52. Termination procedure: In the event of termi- supply specific information to the port authority nation either by the port authority or the on throughput or vessels on a monthly and concessionaire, a termination procedure is annual basis. agreed on that sets out detailed provisions of the rights and obligations of the parties, such 44. Legal compliance: The concessionaire shall at as notice to terminate, remedial program, and all times during the term of the concession information to the lenders of the concession- comply with all applicable laws, directives, and aire. the conditions of all applicable permits. 53. Rights cease: On termination or expiry of the 45. Change in law: This article is necessary to concession, all future rights and obligations of mitigate the effect of a change in law that the port authority and the concessionaire shall materially affects the operations and financial cease and the site lease and the port services position of the concessionaire. It sets out agreement shall also be terminated automatically. detailed provisions describing which changes in law apply, such as changes in taxation, 54. Termination compensation: In case of termina- institutional conditions, nationalization, and tion by one of the parties to the concession, the so forth. Under certain conditions the govern- ports authority shall pay termination compen- ment or port authority compensates losses sation. Depending on which party terminates sustained by the concessionaire as result of a the agreement, the termination compensation change in law event. consists of a percentage of the fair value,

200 Legal Tools for Port Reform

established by an independent expert. There are 63. Performance monitoring: A general provision several methods to used to determine the fair in the event that a party fails in the perform- value, which should be stipulated in advance in ance of its obligations under the concession. the concession agreement. Methods used When that failure is capable of remedy, the include historical cost, inflation adjusted histor- affected party may serve a notice on the other ical cost, depreciated replacement cost, opti- party requiring such other party (at its own MODULE 4 mized depreciated replacement cost or modern cost) to remedy that failure. equivalent asset value, and optimized deprecia- ble value. The expert shall never apply any 64. Transfer committee: The committee, consisting earnings-based valuation methodology or any of representatives of both the port authority goodwill in the business of the concessionaire. and the concessionaire, is responsible for the transfer process at the termination or expiry of 55. Hand-back: After expiry of the concession, the the concession. concessionaire shall hand back the entire terminal to the port authority. This article includes 65. Responsibilities: The port authority and the con- detailed instructions and technical requirements cessionaire shall be solely responsible for the per- and procedures on how the hand-back shall take formance of their functions and services and for place. This is to assure the proper state of the all the acts, or failures to act, of itself and of its facilities when returned to the port authority. contractors, subcontractors, suppliers, and agents. 56. Asset transfers on expiry or termination: It is necessary to regulate the good cooperation 66. Liabilities: Neither the government, the port between the port authority and the concession- authority, nor the concessionaire shall be liable aire regarding the hand-back of the facilities to to the other for any loss, cost, liability, or the port authority. expense arising from any breach of the agreement other than for actual loss directly result- 57. Information technology (IT) license: At the end ing from the breach. of the concession, it might be necessary to transfer IT licenses to the port authority to 67. Confidentiality: The parties may agree to keep guarantee uninterrupted operation on the ter- the details of the concession confidential during minal during transfer to a new operator. a certain period.

58. No share or liability acquisition: This article 68. Disclosed data: Restriction by the government sets out the terms and conditions in case of or port authority for the liability of disclosed participation of the port authority in the capi- data on the terminal or concession area. tal of the concessionaire or vehicle company. 69. Change in institutional structures: During the 59. Employees: At the expiry of the concession, the term of the concession, the institutional struc- position of the employees will have to be regu- ture of the government or the port authority lated. Usually they will be transferred to the may change. The concessionaire agrees with the new operator with certain conditions such as variation of the concession, provided that such the continuation of earlier salaries and benefits variation does not affect its rights, obligations, as well as accrued pension rights. and liabilities under the agreement.

60. Conflict resolution: This article sets out 70. Variations: Variations in the project documents detailed procedures for conflict resolution shall only be valid if they are in writing and including international arbitration. signed by or on behalf of each of the parties

61. Waiver of immunity: It will be necessary for the 71. Applicable law: Establishment of the law appli- government and the port authority to waive cable to the concession. This is usually the law most forms of sovereign immunity to create a of the country where the terminal is located. level playing field with a private concessionaire. 72. Notices: Elected domiciles for formal notices to 62. Recognition of lenders’ rights: The port author- be served under the concession. ity may include in the concession a special recognition of the lenders who will be deemed to be beneficiaries under the concession.

201

PORT REFORM TOOLKIT SECOND EDITION

MODULE 5 FINANCIAL IMPLICATIONS OF PORT REFORM

THE WORLD BANK MODULE 5 O:10.1596/978-0-8213-6607-3 DOI: 0-8213-6608-4 978-0-8213-6608-0 eISBN-13: eISBN: 978-0-8213-6607-3 ISBN-13: 0-8213-6607-6 ISBN-10: [email protected]. fax202-522-2422, USA, DC20433, Washington, 1818 HStreetNW, World Bank, pleasecontacttheOfficeofPublisher, includingsubsidiaryrights, For allotherqueriesonrightsandlicenses, The World Bankencourages disseminationofitsworkandwillnormallygrant permissionpromptly. withoutthepriorwrittenpermissionof World Bank. orinclusioninanyinformationstorage andretrieval system, recording, includingcopying, electronicormechanical, No partofthisworkmaybereproducedortransmitted inanyformorbymeans, Copyrightisheldbythe World Bankonbehalfofboththe WorldThe materialinthisworkiscopyrighted. BankandPPIAF. World Bankconcerningthelegalstatusofanyterritoryorendorsementacceptancesuchboundaries. andotherinformationshownonanymapinthisworkdonotimplyjudgmentthepartofPPIAFor denominations, colors, Theboundaries, Neither PPIAFnorthe World Bankguarantees theaccuracy ofthedataincludedinthiswork. governments theyrepresent. of Public-Private Infrastructure Advisory Facility (PPIAF)ortheBoardofExecutiveDirectors World Bankorthe andconclusionsexpressedhereinarethoseoftheauthor(s)donotnecessarilyreflectvie interpretations, The findings, All rightsreserved. © 2007 The InternationalBankforReconstructionandDevelopment/ The World Bank ws MODULE FIVE CONTENTS 1. Introduction 203 1.1. Cost Risk 204 1.2. Revenue Risk 204 MODULE 5 Part A—Public-Private Partnerships in Ports: Risk Analysis, Sharing, and Management 206 2. Introduction 206 3. Characteristics of the Port Operator 207 3.1. General Aspects 207 3.1.1. National Environment 207 3.1.2. Industrial and Commercial Dimension 208 3.2. Specific Aspects Particular to the Port Sector 208 3.2.1. Vertical Partnership with the Concessioning Authority 208 3.2.2. Horizontal Partnership with Numerous Players 209 3.2.3. Long-Term Commitment 210 4. Risk Management 211 4.1. Country Risks 211 4.1.1. Legal Risk 211 4.1.2. Monetary Risk 212 4.1.3. Economic Risk 213 4.1.4. Force Majeure 213 4.1.5. Interference or “Restraint of Prices” Risk 213 4.1.6. Political Risk 214 4.2. Project Risks 215 4.2.1. Construction Risks 215 4.2.2. Hand-Over Risks 216 4.2.3. Operating Risks 216 4.2.4. Procurement Risks 217 4.2.5. Financial Risks 217 4.2.6. Social Risk 218 4.3. Commercial or Traffic Risk 218 4.4. Regulatory Risks 219 4.4.1. Regulatory Tools 219 4.4.1.1. Technical Regulations 220 4.5. Economic and Financial Regulation 221 4.5.1. Scope of Operator Activity 221 4.5.2. Public Service Obligations 221 4.5.3. Noncompetition Guarantees 222 4.5.4. Pricing Controls 222 4.5.5. Fee or Subsidy 223 4.6. Golden Share or Blocking Minority 224 4.7. Risk and Port Typology 224 4.7.1. Operator Handling Only Its Own Traffic 224 4.7.2. Operator Acting on Behalf of a Third Party in a Competitive Situation 224 4.7.3. Operator Acting on Behalf of a Third Party in a Monopoly Situation 225 4.7.4. Transit or Transshipment Traffic 225 4.7.5. Mixed Situations 226 4.8. Other Concessioning Authority Guarantees 226 MODULE 5 .Cnldn huhs 230 7. MeasuringEconomicProfitability from the Perspectiveofthe 6. Introduction Perspectives Understanding PortFinanceandRiskManagementfrom PublicandPrivateSector Part B—PrinciplesofFinancialModeling,Engineering,andAnalysis: 5. ConcludingThoughts .Rtn ikfo h esetv fteCneso odr 233 8. RatingRiskfrom the PerspectiveoftheConcessionHolder .FnnilPoetEgneig 240 9. FinancialProject Engineering ocsinn uhrt 231 Concessioning Authority ..CnrculRss 227 228 4.10. Approach oftheDifferent PartnerstoRiskandManagement 4.9. ContractualRisks ..Eut eueainRqieet 238 236 237 231 234 8.5. EquityRemunerationRequirement 233 233 232 8.4. FinancialDebtRemunerationRequirement 8.3. Project DiscountRate—CostofCapital 8.2. AssessingtheProject RisksbyProducing aRating 8.1. FinancialProfitability and“Bankability”oftheProject 7.3. AssessingtheEconomicCostsofProject 7.2. CommonlyUsedEconomicProfitability Indicators 7.1. Differential Cost-BenefitAnalysis ..Db tutrn 242 242 240 9.3. Long-Term Commercial Debt 9.2. DebtStructuring 9.1. FinancialStructuringwithintheFrameworkofaProject FinanceSet-Up .03 edr 230 229 228 229 228 227 4.10.3. Lenders 4.10.2. Project Sponsors 4.10.1. ConcessioningAuthority 4.9.3. Credit Risk—Bonds 4.9.2. IndexationRisk 4.9.1. ContractManagement ...Ifain 238 238 238 8.5.1. Sharing ofPublic-PrivateFinancialCommitments:Arbitrationbetween 234 8.4.3. DebtRemunerationRequirement Conclusion 8.4.2. RiskRatingbyDeterminingrd 8.4.1. Inflation 8.2.1. CommonlyUsedFinancialProfitability Indicators ...Bne et 247 243 247 243 243 244 9.3.6. StructuringEquityandQuasi-Equity 9.3.5. BondedDebt 9.3.4. FinancialCredits withaMultilateralUmbrella (A-andB-loans) 9.3.3. ExportCredits 9.3.2. GuaranteedCommercial Debt 9.3.1. Foreign Currency Loans ....PoetNV236 236 236 234 8.2.1.4. InvestmentCoverRatio 8.2.1.3. Project NPV 8.2.1.2. Project IRR. 8.2.1.1. PaybackTime. ....Eut netdb utltrlIsiuin 248 247 248 9.3.6.3. EquityInvestedbyMultilateral Institutions 9.3.6.2. EquityInvestedbythe Project’s Sponsors 9.3.6.1. EquityProvided bythePublicSector iaca n oieooi rftblt 240 Financial andSocioeconomicProfitability 231 231 MODULE 5 261 10.1.2.1. Operating Revenue and Charges in Terminal Management Operations in Terminal 10.1.2.1. Operating Revenue and Charges 10.1.2.2. Operating Finance Requirement 259 10.1.2.3. Operating Account Balance 259 259 9.4.1.1. Interest Rate Swaps9.4.1.1. Interest Market Instruments in the Over-the-Counter 9.4.1.2. Firm Financial Markets Instruments in the Organized 9.4.1.3. Firm Financial rate options) Financial Instruments (interest 9.4.1.4. Conditional 252 252 252 251 9.3.6.4. Equity Invested by Bilateral Institutions Invested by Bilateral 9.3.6.4. Equity Funds Investment 9.3.6.5. Specialist 249 249 10.1.3. Tax Flows 10.1.3. Tax 10.2.1. Cash Flow Statement (income statement) and Loss Account 10.2.2. Profit 10.2.3. Balance Sheet 260 260 260 261 9.4.2. Foreign Exchange Risk Management 9.4.2. Foreign Risk Management and Performance Bonds9.4.3. Counterpart by Multilateral Agencies 9.5.1. Guarantees Offered Agencies by Export Credit 9.5.2. Guarantees Offered Types 10.1.1. Capital Expenditure 10.1.2. Operating Revenues and Expenses 254 252 255 257 258 257 9.4.1. Interest Rate Risk Management Rate Risk Management 9.4.1. Interest 250 Financing: The COFACE ExampleFinancing: The COFACE 246 10.2. Construction of the Financial Model 10.2. Construction of the Financial Model 260 9.5. Financial Engineering and Political Risk Management and Political Risk Management 9.5. Financial Engineering for Covering Political Risks 9.6. The Use of Private Insurers 10.1. Construction of the Economic Model 254 257 257 9.4. Managing Exogenous Financial Risk 9.4. Managing Exogenous 249 References Risks in a Port ProjectAppendix: Risk Checklist—Principal 263 10. Financial Modeling of the Project 10. Financial Modeling of the Project 257 BOXES A Wholly Private Terminal Coal Terminal: Bay Box 1: Richard’s Contractors Using Several Handling Terminal Box 2: Port Réunion: A Single Container in Gabon Terminal Box 3: Owendo Ore Range in the North European Box 4: Container Terminals Operator in the Port of KlaipedaBox 5: Container Terminal and Transshipment Box 6: Port of Djibouti: Transit 223 Box 7: Djibouti Fishing Port: Public Service and Semi-Industrial Activity Partnerships in the Port of Maputo, MozambiqueBox 8: Horizontal and Vertical Export Box 9: The Country Ranking Developed by Nord-Sud in a Port ProjectBox 10: An Example of Export Cover by COFACE Agency for Project by an Export Credit Box 11: Principal Guarantees Offered 219 227 227 225 226 245 235 226 225 MODULE 5 a:1225232.Internet:[email protected] 1.202.522.3223. Fax: Please sendthemto the World Bank Transport HelpDesk. Comments are welcome. andBradle Kruk, Cornelis “Bert” Ronald Kopicki, The preparation andpublishingofthePort Reform Toolkit Juhel, underthemanagementofMarc wasperformed contributions ofthefollowing organizations. The First Edition ofthePort Reform Toolkit wasprepared andelaborated thanksto thefinancingandtechnical oftheILO Meletiou andMarios for theircontributions KeesMarges formerly to thiswork. ofITF, Group, Maritime andSimme Veldman oftheRotterdam Koppies, John We wishto give specialthanksto Christiaanvan Krimpen, for whichconsultants oftheRotterdam Group (RMG)were Maritime contracted.Toolkit’s content, and Water Public for Management) theenhancement ofthe Works, of Fund (NetherlandsMinistry Transport, Financial assistance wasalsoprovided through agrant from The Netherlands Transport andInfrastructure Trust andrural services. infrastructure inthefieldsoftransport and sharingofknowledge for learning for International Development andthe Department World Bank, between theU.K. a partnership TRISP, This SecondEdition ofthePort Reform Toolkit hasbeenproduced withthefinancialassistance ofagrant from Acknowledgments PA Consulting (USA) United NationsEconomic Commission for LatinAmericaandtheCaribbean (Chile) Nathan Associates (USA) ISTED (France) LLP(USA) Holland andKnight Netherlands) The Rotterdam Group Maritime (The Netherlands) (The Management Rotterdam MunicipalPort HoldingRotterdam (formerly as Consultancy known Mainport TEMPO), AssociatesInternational Maritime (USA) The WorldBank The ofForeign French Affairs Ministry The NetherlandsConsultant Trust Fund e ie www Web site: For more information seethe onthefacility throughof theirinfrastructure private involvement. sector PPIAF isamulti-donortechnical aimedathelpingdeveloping assistance facility countries improve thequality The Public-Private Facility Advisory Infrastructure (PPIAF) .ppiaf .or g . y Julianofthe World Bank Transport Division. MODULE

5 MODULE 5 Financial Implications of Port Reform SECOND EDITION

1. INTRODUCTION ver the last few years, there has been a strong trend toward the introduction of private management in the port domain in both Oindustrialized and in developing countries. This privatization principally concerns the handling and storage of freight transiting via the port, and the funding and operation of the infrastructure, superstructures, and equipment required for these activities. This trend has involved the construction of complex, multidimensional partnerships between public port authorities and terminal operators. Module 5 presents an analytical framework for assessing the risks confronting port operators and with the goal of identifying principles for the equitable sharing of each risk between the public and private sector parties involved.

This analysis demonstrates that the scope of the terminal operator must take this essential port terminal operator covers a range of differ- consideration into account. ent situations, depending on the type of traffic Reducing the situation to its simplest terms, the handled and the degree of competition sur- terminal operator carries two fundamental risks: rounding the activity. This diversity substantially a cost risk, or a risk of exceeding initial cost affects the degree of required regulation of the estimates for the construction or operation of operator’s activity on the part of the port the project, and a revenue risk, or commercial authority or other regulating body (see risk, depending on traffic and revenue yields. Module 6). This regulation, in turn, has major implications for the operator, both in terms of There is nothing extraordinary about this situa- the level of risk carried and risk management tion. Any enterprise operating in any field of capacity. Therefore, the principles adopted for activity has to carry these risks. However, the sharing the risk between the port authority and terminal operator conducts its activity largely in

203 Financial Implications of Port Reform

the public domain, and can have the support of anticipated level of return, and can be public investment, supply a public service, and subsequently passed on to customers enjoy a de facto monopoly. Over and above the through increases in charges. overarching legislative and statutory frame- • The service provided by the operator is work, some measure of regulation of its day-to- regarded as a public service. The contract day activity is often deemed necessary. This reg- concluded between the port authority and ulation can cover a number of technical aspects the operator is then similar to a public (definition of the project, performance stan- service franchise agreement. Integration dards, standards relating to maintenance of the of this risk by the operator would facilities, and so forth), economic aspects (pub- increase the cost of the service provided lic service obligations or field of activity restric- and would have an adverse impact on the MODULE 5 tions), and financial aspects (control of prices, user. Furthermore, regulation of tariffs fees, or subsidies). Module 6 reviews in detail imposed on the operator could make it the aspects pertaining to economic and financial impossible for the operator to pass on regulations. increases to the user at a later date. It What is the impact of regulation on the cost therefore appears equitable that this risk and revenue risks, and in what way does it con- should be shared. dition the principles for sharing these risks? The principles of risk sharing should be clearly defined on signature of the agreement, and can 1.1. Cost Risk cover guarantees of stability or provide appro- The constraints imposed by technical regulation priate compensation (for example, lifting of have an impact on the initial estimation of pricing constraints, indemnities, or other con- project cost (investment and operation). siderations). However, provided the rules of the game are established at the outset, and provided these 1.2. Revenue Risk rules are clear, stable, and complied with, they In contrast to the cost risk, regulation has a do not affect the excess cost risk, which then direct impact on the extent of the revenue risk only depends (apart from cases of force majeure) for the operator and on its ability to manage on the ability of the operator to implement the this risk. The revenue risk is in fact the princi- project. Under such circumstances, it is reasonable pal risk involved in a port project due to the to expect the operator to identify and assume uncertainty inherent in traffic and throughput the full cost of attendant risks. level predictions.

Where risks and associated excess cost stem As a general rule, it is desirable to assign the from changes in the regulatory system or legal traffic risk to the operator. This is possible and framework established prior to signature of the justified in a case where the activity is not a contract, the principles of risk sharing must public service. Sharing of profits between the then depend on the very nature of the activity. port authority and operator can be envisaged Two situations are possible in this case: under certain circumstances. This is also possible in the majority of cases where the activity is • The service provided by the operator is subject to genuine competition. not regarded as a public service. The degree of regulation is then low, and has On the other hand, sharing of this risk is fre- no reason to change. The risk of changes quently necessary in the case of a public service in the legal framework is considered by monopoly. The substantial degree of regulation the operator as a country risk, such as required in this case imposes such constraints exists for any industrial company. It is on the operator that it has little means of man- reflected by an adjustment of the initially aging the commercial risk. The port authority

204 Financial Implications of Port Reform can then, as appropriate, provide the conces- on the operator (reflected by a requirement for a sionaire with a guarantee of noncompetition, higher rate of return), the cost of resultant con- possibly temporary, or even implement a nega- siderations, or simply the cost of supervision. To tive concession formula where the operator bids minimize such costs, the objective should be to for the lowest level of subsidy required when regulate only in those cases where it is clearly MODULE 5 the traffic is acknowledged to be too low to essential. sustain commercial viability. The port terminal operator has numerous part- While the operator is then no longer fully at ners in the provision of comprehensive port and risk for meeting the project’s projected revenue transportation service, the most important of level, it must continue to bear responsibility for which is the port authority itself. The port the costs. The regulatory system therefore must authority therefore, is not often only a regula- not deviate from the principle of assigning the tor, but also the primary partner of the terminal project risk to the operator. This is the case operator. From this point of view, the type of where the contract provides for a guaranteed “horizontal” partnership between terminal minimum level of return, or adjustment of rates operator and port authority does not differ and charges according to costs. from that which can exist between two companies. Of necessity, this partnership involves Another risk for the operator is present in all reciprocal obligations, with the port authority cases. This is the political risk of noncompliance guaranteeing not only the services that it pro- with the terms of the contract by the public vides directly, but also those which it may be authority, or the imposition of discriminatory led to delegate to other entities operating within measures affecting the project. This risk can be the port complex. reduced by various methods, or hedged. The The involvement of private companies in port assessment of this risk nevertheless represents a management leads to the introduction of a com- major factor in the decision of the operator to plex, multidimensional partnership with the proceed or not with the project. Political risk port authority. This requires the establishment may manifest itself either as a revenue risk or a of a clearly defined, stable, contractual frame- cost risk. work that enables the operator to quantify and manage the risks with which it will be confront- In the end, the principles of risk sharing between ed, and which is based on comprehensive legal the public port authority and the operator procedures and techniques. However, no con- depend, to a large extent, on the degree of public tract can provide for all eventualities. It is there- service accorded (or not) to the activity concerned fore necessary to include clauses that define the by the national authority and the resultant conditions and procedures for periodic reviews regulation. The initial situation frequently is that and negotiations for the purpose of making nec- of a stagnant public sector, with little means of essary adjustments. Apart from this renegotia- clearly identifying among the various tasks in tion process, the option of issuing new calls for which it is engaged those which relate genuinely tender at periodic intervals during the lifetime to the public service, and which, when delegated of the project is a possibility, despite practical or franchised to an operator, demand strict regu- problems of implementation. In some cases, a lation. While a form of partnership always exists clear division between infrastructure and equip- between the port authority and the operator, the ment management and activities management activities of the port terminal operator do not may be desirable. See Module 4 for a full dis- always embody the characteristics of a public cussion of legal issues. service, and do not therefore require the same level of regulation in all cases. Note, however, Once the risks have been distributed between that any form of regulation imposes costs, the public and private partners, the private namely the cost of the additional risk imposed operator—the concessionaire—will seek to

205 Financial Implications of Port Reform

“quantify” and “rate” the residual risk it must project funding is such a critical element of bear. The risk valuation will be determined any significant port reform initiative, a solid through country and project ratings. Tariff set- understanding of financial engineering is ting will be contingent upon a minimum finan- essential. Part A takes a pragmatic view of the cial break-even point, below which prospective subject and seeks to establish a basic under- concessionaires will be unwilling to participate. standing of what is at stake. It does not From the point of view of the concessionaire attempt to undertake a comprehensive treatise then, the riskier the project, the higher the on the more sophisticated mechanisms for requirement of expected returns. coverage and financing.

A risk-return assessment is an integral part of a PART A—PUBLIC-PRIVATE

MODULE 5 comprehensive profitability analysis of the proj- PARTNERSHIPS IN PORTS: RISK ect. Such analysis would help determine under ANALYSIS, SHARING, AND what conditions and terms the project will MANAGEMENT succeed in meeting the needs of the market, given the ever changing nature of these needs. 2. INTRODUCTION This is what is implied when analysts speak of We are witnessing a vast movement toward the “project bankability.” The operator is now privatization or private management of public faced with two compelling sets of parameters services throughout the world, in industrialized resulting from the profitability analysis and the as well as in developing countries. This trend is cost-effectiveness analysis of the project, and especially marked in the port sector, where calls their impact on the socioeconomic returns for for tenders to introduce private management to the community at large. Because of these ports previously under the control of the gov- market-driven financial constraints and the ernment or other public entity have increased fragile nature of the public-private partnership, substantially in the last few years. This trend there is as much a case for sharing financial has created a market for companies to develop obligations as there is for risk distribution between port concessions. Projects of this type, which the port authority and the concessionaire. To are frequently set up on a project financing reach agreement on an equitable distribution of basis, generate significant risks for the various risks, the difficult balance between socioeco- parties involved (private sector, investors, and nomic returns of a project and financial lenders). profitability must first be achieved. This amounts to finding the optimal equilibrium Port reform also requires public authorities to within the framework of a regulatory system take on a new role, that of “concessioning acceptable to both partners. authority” or regulating authority. These changes permit the public authority to concen- Part A of this module focuses on the issue of trate on its essential tasks of economic, social, “financial engineering” and the effort to spatial, and temporal regulation to achieve the secure the best terms for financing and cover- best balance among the interests and demands age of the project based on the risk analysis of the various port and shipping entities and of and the financial constraints. The key compo- the general public. nents are the structuring of the project equity and debt, and the management of “exoge- Part A of this module will review a number of nous” and political financial risks. Financial financial aspects of port reform using the exam- engineering is a complex process given the ple of a public landlord port that has decided to constant introduction of new and more transfer a terminal into the hands of a private sophisticated financial tools; it is also a deli- operator. (See Module 3 for a full discussion of cate process because financial partners com- service, tool, and landlord ports.) This involves mit to projects on a long-term basis. Since to a greater or lesser degree the delegation of

206 Financial Implications of Port Reform design, construction, and operating functions to which are the handling and storage of merchan- the private sector. In this context, the partner- dise passing through the port. These port activi- ship established between the port authority and ties involve business practices common to all operator can take a number of different forms. companies as well as aspects that are highly

These are difficult to describe accurately by specific to the port sector. MODULE 5 means of a simple topology as many different types of contracts can be used (see Module 4). One can characterize the port operator through Apart from the usual distinctions in terms of a description of these basic and specific aspects the delegated services, ownership of the facili- and, using this characterization, establish an ini- ties or the point in time at which the operator tial classification of the risks that the operator is intervenes during the lifetime of the project likely to encounter. This approach deliberately (operation and maintenance contracts, lease leaves the definition of the “port” very broad to contracts, concession, BOT [build-operate- demonstrate the complexity of the environment transfer], or BOO [build-own-operate] agree- of the port operator, whose activity simultane- ment, and so forth), particular attention will be ously takes place in a port community, a trans- paid to the problem of risk sharing between the port chain, and national and an international port authority and the operator. All public-pri- economies, while nevertheless preserving the vate partnerships are defined in a contract, the principal characteristics of an ordinary company. content of which must be adapted according to the characteristics of the particular project. 3.1. General Aspects These contracts reflect the mutual commitments 3.1.1. National Environment of the parties and in defining them, the risks assumed by each party. In common with any other private company, a port operator must transact business according One of the essential conditions for the success to the legal, economic, social, and political of port reform projects is the ability to identify environment of the country in which it is risks. This is a prerequisite to determining conducting its activity. The legal and statutory optimum risk sharing between the various environment incorporates the applicable com- participants according both to their respective mon law rules and regulations, whether stem- capacity for risk management and their willing- ming from national legislation or international ness to carry these risks. We shall therefore agreements of which the country is a signatory. address the question of risk sharing analysis in These include company law; rules of fair com- greater depth, by means of a pragmatic exami- petition; tax law; exchange control; regulations nation of what it signifies from the terminal governing transfer prices and tax withholding operator’s viewpoint. The tools we will employ on the payment of dividends; labor laws; laws will include a set of principles constituting a relating to the protection of the environment; code of good practice that have proven accept- police; concession and property ownership reg- able to all parties for risk allocation and sharing ulations; and customs regulations. This environ- in various situations, and an assessment grid ment also comprises specific measures applica- that can be used to perform a quick evaluation ble to ports, such as those concerning their legal of the main risks of a project and the ability of status, rules regarding police and security serv- a candidate operator to manage these risks. ices, and even special measures relating to property ownership, labor laws (as specific to dock 3. CHARACTERISTICS OF THE workers), taxation, and so forth. PORT OPERATOR The economic environment is defined by the In the majority of cases, private sector partici- relevant macroeconomic factors (growth, pation in port operations comprises industrial inflation, exchange laws, debts, and so forth), and commercial activities, the foremost of as well as the wage and salary levels, the level of

207 Financial Implications of Port Reform

training and skills of local human resources, are sensitive to the quality of service supplied price levels, and so forth. and the rates charged. These aspects, in turn, are directly affected by the extent of competi- In its broadest sense, the political and social tion confronting the operator. This relationship environments are based on prevailing geopoliti- with customers, on which the level of activity is cal conditions, the stability of the existing largely dependent, generates a “commercial national, local, or regional government, the pos- risk” or “traffic risk” for the operator. sible risk of armed conflict, the labor climate, and so forth. 3.2. Specific Aspects Particular to the Port Sector The port operator is thus subject to the full range of national legal, economic, social, and 3.2.1. Vertical Partnership with the MODULE 5 political influences that determine the stability Concessioning Authority of the nation and locale in which the project is Apart from the legal environment as described located. This must be analyzed in detail, as this above (common law and sector-related rules), environment generates a number of risks, typi- under the terms of its contract with the opera- cally referred to as “country risks.” tor, the port authority imposes a set of measures 3.1.2. Industrial and Commercial on the operator defining, directing, regulating, Dimension or simply authorizing the operator’s activity over a given period. This form of relationship A port operator is a service provider, although between the port authority and the operator is with a substantial industrial and commercial described here as a “vertical partnership.” This (infrastructure and investment) dimension. This vertical partnership reflects the extensive scope is one of the reasons behind the desire to intro- of public service activities the port authority duce private management in ports. It is generally often delegates to the port operator. Inclusion admitted that a private company has a degree of these measures in the operator’s contract is of flexibility and an ability to react quickly that justified for a number of reasons: enables it to achieve greater efficiency than a public entity. • The port activity involves public issues including issues relating to national eco- In the course of its activity, the operator must nomic development, land use, and the finance, install, operate, and maintain the neces- handling of external trade. sary infrastructure, superstructures, and equip- • The tasks undertaken by the operator ment. In common with any other company, the may have the characteristics of a public operator must apply its own expertise and service and may be burdened with at least resources, while also establishing contractual some of the obligations inherent in the relationships with various equipment suppliers notion of public service, including nondis- or service providers (construction contracts and crimination and continuity of service. the purchase of tooling, water, electricity, and so forth), employing subcontractors for specific • The nature of the activity in or the physi- operations (maintenance, security, or even the cal location of the port can lead to the operations themselves), and with the banking development of de facto monopolies with sector for the financial package on which the substantial entry barriers (for example, operation is based. This industrial dimension of rarity of sites, need for public investment, the operator’s activity creates what are referred or an insufficient level of activity for more to as “project risks.” than one operator). This type of situation makes the intervention of a regulating The port operator deals daily with its cus- authority necessary to protect users from tomers, whether shipowners or shippers, who an abusive advantage due to a dominant

208 Financial Implications of Port Reform

position. However, this recognized need • Vertical partnerships by their very nature for oversight should not cast doubt on lead to contractual risk for the operator the principle of legal security, and must because the partnership with the port avoid any malpractice whereby the port authority is based on a contractual rela-

operator could be subjected to arbitrary tionship. MODULE 5 decisions. 3.2.2. Horizontal Partnership with • The activity of the port operator can Numerous Players require public investment in addition to The service a port operator provides to its cus- private investment. The investment nec- tomers, whether shipowner or shipper, is part of essary for the operator’s activity can a more global service of which the operator produce a return on invested capital only provides one element. The operator is thus that, while satisfactory for the public in a de facto partnership with service providers entity involved, is insufficient for the handling the other components of an integrated private investor. This is the case where transport and logistics chain. This is referred to the project generates positive externali- as a horizontal partnership. This type of part- ties and where it is not possible to nership may also exist with the port authority if obtain a direct contribution from all the it is a service provider, and with other players indirect beneficiaries of these external of widely differing specializations. It can also be effects. The need to draw on public an impromptu partnership, not formalized by funds also stems from the lengthy life- direct contractual links between the parties con- time of port facilities, which makes it cerned. The extent of and parties to this hori- necessary to obtain a return from the zontal partnership depend on the legal position latter over periods that substantially and activity of the customer. exceed the term of loans available on the financial markets. One can broadly describe the integrated service expected by the port operator’s principal cus- • The shoreline forms part of the public tomers, shipowners and shippers. For a domain in many countries, which means shipowner, the integrated service expected cov- that, at the least, express authorization ers all operations required for the ship’s call. (unilateral or contractual) is required to The services provided by the terminal operator engage in an activity along the water- (handling and storage) represent the most sensi- front. tive and costly parts of the call, although a vessel It is the integration of these constraints by the call also requires suitable maritime access, oper- public authority that makes a vertical partner- ational buoying, properly maintained basins ship and government oversight essential. These protected from the swell, efficient services to the constraints also have substantial consequences vessel (pilot, tugs, in-shore pilot), and modern for the port operator and the risk it incurs and electronic data interchange (EDI) and vessel its ability to manage this risk. These conse- traffic services (VTS), and so on. Above and quences flow from several factors including: beyond the service offered by the terminal operator, this means that the shipowner is sensitive • The concessioning authority may impose to factors such as the level and reliability of the conditions and constraints on the opera- supporting services provided in the port zone. tor’s industrial project, resulting in cost This identifies a first level of horizontal partner- increases. ship within the port community, where the part- • Regulation imposed by the concessioning ners can be other public or private companies, authority can limit the ability of the oper- and the port authority itself. Procedures imple- ator to manage commercial risks, requir- menting this partnership are formalized in con- ing a sharing of that risk. tracts concluded between the port authority and

209 Financial Implications of Port Reform

the companies operating in the port zone, or via numerous players with which the operator is police and operating rules and regulations. not necessarily in direct contact. This situation creates a further commercial risk for the port For a shipper, the relevant service is the end-to- operator and complicates the management task. end transport service, using a transport chain in which transit via the port is merely one link, or 3.2.3. Long-Term Commitment more precisely a node. This means that the shipper is sensitive to the existence and compet- The port operator runs a business. itiveness of the land transport modes serving the Consequently, it seeks to maximize profit, port as well as to the coordination of these serv- although its primary objective is at least to ices with the port services. This depends on a achieve a minimum acceptable level of return

MODULE 5 multitude of factors—controlled by numerous on operations and investment to be able to players—including the quality of road, rail, or cover its costs and to remunerate its lenders and inland waterway transport infrastructure; the sponsors. The investments that the operator quality of the services provided by the operators makes typically display two special characteris- of the different modes of transport; and various tics: they are substantial, indivisible, and have regulatory measures (flag restriction, charges, extended lifetimes, meaning that they can be and so forth). This leads to a second level of depreciated and yield a proper return only over horizontal partnership, where the partners are periods frequently exceeding 20 years, and they of varying types and frequently remote from the are “nonrecoverable,” either because they can- port activities proper. This situation leads a not be physically dismantled (for example, a number of transport companies to seek the inte- coffer dam) or because the concessionaire does gration of the port operator and land carrier not own the infrastructure or equipment in business to achieve more efficient control of a question. larger part of the transport chain. The justifiable demand of the operator for a In addition, it is clear that the ways in which reasonable return on investment necessarily the government agencies carry out their func- requires that it have the right to exploit those tions in a port (for example, customs, veterinary investments for a sufficiently long period of and phytosanitary departments, or frontier time. The above-mentioned characteristics gen- police) represent another aspect of performance erally mean that an operator’s early withdrawal that is taken into account by customers when from a project would have substantial negative assessing the competitiveness of a particular financial consequences. In some cases, though, a port. In this context, for example, the European long-term commitment by the operator may Union recognizes that the conditions under also become a source of concern to the conces- which customs control is exercised can distort sioning authority. It is therefore in the interests the competitive situation (“Douane 2000” pro- of both parties to seek a clear and stable legal gram). Similarly, a number of countries in arrangement by: Africa have recognized this problem and taken • Agreeing to an appropriate contract peri- steps to harmonize their customs rules and od giving due recognition to the special practices (Central African States Customs characteristics of the project. Union). • Attributing genuine rights of ownership It is therefore apparent that the port operator to the operator for facilities installed in does not control all components of the global the public domain. services delivered to its customers. The customer’s decision to use the operator’s services, • Agreeing on an equitable and clear can- then, also depends on factors external to the cellation procedure (stipulating causes operator. These factors are under the control of and indemnification).

210 Financial Implications of Port Reform

• Adopting rules of the game that both that the public sector would be able to carry at reduce uncertainty and ensure proper a lower cost. transparency. This section explores the approaches operators 4. RISK MANAGEMENT

can use to manage the various types of risk pre- MODULE 5 Risk management by the terminal operator viously identified, and applies the principles set involves a number of steps. Based on the out above to suggest equitable systems for risk approach adopted by many financial institu- sharing between concessioning authority and tions for funding projects with limited or no concessionaire. recourse, these steps are: 4.1. Country Risks • Risk identification. Detailed below are risks resulting from the • Sharing of risks with the port authority, national and international framework within the state, or other public authorities which the projects must operate. where it is justified or possible. 4.1.1. Legal Risk • Sharing of risks with partners (for exam- Legal risks arise in connection with the lack of ple, sponsors, customers, suppliers, or precision in and the possibility of changes in the subcontractors). legislation and regulations governing the • Reduction of exposure to residual risk project. It must be assumed that a set of rules (or the probability of its occurrence). exist at the time the project is initiated.

• Reduction or limitation of the conse- Insufficient precision in applicable laws and reg- quences of residual risks (for example, ulations can lead to disputes and misinterpreta- use of insurance or accruals). tions and therefore creates risk. In some cases, • Adjustment of the expected rate of return legal issues can be extremely complex, not only according to the degree of residual risk. because laws and regulations can be subject to a variety of interpretations, but also in terms of Two principles should be applied in situations jurisprudence. Furthermore, common practice where the activity of the operator represents the frequently imposes a number of mandatory delegated management of a public service. First, rules in terms of port operation (for example, the reduction of the project’s global risk (and FOB [free on board] Dunkirk, Antwerp). consequently of project cost) requires the proper Consequently, a thorough legal analysis should allocation of risk. Risk sharing between conces- be undertaken prior to the implementation of sioning authority and concessionaire on the one the project. When the project is located in an hand, and the various sponsors and lenders on area unfamiliar to the operator, it is particularly the other, must be based on analyses designed prudent to call on the services of local legal to identify and allocate risks to those parties advisors specializing in the various disciplines that can carry them best (with least negative involved in the project. This will help to reduce impact). Second, any risks allocated to the the incidence of circumstances that might delay operator will be reflected in a requirement for project implementation. The risk of noncompli- higher profits, in terms of level or duration, ance by the operator with legal or regulatory with a resultant increase in the cost of the service requirements through ignorance is one carried provided. It is, consequently, in the interest of exclusively by the operator. the concessioning authority to restrict, as far as possible, the unnecessary imposition of risks on The risk of changes in legislation or regulations the operator when the operator is not in a stems from the possibility that circumstances in position to manage them. In other words, it is effect at the time of the agreement may change undesirable to make the operator carry risks at a later date. According to the principles put

211 Financial Implications of Port Reform

forward at the beginning of this chapter, one changes in environmental legislation during the can argue that the operator is justified in calling life of the concession should trigger renegotia- for guarantees of legal stability to guard against tion of the contract between the two parties to changes over which the operator has no con- define the amount of and procedures for indem- trol. Any such guarantee of legal security nification of the operator by the concessioning should not come at the expense of fair competi- authority. tion among operators or jeopardize the continued operation of any public service. On the 4.1.2. Monetary Risk other hand, in the case where management of In a country where the national economy is public service is delegated to an operator, the weak or unstable, macroeconomic problems or operator is not in an ordinary business situa- fiscal rules imposed by the host country create a MODULE 5 tion. First, because the permanency of the oper- risk, for both shareholders and lenders, that the ator’s activity is essential to ensure continuity of project may be unable to generate sufficient the public service, and second, because the income in strong currencies. The main mone- degree of regulation imposed on the operator tary risks that can create this situation include: may well prevent it from adapting to such changes in the legal environment. Consequently, • Exchange rate fluctuations. it is desirable either to guarantee stability or to include a contract revision clause to avoid situa- • Nonconvertibility of the local currency tions where a change in the legislation or regu- into foreign currencies. lations could put the financial viability of the • Nontransferability (funds cannot be project in jeopardy. exported from the host country).

The risk of changes in legislation relating to the Where the project can generate foreign currency environment can be particularly significant, and income, which is frequently the case when serv- can materialize during the construction or the ices are invoiced to foreign shipowners or ship- operational phase. Prior to any decision con- pers, the foreign exchange and convertibility cerning privatization, the prudent concessioning problems can be easily overcome. The best way authority should undertake an environmental of hedging the transferability risk is for the study of the project. Conventionally, such stud- operator to be paid via an account opened out- ies include: side the host country (offshore account). Use of such accounts frequently requires approval by • The impact of the construction of marine the local authorities. When an offshore account infrastructures on the existing marine can be opened, exchange controls or the prohi- environment. bition of the export of foreign currency from • Management of pollution from ship the host country would have no direct impact wastes. on the economics of the project. In this case, the monetary risk is not hedged, but eliminated. In • Management of dredging-induced con- the contrary case, where no authorization can tamination. be obtained to open an offshore account, other • Management of pollution resulting from measures must be considered. The concessionaire accidents. should seek convertibility and transferability guarantees from the government or central With respect to environmental risk management, bank. Decisions about such guarantees often the aspects specific to environment-related become political issues. regulations should be established prior to the bidding process and, where appropriate, negoti- As for the exchange risk, this can be partially ated at the time of signature of the contract. hedged by ensuring that the majority of expenses Any increased construction costs caused by are paid in local currency; for example, by rais-

212 Financial Implications of Port Reform ing part of the debt in the currency of the host • Natural risks, such as climatic phenome- country. However, frequently this is not suffi- na (cyclones and exceptionally heavy cient; it is rarely possible to raise the required rainfall), earthquakes, tidal waves, and funding for large projects locally. Further, for- volcanic eruptions. eign investors must be remunerated in foreign • Industrial risks, fire, or nuclear accident. MODULE 5 currency. The latter also applies to part of the purchases and personnel expenses (expatriate • Internal sociopolitical risks, such as personnel). Where conditions allow, hedging strike, riot, civil war, and guerrilla or ter- products (for example, exchange rate swaps) rorist activity. can be used to manage the exchange risk. If, • Risks of war or armed conflict. on the contrary, such products do not exist due to the instability or weakness of the host In certain contracts, unilateral decisions by the country currency, the exchange risk represents local authorities can be included in the list of a major problem as it can only be carried by events covered by force majeure, in particular the shareholders and lenders, unless an where such decisions discriminate against the exchange rate guarantee can be obtained from operator. the central bank of the host country. The latter These risks are included under country risks, as it solution can only be envisaged in the event the is the national context that determines the proba- project is of critical importance for the host bility of their occurrence. It is reasonable that if country. Such considerations again add a polit- any such event occurs, it should result in the sus- ical element to management of exchange risk. pension of reciprocal obligations of the parties 4.1.3. Economic Risk involved, with a resultant limitation (although not elimination) of their consequences. The con- Port activities form part of national and inter- tract can also include procedures for sharing the national transport chains. The volume of trade burden of the consequences of such events moving through these chains depends to a large between the parties, in particular where the oper- extent on macroeconomic factors, namely popu- ator is managing a delegated public service. lation, consumption, production, exports, and 4.1.5. Interference or “Restraint of Prices” so forth. Consequently, the macroeconomic sit- Risk uation and its expected evolution have a strong impact on the level of activity in a port. It is Interference or restraint of prices risk covers essential to take this element into account in the those risks that relate to the direct intervention market survey conducted to estimate the traffic of the public authorities in the management of and throughput risk. The principles of traffic the project. Public service requirements are nor- and throughput risk sharing are analyzed in a mally defined in contract specifications, and the later section devoted to this topic. concessioning authority should not, in principle, 4.1.4. Force Majeure interfere in any way during the construction or operating phases, provided the concessionaire Force majeure generally covers all events out- complies with these requirements. However, side the control of the company and events that concessioning authorities frequently do inter- cannot be reasonably predicted, or against vene in the name of public service or for the which preventive measures cannot be taken at protection of the users, for reasons of security, the time of signature of the contract, and which for the protection of the environment, or simply prevent the operator from meeting its contrac- on an arbitrary basis. Such interference can take tual obligations. Apart from this general defini- the form of the imposition of new operating tion, examples of force majeure are generally requirements, additional investment, or new stipulated in the contract, including: constraints, the result of which is to increase operating costs or reduce revenue.

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Intervention by the government may be well for settling disputes. Recourse to international founded, but the concessionaire can then legiti- arbitration is desirable, involving a neutral mately expect compensation from the conces- jurisdiction applying recognized international sioning authority for the constraints imposed rules, such as those of the International and indemnification of losses resulting from the Chamber of Commerce. Likewise, the applica- concessioning authority’s actions. ble contract law can be that of a mutually acceptable third-party country. The best way of attenuating the interference risk is to have a contract that not only states unequivo- This purely contractual approach, while useful, cally the objectives of the parties, but also specifies is frequently inadequate to ensure the accept- the limits on government authority to intervene. able management of the political risk. In prac-

MODULE 5 The contract may also include provisions that tice, the arbitration phase of disputes is rarely will obviate the need for arbitrary government reached, but when it is, it reflects the degrada- intervention, for example, price escalation clauses tion of relations to such an extent that the or the obligation to increase capacity above a future of the project is very often threatened. certain traffic or throughput level. There are, however, other strategies for protect- Clearly, it is impossible to foresee all events that ing against political risk. The inclusion of multi- might give rise to intervention by the govern- lateral organizations, such as the World Bank or ment. Hence, it is a good idea to include con- the International Finance Corporation (IFC), tract provisions that call for periodic meetings among the shareholders or lenders represents a to discuss the status of the contract and allow form of protection for the operator. The pres- for renegotiation of the contract to account for ence of these institutions is not a formal guar- significant changes in circumstances. antee, but governments generally seek to avoid antagonizing these important multilateral insti- 4.1.6. Political Risk tutions by imposing measures that would upset The operator cannot control the risks inherent the equilibrium of a project in which they are in decisions taken by public authorities. The involved. Similarly, the financial involvement of operator naturally seeks protection against sponsors or lenders from the host country can harmful decisions through the clauses of the also serve to limit the political risk. contract by transferring this risk to the conces- Another approach involves recourse to the sioning authority. This is not sufficient, however, export credit agencies such as COFACE in since noncompliance with the terms of the France or Export-Import Bank in the United contract by the concessioning authority or the States, which act as guarantors for the political government is just one of the risks facing the risk during the loan period. operator. In addition, the approval of contracts or the issuance of authorizations from adminis- Actual insurance cover can also be obtained to trative authorities can cause delays and increase hedge certain specific risks. Such policies can be costs for the operator. Finally, the risks of obtained from both public insurers such as expropriation and nationalization are also a MIGA (World Bank Group) and private insur- danger. The risks of noncompliance, inefficiency ance companies. or expropriation, and nationalization are grouped under the designation of political risk. Quantification of the political risk is always a delicate matter, and there are no reduction or Apart from the detailed analysis of contractual hedging methods that make it possible to elimi- commitments, there is also the problem of the nate the political risk entirely. Thus, if the per- credibility of the applicable legal system. The ceived political risk is great, and the ability to effectiveness of contractual commitments mitigate those risks is slight, the operator may depends initially on the mechanisms available opt to abandon the project.

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4.2. Project Risks • Poor management of the job site, poor Project risks are those risks associated with the coordination of the parties involved, or the investment in and operation of the resources bankruptcy of a supplier or subcontractor. required for implementation of the project by These project design and management tasks are MODULE 5 the operator as set out in the contract between under the control of the operator, thus the oper- the operator and the port authority. The majority ator should carry these associated project risks. of these risks are carried by the operator, who The operator can then conclude a “design and therefore manages and assumes their build” type contract with the construction com- consequences. pany so that it can be associated with the project from the design phase on and help shape the Project risks include: project for which it will be responsible. If not • Construction risks. involved from the outset, the operator must analyze and accept imposed specifications (for • Hand-over risks. example, basis of design), proposing alternative • Operating risks. solutions or refusing certain aspects that it considers unacceptable, but may ultimately have to • Procurement risks. accept a less than optimal design (for which it • Financial risks. will bear the consequences). Increased costs or delays caused by the government or concession- • Social risks. ing authority are considered as country risks 4.2.1. Construction Risks (for example, political, restraint of prices, or legal risks) rather than project risks. In particu- Risks associated with the construction of the lar, this is the case when the functional defini- project involve unforeseen cost increases or tion of the project is modified or when, subse- delays in completion. A construction delay also quent to signature of the contract, constraints translates into increased costs, principally for are introduced concerning the choice of techni- the operator, in one of several forms: cal solutions. • Penalties the operator may have to pay to Hedging of excess cost increases and comple- the concessioning authority or its cus- tion delay risks by the operator are generally tomers under its contractual commitments. undertaken simultaneously. A common method • Delays in start-up of the operational of managing these risks is to transfer them to the phase of the project, causing a loss of construction company or equipment supplier. earnings. When the project includes a major construction phase, the financial package generally requires • Increased interim interest charges (inter- the inclusion of the primary construction est due during the construction phase, company among the project sponsors. The con- most often capitalized). struction risk (and design risk where applicable) In turn, the principal causes of excess costs or is then allocated to the shareholding construc- delays are: tion company, enabling the nonconstruction company shareholders to avoid bearing a risk • Design errors leading to the underestima- for which they have little or no control. tion of the cost of equipment or work or Transfer of the risk to the shareholding con- the time required to complete the job. struction company is achieved via the construc- • Inadequate assessment of local conditions tion contract or the design and build contract. (terrain in particular), which can necessi- From the operator’s perspective, then, the objec- tate modification of the original technical tive is to bind the construction company in a solution. lump-sum design and build a turnkey contract

215 Financial Implications of Port Reform

that incorporates a performance guarantee and authority and adversely affect commercial appropriate penalty clauses. This makes it pos- operations (for example, cause traffic lev- sible to convert the construction risk of the els to fall below expectations) and result project promoter into a credit risk for the con- in financial losses. struction company. • Risk of operating cost overruns stemming Careful selection of a technically competent and from underestimating operating costs in financially sound construction company makes the bid proposal (for example, omitting a it possible to reduce both construction and cost category or making a defective calcu- credit risks because of the assumed capacity of lation) or inefficient management of the the construction company to honor its contrac- project by the operator.

MODULE 5 tual, technical, and financial commitments. • Risk of loss of revenue not associated with a drop in traffic level; for example, It should also be noted that the sponsors of the as a result of the noncollection of rev- project (future shareholders) and lenders to the enue, fraud, or theft in a case where the project do not always carry the construction risk operator has not complied with the pro- in the same way. The lenders will often call on cedures demanded by the insurers, and the sponsors for a credit guarantee covering the claims by customers or frontage residents. construction phase, since the lender is protected by limited recourse for the operating period. Nonperformance risks can be minimized by selecting an operator with recognized experi- 4.2.2. Hand-Over Risks ence in port and terminal management. Cost Hand-over risks arise when the operator takes overrun and loss of revenue risks can be over the management of existing infrastructure transferred to the operator through use of a and facilities, including operation and mainte- fixed-price contract between the master conces- nance, and in some cases must first begin rehabili- sionaire and operator (which may provide for tation work. The general rule is that the operator escalation by application of an indexing formu- takes over the existing facilities at its own risk la), with the possible inclusion of a variable and peril. The operator is authorized to carry out component designed to reward better-than- prior inspection of the facilities to assess their expected commercial performance. condition and estimate the rehabilitation and Concessionaires and port authorities should maintenance costs to which it will be exposed. avoid cost-plus-fee type contracts with operators because they do not transfer any of the risks. Even with the ability to inspect facilities, it is Like the project construction company, the desirable to include a clause in the concession operator may become one of the project spon- contract to safeguard the concessionaire against sors. This then makes it possible to associate recourse relating to events and conditions exist- the operator at the outset with the definition ing prior to the contract, thereby exempting the of the operating system and its cost, thus mak- operator from resulting liabilities. ing the operator fully responsible for the aspects 4.2.3. Operating Risks of the project for which it will subsequently carry the risks. The concessionaire operates the facilities necessary to meet its contractual obligations at its Such measures, however, do not eliminate the cost, risk, and peril. Consequently, operating operating risk completely. The responsibility of risk is allocated entirely to the operator. the operator is necessarily capped. Furthermore, Operating risk principally comprises: this approach in fact converts the operating risk into a credit risk for the operating company. • Nonperformance risk, which can lead to The latter generally has limited initial capital, payment of penalties to the concessioning which will not exceed its working capital

216 Financial Implications of Port Reform requirement because it has no investment to be able to conclude a put or pay contract expenses. The responsibility of the operating with the public monopolies concerned. This company can then be covered by shareholder usually can be justified in cases where the proj- guarantees or a bond system. ect has a substantial public service dimension. MODULE 5 In any case, the concessionaire should have the Where the procurement of imported supplies is resources to manage this endogenous operating concerned, the procurement risk can stem from risk, and it is therefore logical that this risk be customs-related problems; thus, it becomes a allocated to the concessionaire in full. component of the country risk. In such cases, the concessioning authority may reasonably 4.2.4. Procurement Risks bear a portion of the risk.

Procurement risks arise due to the potential 4.2.5. Financial Risks unavailability of critical goods and services and unforeseen increases in the cost of external The operator bears all risks associated with resources necessary for the project. This is sig- raising the shareholders’ equity or obtaining nificant for port projects since they often loans required for funding the project. Likewise, depend on public monopolies to supply critical the operator carries all risks associated with for- services, for example for the supply of water mation of the project company (the special pur- and electricity. pose company or SPC). Contractual documents define the relationships among the various pri- Two approaches can help the operator to reduce vate players involved in the project (for exam- or eliminate this procurement risk. The operator ple, the shareholders’ pact and loan agreement). can choose to produce the critical resource itself. Apart from raising the initial tranche of share- For example, the installation of a dedicated gen- holders’ equity and loans, the establishment of erator in a refrigerated container park or refrig- standby credit loans should also be considered erated warehouse makes it possible to reduce the because it makes it possible to fund any excess cost of the resource in some cases and limit the costs with which the project company may be risk of power cuts (which, in addition to simple confronted. interruption of the service, can cause damage to the merchandise). This solution often requires Likewise, the interest rate fluctuation risk is car- specific authorization from the local authorities. ried exclusively by the operator. This risk arises Furthermore, providing such goods and services when loans used to fund the project are based oneself may not always be possible or financially on floating rates (for example, Euro Interbank feasible for the operator. Offered Rate [EURIBOR] plus margin). An increase in the reference rate consequently Alternatively, the operator can sign a long-term increases the amount of interest to be paid, and purchase contract with the producer of the hence the project costs. This risk can be hedged resource. This makes it possible to set the pur- by means of appropriate financial instruments chase cost using a predetermined price escala- (for example, rate caps, ceilings on variable tion formula, and to limit the risk of a unilater- rates, or rate swaps). al price adjustments or restrictions on supply. Further, the contract may include a clause to When projects are built or operated with the indemnify of the operator against losses aid of subsidies, there is the risk that the gov- incurred in the event of interrupted supply of a ernment will fail to make good on its subsidy critical resource. This is referred to as a “put or payments. This risk is relatively small where pay” contract. investment subsidies are concerned, as the construction phase covers a relatively short period. The concessionaire may require the assistance of However, international agreements (for exam- the concessioning authority or the government ple, the Marrakech Accords) or the dictates of

217 Financial Implications of Port Reform

internal law can still intervene to prevent the authority personnel) can amplify the social payment of subsidies. risks. Module 7 describes port labor issues in depth. 4.2.6. Social Risk 4.3. Commercial or Traffic Risk The social risk arises when operators have to restructure the workforce and bear the cost of Commercial risks arise from potential shortfalls severance payments, retraining, and other in projected traffic and from pricing constraints. employee issues. The risks of general strikes or Traffic and pricing risks are significant in port civil disturbances in the host country are fre- reform projects due to the high degree of uncer- quently classified as cases of force majeure (see tainty associated with medium- or long-term country risk), which means that they are often projections of port activity. These risks are MODULE 5 only partially covered by the protections afforded affected by the operator’s pricing decisions and in the contract. Additional insurance can be by any price regulation imposed by government. obtained to cover residual social risks. The nature of the partnership between the opera- The port sector presents special challenges relat- tor and the port authority leads, in practically ing to social risk: every case, to sharing of traffic risk, both in terms of responsibility and consequences. The terms of • Dock workers often enjoy a special status the concession agreement effectively allocate these under national law, which may put the risks between the two parties. However, even operator in the diminished position of though they are partners in port reform, there is a merely acting as an employer of hired natural tension between the port authority as a labor. These special treatment situations custodian of the public interest and the operator are disappearing in some countries, but as a profit-maximizing business. where they still exist they are a source of risk and excess cost for the operator. When the number of customers using a port, a • Port or terminal concessions, while requir- terminal, or other facility is limited, or when a ing the operator to continue employing a small number of customers represents a major portion of the existing personnel, often share of the activity, the operator can protect result in a very substantial reduction in itself against traffic or commercial risks by the number of port workers (reductions of means of establishing minimum volume guaran- 50–70 percent are not exceptional). tees. This is a long-term contract under which Although the port authority or govern- the customer undertakes to generate a minimum ment may give the concessionaire free level of traffic and agrees to pay a fixed sum to reign to rationalize the port workforce, the operator whether or not the service is this alone is not sufficient to eliminate the required or used. social risk. The operator must also be A terminal’s main customers—shipping lines or assured that the local authorities have the large shipping companies—will frequently capability to manage the social situation become project sponsors, much like construc- thus generated (for example, through tion companies or operators. In such cases, the retraining, early retirement, relocation customer-shareholder carries part of the com- allowance, or other program). Otherwise, mercial risk. However, this arrangement has a displaced port labor may seek recourse number of disadvantages, particularly the risk against the concessionaire. of discrimination against nonshareholder cus- In addition to the social risk relating to dock tomers. Nonshareholding customers can guard workers, the presence in the port of other cate- against this possibility by entering into a mini- gories of personnel with special status (for mum guarantee contract with the terminal oper- example, seamen, customs officers, and port ator (see Box 1).

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Regulation invariably generates costs. These Box 1: Richard’s Bay Coal Terminal: A include costs for the concessioning authority in Wholly Private Terminal the form of additional compensation it may outh Africa is one of the world’s leading have to pay to the concessionaire plus the direct

exporters of coal. The seven most costs of enforcing the regulations through MODULE 5 important mine operators in the country S inspections and other measures. Regulation also have funded, built, and now operate a huge coal terminal at Richard’s Bay with exceptional generates costs for the concessionaire, which rail access facilities to serve their export bears greater risks and has less freedom of business. The terminal has no public service action than it would in the absence of regula- obligation and handles the traffic of its share- tion. Thus, the concessionaire will expect this holder-customers on a priority basis. This higher risk level to be rewarded. places the small producers in a situation of dependence. They in effect are obliged to sell The costs or regulation are ultimately borne by their production to large operators or use other, less competitive and more expensive the port users or by the taxpayer. Government ports (Durban or Maputo), or use the terminal regulation, therefore, should be kept to the as second-class customers. minimum necessary to correct market imperfec- Source: Author. tions and protect the public interest.

The nature and extent of government regulation in connection with port reform are many and 4.4. Regulatory Risks varied. Ideally, the concessionaire and the port authority or other regulating entity can arrive at The relationship between the concessionaire and a compromise acceptable to both parties by the port authority or other government agencies adjusting regulation and the guarantees and is important in defining the rules of the game compensation allowed to achieve equitable risk for the concessionaire and, hence, its risks. sharing. Because situations affecting port reform The concessionaire generally desires to limit the vary so widely, there is no single set of rules scope of the vertical partnerships with the port applicable under all circumstances. Instead, this authority, taking the view that operator activity section describes the different regulatory tools should be regulated predominantly by market available to the port authority and identifies conditions. Consequently, the operator seeks how each might affect the distribution of risk. greater freedom of action in the management of 4.4.1. Regulatory Tools its project to be in the strongest possible position to manage risks. Regulation often takes the form of specifications and performance standards included in the The concessioning authority is concerned with concession contract itself. These might be set by protecting the user, safeguarding the general the concessioning authority in detail prior to interest, and avoiding abuse of dominant mar- the initiation of the selection procedure. Or, ket positions. The concessioning authority, con- they might be defined only in broad terms, with sequently, seeks to restrict the operator’s free- the bidders required to provide details in their dom of action through technical or economic proposals (for example, maximum price levels, regulatory measures. fee, or expected amount of subsidy to be received). In the latter case, these elements serve The search for a fair balance between regulation as a means for comparing the submitted bids, imposed by the concessioning authority and the and then become the performance standards to discipline imposed by the market is complex be applied to the winning bidder. and effectively determines how the commercial risk will be shared (see Module 6 for a detailed Regulation by the concessioning authority can discussion of economic regulation). be classified as either technical or economic.

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4.4.1.1. Technical Regulations. These regulations functional obligations and performance require- define the minimum technical requirements of ments on the operator and to leave to the inge- the project. They establish a set of parameters nuity of the operator the task of finding the best within which the concessionaire must operate, way to meet those requirements. and go a long way toward defining the risks to which the concessionaire will be exposed. Regulation of maintenance. Defective mainte- Technical regulation includes regulation of nance of port facilities creates three types of investments, maintenance, and performance. risks: commercial risk for the operator as a consequence of the deterioration in the level of serv- Regulation of investments. Regulating invest- ice offered to customers, risk of default by the ments is necessary only when the operator is operator with respect to the public service obli-

MODULE 5 itself responsible for the execution of the proj- gations contained in the contract, and risk of ect. The port authority may then choose to deterioration of assets during the term of the impose a number of regulatory measures: contract. The commercial risk is properly borne by the operator, and poor service will be penal- • A functional definition of required capacity ized by the market. No regulation by the conces- or traffic and throughput thresholds that sioning authority is required to guard against would trigger new investments in capacity this aspect of maintenance-related risk. The pub- to ensure a minimum level of service lic service obligation, in particular the obligation (where market conditions might lead to for the operator to provide continuous service, undercapacity). typically is defined in performance requirements • Construction standards to ensure that the contained in the concession contract or work is satisfactorily executed. subcontract with the operator. An interruption of service resulting from a failure to perform • Constraints or particular specifications maintenance can then give rise to penalties. relating to security or protection of the environment. In the case of a concession where assets are Oversight by the concessioning authority should be handed over to the port authority on termina- limited to the verification of compliance with the tion of the contract, the need for regulation can defined measures, and should not extend to the go beyond a definition of functional obligations. imposition of specific technical solutions, as long as It is normal for the concessioning authority to the concessionaire meets the performance stan- require that repair and maintenance work is dards. Any requirement on the operator to obtain correctly carried out to ensure that the installa- approval of various aspects of the project by the tions are handed over in good operating condi- port authority, above and beyond these predefined tion at the end of the concession period. The standards, creates uncertainties that increase the concessioning authority can impose specific concessionaire’s risks. This makes it difficult for the maintenance standards in the contract to ensure operator to properly estimate future costs for the the satisfactory preservation of the assets. project, adding an element of risk for which the operator will seek compensation. Regulation of performance. Finally, where the lack or absence of competition is liable to dis- Tenders should not be judged solely on the courage the operator from providing an adequate basis of the amount proposed to be invested by level of service, the concessioning authority can the candidate. Indeed, making sure that a mini- include specific performance standards in the mum amount is invested is not an end in itself concession contract, for example, minimum (except perhaps for the construction company). levels of productivity. While sometimes deemed Such one-dimensional measures can have necessary, this approach is not without difficul- adverse effects by possibly encouraging noneco- ties, since it assumes that the concessioning nomic investment. It is preferable to impose authority:

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• Is in a position to define and codify a the consequence of an exclusivity guarantee pre- level of service, whereas the content of viously granted by the port authority to another the service and the required level of per- operator in the port. formance can change over time.

By restricting the scope of permissible activity, MODULE 5 • Is capable of determining compliance by the port authority increases the commercial risk the operator with the set standards. for the operator. With a narrow scope, the • Has the ability to apply either incentives operator’s capacity to adapt or diversify its or penalties when the performance objec- activity in response to market changes is limit- tives are exceeded or not achieved, ed. On the other hand, the port authority could respectively. allow the operator considerable freedom of initiative and action to exploit port land and facil- Beyond productivity criteria and service stan- ities in return for the operator’s performing dards, performance standards can also include a unprofitable public service activities. minimum capacity for the terminal. These standards might be based on investment levels or on 4.5.2. Public Service Obligations direct measures of storage and throughput capacity. Generally, it is preferable to permit the The port authority may require the operator to concessionaire sufficient flexibility to meet the comply with principles governing the provision standards in the most cost-effective manner (for of a public service. This obligation typically example, extension of yard space versus the imposes requirements for service continuity, purchase of higher stacking equipment). with the assessment of penalties or early termination of the contract in cases where the service 4.5. Economic and Financial is interrupted due to the fault of the operator, Regulation and also requires equal access and treatment for Virtually all concession contracts contain eco- users (nondiscrimination with respect to pricing, nomic and financial provisions defining the priorities, level of service, and so forth). scope of permissible activity, the minimum serv- It is not always possible or desirable to avoid ices required, the degree of competition the all discrimination among an operator’s cus- operator can expect, the freedom to set prices, tomers. For example, obliging an operator who and any fees or subsidies associated with the is a subsidiary of a shipping line to serve other project. These provisions are designed to estab- competing shipping lines under the same condi- lish some level of certainty for the operator tions as its affiliated company, irrespective of with respect to its flexibility to manage the contractual stipulations, is unrealistic. This project so that the operator can assess risks and problem can and should be avoided when ways to manage them. developing the concession bidding qualifica- 4.5.1. Scope of Operator Activity tions. Business affiliations of the bidder, and any restrictions thereon, should be taken into The concession contract should define the activ- account when designing the concession and ities the operator is authorized to conduct in the awarding the contract. area defined by the contract. The port authority will define this scope based on its reform strategy The principle of nondiscrimination among users and operational needs. For example, the port does not prohibit prudent commercial manage- authority may prohibit the operator from ment of the affected activity, including differen- engaging in any activities other than the tiation in tariff or pricing, berthing priority, and handling and storage of merchandise within the service levels, provided these are based on project’s defined domain, or specify the types of objective criteria such as annual traffic or traffic the operator will be authorized to han- throughput volume, the period of commitment dle. In the latter case, such limitation may be of the parties, or the characteristics of call or

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vessel, and provided these are applied uniformly the port, another port, or another means of to all similarly situated users. transport (air, land, or coastal transport). Estimation of the true level of competition can 4.5.3. Noncompetition Guarantees be difficult (see Module 6 for a methodological approach). From the concessioning authority’s Under certain circumstances it may be reason- perspective, the objective of price regulation able for the concessioning authority to grant the should be to limit the risk of the operator abus- concessionaire a noncompetition guarantee to ing a dominant market position. As indicated compensate for the imposition of strict regula- above, when sufficient competition exists to dis- tion, if such regulation may deprive the conces- cipline pricing, the tariff regulation need be sionaire of the normal means available to a nothing more than an obligation to treat all company for positioning itself in a competitive MODULE 5 users on an equal basis and the requirement to market. This type of guarantee is generally lim- publish a tariff. ited in time and terminates on a specified date, or when the level of traffic reaches a predefined Government oversight can also be kept to a threshold. minimum when the activity in question does not constitute a public service. This is the case Although they can be useful in limiting a conces- where the operator only conducts its activity for sionaire’s risks, we do not recommend creating its own account or on behalf of its sharehold- monopolies de jure unless necessary, even if they ers. This is also the case where the port cus- are limited in time. Instead, we recommend that tomers are not national economic units (for the concession contract provide for renegotia- example, when they represent transit traffic or tion in the event that the competitive situation transshipment activity). The operator should significantly changes. Renegotiation may include then be free to negotiate charges with its cus- a review of the regulatory clauses to adapt them tomers on a case-by-case basis. to new market conditions. In certain cases, this could lead to the indemnification of the operator Pricing regulation is necessary, however, in where the newly created situation calls into other cases, namely when the operator provides question the viability of the project. an essential public service and is in a position of 4.5.4. Pricing Controls strong market dominance. Apart from the requirement of equal treatment of users and the The procedures for setting tariffs represent a publication of prices, in such cases the adminis- critical element of the economic regulatory sys- trative authority may choose to establish a max- tem. Prices and pricing flexibility affect the ter- imum charge (a price cap). This maximum minal’s level of traffic and throughput and the charge can be set initially by the market, as the profitability of the concessionaire’s operation. set of tariffs submitted by the terminal operator Regulation of prices by the public authority as part of the bid. The price caps are generally affects the operator’s flexibility in two key accompanied by price escalation formulas ways: the ability to negotiate the terms of serv- indexed to a set of economic indicators. ice provided to the customer on a case-by-case However, these escalation formulas are general- basis or the obligation of the operator to pub- ly applied only for a short term (for example, lish a list of charges applicable to all users, and for a period of up to five years). Following that, in the case of a published list, the ability to set periodic renegotiation of the price caps is the level of charges. required, which becomes another source of uncertainty and, hence, risk for the operator. Operators should be free to set tariffs without significant government oversight when the mar- The problem of regulating public monopolies over ket is effectively regulated by competition. the life of a long-term concession continues to be a Competition can come from another terminal in subject of concern in industrialized countries.

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of fees or subsidies. This constitutes another Box 2: Port Réunion: A Single Container form of regulation, as the level of the fees or Terminal Using Several Handling Contractors subsidies is closely linked to the tariff policy. n common with the majority of island The fees or subsidy mechanism typically has a

economies, Réunion does not generate suf- fixed and variable component. MODULE 5 Ificient traffic to justify more than one container terminal. The majority of the containers The fixed component can be a fee equivalent to a are consequently handled by a single container rent paid by the operator to the port authority for terminal. However, the containers are handled by a number of competing cargo handling the use of land and facilities or utilities provided contractors. by the public sector. This fee also incorporates This has not prevented recourse to private profit sharing, that is, the rental fee effectively investment or management. The resources includes an element to reward the concessioning required for these operations have been pro- authority for permitting the operator to profit vided by an economic interest group compris- from the operation of the terminal. Conversely, ing the cargo handling operators and other the fixed component can be a subsidy paid to the partners. The partners include the Chamber of Commerce and Industry, yard equipment operator when the concession is acknowledged to owners, land storage management, and be an unprofitable undertaking. This is a way of gantry crane owners. compensating the operator for providing essential Source: Author. public services. In this kind of concession, the subsidy level will usually be one of the main award criteria during the selection process. So far, no clear and fully satisfactory response The variable component of compensation to the has been produced. The problem is even more concessioning authority can be a payment by acute in the developing countries where regulato- the operator of a fee based on the level of activ- ry oversight capabilities may be weak. ity. The variable component can also be an A radical approach to regulating such monopo- indexed subsidy based on traffic level. These lies would be to recompete the entire concession same things include a minimum traffic thresh- at periodic intervals, at the same time setting old that can be used to share the traffic risk and new tariffs according to market conditions. But indemnify the operator if the level falls below such a recompetition of the concession cannot the predefined threshold. This latter approach be envisaged every five years. Moreover, a may be most appropriate when there is signifi- recompetition would also require the inclusion cant uncertainty about the potential traffic in the contract of provisions on equitable moving through the terminal and when the con- withdrawal conditions for the concessionaire, cessioning authority desires to impose tight including concession repurchase clauses. These technical and pricing regulations. are generally based on the discounted value of Experience shows that these fee and subsidy lev- anticipated profits from the concession through els and any escalation clauses should be decided the original termination date. This amount as part of the concession contract and should be depends directly on the tariff assumptions for based on traffic levels rather than the degree of the residual period. profitability for the operator.

Another approach might be to require the conces- The port authority could choose to set the ini- sionaire to use several handling companies for the tial levels for the fixed and variable components same facility, as in Réunion Island (see Box 2). of subsidies or fees. However, these levels repre- 4.5.5. Fee or Subsidy sent the most frequently adopted financial cri- terian for judging bids and, therefore, prefer- Vertical partnerships between the concessioning ably should not be set by the port authority, but authority and concessionaire involve some form left for the bidders to propose.

223 Financial Implications of Port Reform

4.6. Golden Share or Blocking types of operations and the resultant implica- Minority tions for regulatory oversight and risk sharing. Over and above the contractual conditions 4.7.1. Operator Handling Only Its Own included in the bid specifications, the conces- Traffic sioning authority can retain a “right to know” concerning decisions taken by the concession- This method of operating is frequently encoun- aire. The most commonly used techniques for tered in the case of a terminal handling industri- this are to hold an equity interest in the project al bulk (ore or oil) and general cargoes (forest company and to hold a “golden share,” or products or fruit). Under these circumstances, it blocking minority. This enables the concession- is frequently the shipper, a group of several ship- ing authority to exercise oversight from within, pers, or the shipowner itself who serves as the MODULE 5 but also can invalidate the risk sharing balance operator of the terminal. This type of special by introducing chronic interference by the con- purpose operation does not necessarily represent cessioning authority in the management of the a public service, hence, it does not require sys- concessionaire company. tematic regulation by the port authority. Nevertheless, standards governing the mainte- Despite its drawbacks, this form of government nance of the facilities can be imposed for the oversight is widespread. In over one-third of the preservation of the assets given in concession. privatized port terminals worldwide, the port or municipal authority owning the port also has The administrative document formalizing the an ownership interest in the terminal operator contractual relationship between the port company (International Association of Ports authority and the operator of special purpose and Harbors [IAPH] Institutional Survey, facilities merely needs to authorize the use of 1999). For example, in the case of Hamburg, the site for the defined activity. A fixed fee is the port (owned by the Hamburg regional gov- typically paid for the occupation of public land, ernment) has a majority interest in the operator and where appropriate, the provision of infra- company. This situation often gives rise to con- structure or equipment by the public sector. flicts of interest between the shareholder and Port dues billed directly to users (shipowners regulator roles of the concessioning authority, and shippers) by the port authority already gen- which tend to outweigh the perceived benefits erate remuneration for the use of the general of such a scheme. Control and monitoring of infrastructure, and therefore would not be fur- the concessionaire’s behavior generally is best ther billed to the terminal operator (see Box 3). carried out through a well-drafted concession 4.7.2. Operator Acting on Behalf of a Third contract, making proper allowances for the con- Party in a Competitive Situation cessioning authority’s interest in reviewing certain strategic decisions of the concessionaire. In this case, it is desirable for the traffic risk to This will safeguard the concessioning authori- be carried in full by the concessionaire. This ty’s role as an impartial regulator with all its means that the concessionaire must be able to operators, which runs the risk of being compro- manage this risk by controlling the operating mised if it becomes involved as an equity holder parameters affecting its competitive position. in any of the private parties it is supposed to This assumes substantial freedom for the con- oversee. cessionaire in terms of investment, level of service, and the tariff, although some limited regula- 4.7. Risk and Port Typology tion may still be necessary to ensure compliance Risk sharing and the extent of required govern- with public service obligations, preservation of ment oversight can also be influenced by the public assets, and maintenance of minimum nature of the terminal operations being conces- capacity. Because the market is regulated by sioned. This section identifies several different competition, the tariff can be set freely. The

224 Financial Implications of Port Reform

countries. The existence of a natural monopoly of Box 3: Owendo Ore Terminal in Gabon the port terminal management activity undeniably he Owendo ore port was built in 1987 to introduces a public service dimension requiring export manganese ore mined in Moanda close economic oversight. This can involve the Province. A number of agreements were T setting of charges and awarding of the concession MODULE 5 signed at the time, including an agreement for the construction of the port and another for to the candidate proposing the highest fee (or the use of public land and installations and lowest subsidy), or, alternatively, setting the the operation of private facilities. These amount of the fee (or subsidy) and awarding the agreements provide for the transfer of respon- concession to the candidate proposing the lowest sibility from the port authority to the private weighted mean tariff rates. Price escalation and operator for maintenance of the facilities and dredging along the wharf, thus making the indexing clauses are essential in all cases. operator responsible for all maintenance and There are several ways that traffic risk and management of the terminal it uses. In return for the operator assuming these responsibili- profit can be shared between the concessioning ties, the port authority reduced the fee paid authority and private operator. First, the con- by the operator. cessioning authority can guarantee that the

Source: Author. monopoly will be protected from competition for a specified time or until a specified traffic level is reached. The agreement may contain clauses providing for modification of the regula- Box 4: Container Terminals in the North tory system or even indemnifying the conces- European Range sionaire from completion of the contract should he current situation in Northern Europe the monopoly disappear. provides an example of genuine compe- Ttition between different terminals in the Second, the concessioning authority can guaran- same ports, and between the different ports tee minimum traffic levels when the volume of of the Le Havre-Hamburg range. The high level of traffic, the opening of European fron- traffic forecast by the concessioning authority is tiers, and the quality of the available land regarded as highly uncertain by the concession- transport services support the existence of aire. When such uncertainties exist, the conces- numerous container terminals, while providing sion agreement typically limits the amount of shippers and shipowners with a genuine the fixed part of the fee and introduces a vari- choice of port and operator. This situation able part (reduction) if traffic fails to reach a allows the coexistence of public and shipowner-dedicated terminals. minimum threshold to protect the operator This situation, however, is rarely the case in from significant revenue shortfalls. developing countries, where traffic is thin, border crossings are difficult, and intermodal con- Finally, the concessioning authority and the nections are poor. Hence, the ports on the West operator can agree to share profits when traffic African coast have virtually no competition. exceeds a specified volume (see Box 5). Source: Author. 4.7.4. Transit or Transshipment Traffic

Transit traffic refers to goods whose origin or contract is awarded to the candidate proposing destination is a country other than that of the the highest rental fee or the lowest subsidy port. Transshipment is the discharge of cargo or requirement, whichever is relevant (see Box 4). containers from one ship and the loading of them 4.7.3. Operator Acting on Behalf of a Third onto another in the same port (vessel-to-vessel). Party in a Monopoly Situation Both activities may have a positive impact on the economy of the country, generating oppor- This situation is relatively common in developing tunities for value-added activities, jobs, and countries, particularly in African and insular national wealth.

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Box 5: Container Terminal Operator in the Box 6: Port of Djibouti: Transit and Port of Klaipeda Transshipment he Port of Klaipeda in Lithuania has a he independence of Eritrea has deprived new container terminal designed to Ethiopia of its maritime access (ports of T handle import-export traffic as well as a TAssab and Massawa). Ethiopia is now high volume of (competitive) transit traffic landlocked. The recent conflicts between the between Western Europe and the Baltic two countries have made Ethiopia substan- States and Russia. Although the terminal was tially dependent on the Port of Djibouti for its financed from public development aid funds maritime trade. A lack of budgetary resources (EIB), an operating concession was awarded has led the Djiboutian authorities to seek pri- to the German operator Eurogate in associa- vate funding for the necessary development tion with local partners. projects (for example, a cereal terminal). This MODULE 5 Source: Author. project, based on the realization of a “situation rent,” should achieve a fair yield for the investors. It will generate new revenue for the When the customer is not an economic unit in independent international Port of Djibouti and economic activity for the country. the country of the port, the government does not have the same interest in protecting the cus- The Port of Djibouti has long enjoyed a strategic situation in the container transship- tomer. Consequently, in the absence of any ment domain, this activity representing a special agreement, there is little reason for the significant proportion of its container traffic government to accept any of the risks associated and resources. The Dubai Ports Authority now with transit and transshipment traffic or to manages the Djibouti container terminal under regulate economic activity by the operator. a concession agreement. Source: Author. In fact, the port may benefit from the operator’s market dominance in handling transit traffic, which is disciplined by the existence of alternative transport systems (transit), the capacity of 4.7.5. Mixed Situations competing ports in the region (transshipment), The situation frequently existing in ports is a mix- and the degree of international competition. ture of the configurations described above, further Under these circumstances, it is reasonable for complicating decisions about the procedures to be the port authority to seek to obtain maximum adopted. This leads to a hybrid approach, combin- profit from this favorable (although perhaps ing compensation systems, regulatory oversight transitory) situation. In this case, the port mechanisms, and encouragement of “situation authority charges an operator with the manag- rents” (highly profitable operations in select activi- ing of this “natural resource” (that is, the coun- ties to help fund a needed public service that try’s geographic advantage) with the objective might otherwise generate a loss) (see Box 7). of maximizing spin-off benefits for the country. 4.8. Other Concessioning Authority Regulation of the activity is not required, apart from the actual authorization and an obligation Guarantees to preserve existing assets where appropriate. The existence of a horizontal partnership There is no need to subsidize the activity nor to between the various players in the port commu- share commercial risks because they are fully nity and its relationship with the transport carried by the operator. On the other hand, the chain was described earlier. The operator will port authority will seek to maximize its profit often seek to combine the various services by awarding the concession to the highest bid- required by customers into an integrated whole der, namely the candidate proposing the most or, alternatively, give contractual guarantees to favorable profit-sharing arrangement (fixed and customers as to the level of service provided in variable fee) to the authority (see Box 6). these various domains.

226 Financial Implications of Port Reform

Box 7: Djibouti Fishing Port: Public Service Box 8: Horizontal and Vertical Partnerships and Semi-Industrial Activity in the Port of Maputo, Mozambique he Republic of Djibouti has constructed n a horizontal partnership, the public port

a fishing port to encourage the develop- authority awarded a concession for the MODULE 5 Tment of a small-scale fishing industry IMatola Terminal to a private operator, with that can provide the country with new the goal of developing transit traffic for the sources of animal protein for human con- export of coal from South Africa. As the sumption. Financed by public development admissible draught of vessels is a major aid funds (concessional loan from the African strategic element for the operator, the con- Development Bank), the port cannot be finan- tract stipulated that the port authority would cially profitable on the basis of this small- maintain a minimum access channel depth. scale activity alone. The concessionaire has claimed that the port However, the fishery resources of the authority has failed to meet this commitment, region, combined with certain advantages and has declined to pay the scheduled fee as granted to the country Lomé 4, make it possi- a result. ble to look toward the development of an In a vertical partnership, the port itself and export-oriented semi-industrial fishing activity. the railway that serves the port are in the Furthermore, this project has led to the process of privatization. The port has been preparation of reclaimed, back-filled sites, a profitable while the railway has operated at privileged location that will provide space for significant losses. Separate privatization the development of various activities. requires adjustments to balance the two con- Placing the complete entity under conces- cessions without raising doubts as to the sion could possibly enable the concessionaire global cost of the transport chain for cus- to make a profit from the overall project, while tomers. A solution under consideration meeting its public service obligations relating involves the creation of a joint price regulation to small-scale fishing activities. authority for the port and railway concessions. Source: Author. Source: Author.

It is logical for the port authority to provide the Likewise, while it may be useful to include guar- operator with guarantees concerning standards antees regarding land transport modes (for exam- of facilities and performance of services in the ple, hours of operation, access to carriers, creation port (for example, depth of access, buoying, of new infrastructure, maximum charge, or mini- operating hours, and ship services), whether mum capacity for a rail service), the quality of the provided directly by the port authority itself or intermodal service at the port is critical to efficient delegated to other service providers within the and cost-effective operation and should be ana- framework of a vertical partnership. These lyzed before the operator puts in a bid (see Box 8). commitments, frequently grouped in a clause headed “concessioning authority’s obligations,” 4.9. Contractual Risks can result in financial penalties against the port Relationships between the port authority and authority in the event of failure to meet its obli- concessionaire, as well as between the conces- gations. The resultant commercial risk for the sionaire and its suppliers, lenders, customers, operator is then transformed, theoretically, into and subcontractors, are defined in contracts. a credit risk for the port authority. Clearly, it is This section highlights the principal risks important for the operator to conduct a thor- involved in the drafting and implementation of ough analysis of the complete port community, such contracts. its operations, and its reputation before com- mitting to the project. Irrespective of the clauses 4.9.1. Contract Management included in the contract with the port authority, the operator will inevitably suffer the conse- To protect both the concessioning authority and quences of any defective operation of the port. the concessionaire, contracts typically include

227 Financial Implications of Port Reform

provisions governing the possibility of changed 4.9.2. Indexation Risk circumstances or disputes about contract implementation. The main elements of the contract Indexation formulas have been mentioned on a governing such developments include: number of occasions in connection with changes in tariff levels, long-term contracts with cus- • Revision clauses: At the outset of the tomers or suppliers, operating contracts, and so project it is impossible to foresee all the forth. Indexing designed to enable the operator events that might arise over a period of to cover or reduce certain risks (in particular the several decades. This means that revisions inflation risk) itself induces other risks, such as will be required to adjust the terms of the risk of significant deviation of real-world condi- contract to changing situations. The con- tions from the indexation formula over a certain

MODULE 5 ditions and procedures for these revisions period and the risk of divergence between the must be defined, for example, periodic indexing conditions of different contracts signed revision at defined intervals, revisions by the port authority and the operator (procure- scheduled for key project dates, revision ment, operation, and sale). The risk for the triggered when a particular throughput operator is that the indexing formulas can lead level is reached, or revision at the request to an increase in costs that exceed the increase in of one or other of the parties. revenue or the potential reduction in negative effects. The risk for the concessioning authority • Contract termination or renewal clauses: is that the operator’s prices rise too high when The duration of the original contract competition is inadequate. period is a major risk consideration for the operator. The possibility for renewal 4.9.3. Credit Risk—Bonds or extension of the contract must be defined, as must the procedures for take- Sharing or mitigating the many risks associated over or repurchase of the project assets with port projects frequently gives rise to con- on termination of the contract. tractual obligations and attendant financial sanctions if one party’s or another’s obligations are • Early termination clauses: These clauses not met. Sanctions convert the risk into specific define the conditions potentially leading financial obligations (payment of penalties). This, to cancellation or early termination at the in turn, generates the credit risk of the partner request of one party or another, and the that is unable to meet its financial obligations. applicable procedures relating to penalties or compensation. These clauses must The most efficient method of ensuring that the also be compatible with the underlying partners honor their financial commitments is to loan contracts signed by the operator, require bank bonds. These are frequently demand- where these agreements provide for a ed from the concessionaire or by the operator lender’s right to substitute another opera- from its private partners. The amounts and call tor in the event of the bankruptcy of the conditions for these bonds must accurately reflect original operator. the respective commitments of the parties. However, the operator’s credit risk with respect to • Procedures for settlement of disputes: the concessioning authority cannot be covered by Risks associated with disputes were bonds, and generally remains a political risk. addressed in the section on political risk management. The relevant clauses cover 4.10. Approach of the Different settlement out of court, the eventual intervention of independent experts subject to Partners to Risk and Risk prior acceptance by the parties, and arbi- Management tration clauses (for example, place, appli- Part A of this module has been largely devoted to cable law, arbitrator, expenses). analyzing the principles of risk sharing between

228 Financial Implications of Port Reform the public port authority (as the entity offering entities. These sponsors can thus play the dual the concession) and the private concessionaire. role of lenders and advisors to the concession- This section looks in general terms at other ing authority. aspects of risk sharing from the perspective of each party and the particular risks affecting it. Apart from the challenge of selecting the origi- MODULE 5 nal partner, as time passes there is also an issue 4.10.1. Concessioning Authority associated with the continued commitment of the shareholders. A particular risk arises if the The primary challenge for the port authority is initial shareholders decide to dispose of their to identify and define a balanced set of risk interests in the project company to third parties management measures. This requires expertise that do not meet the expectations of the conces- in numerous areas, which can lead to the use of sioning authority. This risk must be anticipated specialist consultants. In addition to the terms by appropriate contractual clauses. of the contract concluded with the operator, which defines risk sharing between the port 4.10.2. Project Sponsors authority and the operator, the composition and characteristics of the sponsors raise major issues Having first analyzed the risks of the project, for the port authority in terms of: the shareholders will logically seek to align the level of risk with the expected return on the • The capacity of the operator to comply operation. Their decision to become involved, with the terms of the contract. consequently, depends on their assessment of indicators such as the project internal rate of • The degree of commitment of the various return, investment coverage ratio, or return on shareholders. equity. • The commercial positioning of the operator, with particular reference to the equal However, apart from this determination, which treatment of users or customers. is the same one every investor must make, each sponsor generally adopts its own particular • The transfer of technology and the partici- approach according to its own agenda, enabling pation of national players in the project. it to reduce this risk/shareholder return profile. This means that the process for selecting the For example: partner is a matter of prime importance for the • A constructor or equipment supplier port authority. Apart from selecting a partner seeks to maximize its return for the con- who can meet financial objectives (for example, struction phase and through the upstream reasonable tariff levels, minimization of subsi- services it provides. dies, and maximization of the fee), the port authority must also be able to select a reliable • An operator seeks a return on the facility partner, one capable of complying with all the management services that it provides. terms of the concession contract and capable of • A customer, shipper, or shipowner looks carrying all of its allocated risks. for a high quality of service and reason- Recommendations relating to the management able rates over the long term. of calls for tender are published by the principal • A financial investor is primarily looking for international financial institutions (IFIs). These the sustainability of the project throughout documents describe in detail relevant selection the life of the investment period. criteria and methods for achieving the satisfactory selection of candidates. The involvement of The agendas of the various sponsors can lead to the IFIs in these privatization initiatives also different expectations in terms of concessionaire may permit port authorities to avail themselves policy. This situation also creates major differ- of additional assistance provided by these ences in each sponsors willingness to carry risk

229 Financial Implications of Port Reform

or in the length of time over which they expect 5. CONCLUDING THOUGHTS to earn a return. The concessionaire consortium It is not possible to cite universal principles for clearly must manage possible differences in risk sharing in view of the widely varying char- objectives among the sponsors; but these differ- acteristics and environments of port projects, ences also concern the concessioning authority but one important area to consider is the public because they can lead to situations that are prej- service obligation. The public service dimension udicial to the general interest, for example, serv- of port operations, which the public authority ice continuity. assigns to each port activity, is a core element in 4.10.3. Lenders the process of defining and sharing risk. However, the notion of public service is by no The project’s lenders primarily look for the project

MODULE 5 means universal. While some principles are con- to have the capacity to repay its debts. They constant, the definition of public service varies from sequently adjust the amount of the debt and the one country to another, and does not remain repayment profile according to the annual and constant over time even within a given country. actuarial debt coverage ratios (see Part B of this module for a precise definition of these concepts). This variation, consequently, is a major consideration in the preliminary debate on the intro- Apart from these financial ratios, the lenders duction of private management in ports. The frequently impose other constraints on the delineation of public services is all the more deli- sponsors to ensure their continued commitment cate as the initial situation is frequently one of a throughout the defined repayment period. This stagnant public sector, often with limited capacity stems partly from the fact that the loans are not for clearly identifying the responsibilities that fall (or are only partially) guaranteed by project within the public service domain. For example, assets (which tend not to be liquid in port proj- the activity of a port terminal operator cannot ects), but principally from the cash flows fore- be qualified as a public service in all cases, and cast for the period of the loan. is more akin to a purely commercial activity in The lenders, therefore, invariably call for a min- many instances. At the same time, the activity of imum equity investment on the part of the the port terminal operator cannot be fully classi- sponsors. Alternatively, lenders may consider fied as to that of a commercial company, as the the replacement of equity participation by sub- notion of partnership with the port authority is ordinate debt (which presents the same advan- still present, although the levels of regulation tages) as acceptable. Furthermore, reserves can and guarantees may be considerably reduced. be set up for the purpose of earmarking cash- flow surpluses for debt repayment, thereby pre- In a case where the public authority assigns this venting the shareholders from recovering their public service dimension to the activity, it is equity contributions before loans have been legitimate for the authority to retain careful repaid. It is also rare for “nonrecourse” loans oversight of the activity, while being free to del- to be genuinely without recourse, and the egate its actual implementation. The public lenders frequently impose guarantees on the authority might regulate the activity of the part of the sponsors, particularly during the implementing entity to a greater or lesser construction period. degree, while the delegatee must reconcile the right of fair competition with the proper protec- The techniques adopted by the lenders to limit tion of the interests of users (or customers). their risk also include other measures including This has complex implications for risk sharing, comfort letters or commitments by the conces- for which the procedures must be very carefully sioning authority, domiciliation of revenue or adjusted to achieve a fair balance, one that debt, assignment of debt, and technical and respects the objectives and constraints of the financial performance bonds. parties involved.

230 Financial Implications of Port Reform

The main objective of this part of this module to “speak the language” of their private sector has been to describe various approaches for counterparts. This, in turn, should help govern- identifying risks involved in port reform proj- ments and concessioning authorities design port ects and to suggest ways that these risks might reform projects to be more attractive to the pri- be shared equitably among the interested par- vate sector. MODULE 5 ties. Part B of this module will introduce analytical tools and risk measurement options avail- 7. MEASURING ECONOMIC able for port authorities contemplating port PROFITABILITY FROM THE reform. PERSPECTIVE OF THE CONCESSIONING AUTHORITY PART B—PRINCIPLES OF FINANCIAL MODELING, 7.1. Differential Cost-Benefit ENGINEERING, AND ANALYSIS: Analysis UNDERSTANDING PORT Traditionally, economic assessment is based on FINANCE AND RISK a comparison of two solutions: a solution with MANAGEMENT FROM PUBLIC a proposed project and a reference solution (that is, a solution without a proposed project). AND PRIVATE SECTOR In the case of a proposed expansion versus a PERSPECTIVES greenfield project, the reference solution corre- 6. INTRODUCTION sponds to a solution in which the existing port infrastructure would evolve without moderniza- Concessioning authorities, concessionaires tion or expansion. (SPCs), investors, lenders, and guarantors involved in port reform use a wide variety of The assessment is based on a differential cost- economic and financial analytical tools and per- benefit analysis. The costs and benefits are formance measures to evaluate the feasibility of assessed in terms of economic value. This has a prospective projects. Each party has a different dual implication in terms of methodology: perspective on what makes a proposed project a • The project assessment framework must success and, consequently, may use somewhat be calibrated according to the nature of different tools and measures. All measures, the national economic entity in question: however, are designed to capture the economic state, local authority, port community, value of the proposed project to the interested and so forth. In other words, economic party, including an assessment of the likelihood assessments must be carried out at several that the full economic value will materialize levels to ascertain to which economic (that is, taking uncertainty and risk into entity the benefits of the project will account). accrue. Part B of this module provides a tour of the • The various costs and benefits must be most commonly used analytical tools and meas- considered net of all taxes (direct or indi- ures of economic performance and risk to famil- rect tax, customs duty, and so forth) and iarize interested parties with the types of tools national subsidies, regardless of the and measures that are used by their potential nature of the national economic entity in partners in port reform projects so they can bet- question. The various taxes and subsidies ter understand what motivates and concerns correspond to monetary transfers each of them. It will especially help government between national economic entities and decision makers without a private sector finance are therefore not to be taken into account background to appreciate the private sector’s in the national economic assessment of perspective on port reform and will permit them the project.

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The assessment of commercial benefits and with time) it can be shown that discounted costs does not pose any particular valuation profit reaches a maximum for a certain commis- problem because their value is determined by sioning date, referred to as the optimal commis- the market. However, assessing noncommercial sioning date. If the project is carried out before benefits and costs is more difficult. that date, the community loses benefits. Conversely, once that date is passed, the project 7.2. Commonly Used Economic should be carried out as quickly as possible. Profitability Indicators Internal rate of return or economic IRR. The Socioeconomic discounted profit or net present (positive or negative) value obtained when cal- value (NPV). In the field of public investment culating the discounted profit is an absolute and port investment in particular, the principal

MODULE 5 value (as opposed to a relative value) that does criterion on which the investment decision is not allow public decision makers to weigh the based is the socioeconomic discounted profit. relative merits among several projects or vari- This criterion enables the intrinsic value of the ants. To permit this weighing of alternatives, project for the community to be assessed, and another way of tackling the economic assess- only projects with a positive discounted profit ment of a project is to consider the value of the should be selected. discount rate at which the net discounted profit The discounted profit is defined as the differ- is zero, or the economic IRR of the project. ence between the discounted investment expen- The economic IRR is the solution r of the equa- diture and the discounted value of the net bene- tion: fits generated by the project during its lifetime. We also use the expression economic net present value or economic NPV.

For a project whose operations begin in year t, the discounted profit is calculated as follows: C = Discounted investment cost

Ai = Benefits in year i

This second criterion enables us not only to assess the intrinsic interest of the project for the C = Discounted investment cost community by accepting only projects whose economic IRR is higher than the discount rate a = National economy discount rate of the national economy, but also enables us to arbitrate among several projects or variants by Ai = Benefits in year i choosing the one with the highest economic IRR. t = Year in which the infrastructure is put into service Sensitivity studies. The economic assessment of a project is normally supplemented by a sensi- The discounted profit criterion enables govern- tivity study, which enables decision makers to ment officials to decide on the appropriateness ascertain the effect of changing a number of and interest of the project for the community. parameters on the value of the economic IRR. However, employing this tool does not provide any information as to the date on which it By way of illustration in the port sector, we can should be carried out. With certain hypotheses test the effect of changes in traffic levels, invest- (for example, investment made at the beginning ment costs, operating costs, and cargo handling of a period, or net annual benefits increasing productivity on any project’s discounted costs with time, unchanging chronicle of benefits and benefits.

232 Financial Implications of Port Reform

7.3. Assessing the Economic Costs form of a direct increase in national added of the Project value corresponding to an increase in the wages created by net job creation, or an increase in Assessment of market economic costs. company profits (new activities whose develop- Traditionally, the market economic costs of a ment depends on the realization of the project). MODULE 5 project consist of investment costs, maintenance Another benefit is a price reduction translating and operation of equipment, and materials used into an increase in real income for consumers in each solution (that is, the solution with the and an increase in profits for companies. This proposed project and without the project). In covers, for example, reductions in ship turn- the case of a project to expand an existing around times resulting from improved handling infrastructure versus a greenfield project, the efficiency (theoretically leading to a fall in costs to be considered in the reference solution freight rates), benefits from economies of scale, account for the normal expenses necessary to lower insurance costs, reduced cargo inventory maintain the operating life and the normal safe- costs, lower inland transport costs, and more. ty conditions of port equipment and structures. The benefits can theoretically affect all national The inventory of project costs includes induced economic agents who, in some way or another, infrastructure costs, such as the new land are concerned with the production, marketing, service networks required by the project. For transport, and handling of goods passing example, a greenfield project often requires the through the port in question. building of a new access road, for which the investment cost to the community can sometimes 8. RATING RISK FROM THE be higher than the cost of the port project itself. PERSPECTIVE OF THE Assessment of nonmarket economic costs. The CONCESSION HOLDER inventory of project costs must also take into account “nonmarket” economic costs. In the 8.1. Financial Profitability and port sector, these include but are not limited to: “Bankability” of the Project Once the risk allocation chart between the pub- • The costs related to transferring traffic lic and private sectors has been produced, as from one transport route to another (for described in Part A of this module, the private example, if several ports are competing concession holder will then seek to quantify and within the same country). price the residual risk of the project that must • Possible effects of the project on town be borne. This risk is assessed by producing a planning (particularly traffic congestion). country and project rating. Once this first stage is carried out, rating the risk is then defined by • The impact of the project on the environ- setting a minimum financial profitability thresh- ment and safety (for example, marine old for the project below which a private con- pollution, nuisance to locals, and pollu- cession holder will refuse to commit itself. In tion resulting from handling bulk other words, the more risk associated with the cargoes). project by the concession holder, the higher the Assessing these economic costs is a particularly required project profitability. difficult exercise, but one that is essential to determine the economic rate of return of a project. It is within this framework that one analyzes the financial profitability of the project. The Assessing the economic benefits or positive financial analysis is designed to determine the externalities of the project. The economic bene- conditions under which the proposed project fits of a port project can be analyzed as an can respond to market requirements, which increase in real revenue for the various elements usually vary with time, or in other words, deter- of the national economy. They can take the mine the bankability of a project. In terms of

233 Financial Implications of Port Reform

methodology, the financial profitability of a • Reducing the exposure of the SPC or the project is determined by forecasting the cash likelihood of the occurrence of a residual flows generated by operation of the project. risk. This aspect will be developed later in the sec- The next stage consists of quantifying the resid- tion on financial modeling. ual risk that will be borne by the SPC. This risk The calculation of the financial profitability of a is assessed by producing a rating. There are two project does not take into account the envisaged types of ratings: a country rating to quantify the financing structure. In practical terms, only risk attached to the project’s background and, operating cash flows (calculated after tax and therefore, to establish whether the country risk duty), consisting of investment and operational is acceptable to the market, and a project rating, a project risk assessment through the estab- MODULE 5 flows, are considered. Taking the predicted financing structure into account in the project’s lishment of a checklist, which establishes forecasted cash flows would result in account- whether the intrinsic risks in the project were ing for them twice. The purpose of this first correctly handled by the sponsors. stage of the financial profitability analysis is to There are numerous country risk assessment decide whether it is interesting for the private methods. Box 9 presents the method developed concession holder (sponsors and banks) to con- by Nord Sud Export (NSE), which acts as an tinue the analysis of the project from a financial adviser to the French insurance company point of view. In fact, a financially unprofitable COFACE (Compagnie Française d’Assurance du project at this stage will not become profitable Commerce Exterieur) in its country risk assess- regardless of how it is financed. ment process. This economic model of the prospective project, The project rating checklist, established following described later in this module, is usually pro- the principles spelled out in Part A of this mod- duced by the sponsors in collaboration with the ule, is included as an annex to this document. financial advisors (merchant banks or specialist agencies). The economic model should not to be 8.2.1. Commonly Used Financial confused with the economic analysis carried out Profitability Indicators by the concessioning authority as described above. The purpose of financial profitability indicators is to determine the conditions under which the 8.2. Assessing the Project Risks by proposed project is financially justified. There Producing a Rating are four main measures used to assess a pro- Part A of this module presented the principles ject’s financial viability: payback, IRR, NPV, for allocating and managing risks between the and investment cover. concessioning authority and the concession 8.2.1.1. Payback Time. The payback time, or holder on the one hand, and between the con- the time required for a return on investment, is cession holder and the sponsors or lenders on the first indicator enabling investors and opera- the other. The method used, inspired by the tors to assess the financial profitability of a logic of the banking analysis of project financ- project. It is measured by relating the value of ing, consisted of: the investment to the average annual cash flow. • Drawing up a list of risk types: for example, country risks and project risks. • Distributing the risk to the party best able to assume it, for example, conces- T = years to pay back investment sioning authority, sponsors, lenders, customers, suppliers, or subcontractors. I = total investment

234 Financial Implications of Port Reform

Box 9: The Country Ranking Developed by Nord-Sud Export he country ranking process by Nord-Sud • Importance of public debt and debt service Export (NSE) ranks a hundred or so (6 criteria) emerging economies according to market T • Sovereign default risk (6 criteria) MODULE 5 opportunities and the risks the individual coun- • Inconvertibility risk (3 criteria) tries may represent for international operators (industrialists, bankers, or insurers), either for Parameter 2: Market financial risks mere export operations or for investments. • Command of fundamental economic bal- This ranking is made possible thanks to an ances (5 criteria) objective rating system based on more than • Exchange risk, sudden currency devaluation 100 criteria, coming out of a database devel- (4 criteria) oped by NSE over 18 years. • Systemic risk and economic volatility What Is Included in the Country Risk? (6 criteria) Strictly speaking, the country risk concept Parameter 3: Political risks includes three main kinds of risks: • Homogeneity of the social fabric (4 criteria) • The political risk, which may affect property • Government and regime stability (7 criteria) rights through confiscation, expropriation, or nationalization, with or without compensa- • External conflicts (4 criteria) tion, through contract or debt repudiation. Parameter 4: Business environment • The transferability risk, when a country’s cen- • Conditions for foreign investments (6 criteria) tral bank cannot convert resources in local • Labor conditions (4 criteria) currency into international means of payment. • Good governance (5 criteria) • The payment risk for governments themselves, or for public enterprises, when the Weighing of the Risk Factors public buyer or debtor does not meet its There cannot be any country ranking without financial commitments. weighing of the risk factors. The exercise is all the more difficult to carry out when there are These three risks make up the basis of the about 100 criteria to assess. Furthermore, the country risk, that is: specificity of NSE’s country ranking method is • For lawyers, the act of government, knowing to provide for a differentiated weighting system that recourse against a foreign government depending on whether a country is being is for all practical purposes a very difficult assessed from an exporter’s standpoint (taking undertaking. a risk for less than 18 months), or from an • For bankers, the sovereign risks, knowing a industrial investor’s standpoint (local long-term sovereign guarantee often constitutes the development). This leads, therefore, to propos- financial safety scheme. ing two specific weighing systems. • For insurers, the political risks, knowing One needs to know how to make good use those risks can be interpreted as catastro- of country rankings, which can lead to ques- phe risks, and as such should be covered by tionable results for at least four reasons: specialized insurance companies acting • It is hazardous to compare countries as dif- either on behalf of governments or within the ferent as South Korea and Egypt, for market reinsurance framework. instance, speaking of countries within the Country Ranking Methodology Proposed by newly industrialized economies. NSE • Country ranking methods mix various risk NSE developed a two-step methodology: a factors according to a necessarily subjective rating of risk factors identified and distributed weighting system. by categories, and use of weighing coefficients • Most country rankings are made after experts’ for each identified risk factor. assessments, and therefore reflect more their Rating of Country-Risk Factors own perceptions of the risks involved, rather than the sheer reality of the countries. The country risk assessment is established based on the following classification: • Finally, country rankings have as an objective to deter commercial operations in Parameter 1: Sovereign financial risks countries deemed to be—objectively or

235 Financial Implications of Port Reform

8.2.1.3. Project NPV. A third indicator of finan- Box 9: The Country Ranking Developed by cial profitability is the project NPV. A project Nord-Sud Export (Continued) will be considered insufficiently profitable from subjectively—high risk, when no country a financial point of view if the obtained project ranking system is able to foresee events of NPV is negative. The NPV value is an absolute a revolutionary type. As a result, most figure that does not allow for comparisons country ranking systems have to go through sudden and ex post downgradings, among several projects or variants. Because of an impediment to effective decision making. this shortcoming, it is generally appropriate to In other words, it may be questionable for a calculate the investment cover ratio as well. company to decide on long-term commitments only on the basis of country rankings, which, by definition, offer only MODULE 5 limited reliability. Source: Jean-Louis Terrier, NSE Founder. Ii = amount invested in year i

Ri = operating income in year i R = average annual operating income Ci = operating costs in year i C = average annual operating costs n = length of concession contract R – C = average annual operating cash flow t = project discount rate Other things being equal, an investment project will be more interesting for the private investor 8.2.1.4. Investment Cover Ratio. The investment if its payback period is shorter. A high value for cover ratio (ICR) compares the project’s dis- T reveals, among other things, the need for counted cash flows to the total of the discounted long-term financing and introduces great uncer- investments. tainty.

8.2.1.2. Project IRR. The advantage of the IRR is that it does not rely on the notion of average year cash flow, which can be dangerous in the case of income and costs that are very change- able with time. The factors are the same as those used in calcu- The project IRR is the solution r of the equation: lating the project NPV.

A project will be considered profitable from a financial point of view if its ICR is greater than one. This is a variant of the previous indicator, Ii = amount invested in year i but it has the advantage of providing a relative value, thus enabling investors to compare the Ri = operating income in year i results of several projects or variants.

Ci = operating costs in year i 8.3. Project Discount Rate—Cost of Capital Ri – Ci = operating cash flow in year i Apart from the rate of return on investment (the n = length of concession contract payback method), the other three measures of profitability noted above take into account per- The higher the value of r, the more interesting a formance over a project’s lifetime. These methods project will be from the financial point of view. require the use of a project discount rate based on

236 Financial Implications of Port Reform the notion of the time value of money. This rate can be used directly in the formula (project NPV and ICR) as well as indirectly (comparing the project IRR obtained to the project’s discount rate). There are four fees usually charged by lenders

The concession holder, therefore, requires an accu- in financing projects: MODULE 5 rate value for the project discount rate. In financial 1. An arrangement fee (up front commis- analysis, the profitability of an investment is meas- sion) to pay for the time spent in study- ured against the cost of the financing required to ing and setting up the dossier. own the resources placed under the company’s control. In other words, it is the cost of capital 2. A participant’s fee to pay for the time (weighted average cost of capital [WACC]) that spent in studying the dossier. gives a true measure of the project’s discount rate. 3. A commitment fee designed to pay for Traditionally, the cost of capital represents the the commitment to make unused funds weighted average cost of all the financial available in the future (for example, the resources invested in the project and is meas- cost of a forward rate agreement). ured as follows: 4. An agent’s fee, which pays for the administrative work consisting of checking and applying the loan agreement and managing g = financial gearing or leverage or the amount credit flows (draw downs or repayments). of the financial debt in relation to the total The interest rate is expressed as follows: interest financial capital rate = base rate + bank margin. The bank margin is known as the “spread.” It is usually fixed rd = cost of the financial debt or the financial and determined when the loan agreement is debt remuneration requirement signed. re = cost of equity (the return on equity requirement) The interest rate may be any of the following: In the next section, the remuneration require- • In the case of a fixed rate loan, a reference ments of the various private capital providers rate such as the return on treasury bonds (lenders and sponsors) will be analyzed, includ- of the country of the currency concerned. ing the determination of both rd and re. • In the case of a revisable or variable rate 8.4. Financial Debt Remuneration loan, a reference rate quoted in a finan- Requirement cial market such as EURIBOR or LIBOR The financial debt remuneration requirement (London Interbank Offered Rate). relates to the yield to maturity of the financing. • In the case of an indexed rate loan, the It is the discount rate that cancels the present procedures for changing the base rate are value of the sequence of expenses created by laid down from identified parameters (for this financing. It therefore incorporates all the example, inflation). elements of the cost of finance, that is, the interest rate of the loan and all the fees charged in It should be remembered that a rate is said to be setting up the loan. If there are no fees and “revisable” if the reference is predetermined; in expenses, the yield to maturity is the same as the bond market, the coupon relating to a period the interest rate. (paid at the end of the period) is known at the beginning of the period. Also, a rate is said to The yield to maturity engendered by the flow be “variable” if the reference is postdetermined; sequence [F0,F1,...,FN] is the solution for the in the bond market, the coupon relating to a rate r of the equation: period is not known until the end of the period.

237 Financial Implications of Port Reform

8.4.1. Inflation lead one to lose sight of the fundamental objective of commercial banks to not get “stuck” Real and nominal interest rates translate the with a high level of commitment above the ceil- cost of money at a given moment in time, for a ing allowed by their management board and specific period, and in a specific financial mar- defined within the framework of their own ket place. The nominal interest rate initially rep- development and risk management policies. resents the sum of the real interest rate and expected inflation. The real interest rate there- Since the beginning of the 1980s, deregulation fore represents the cost of the money excluding of financial activities has occurred contempora- all monetary erosion. The relationship between neously with an increase in market volatility the real and nominal interest rates is given by and competition between financial establish-

MODULE 5 the following formula: ments. This situation has contributed to the development of assets and liabilities manage- Within the framework of assessing financial ment as a stand-alone function in the banking world. Traditionally focusing mainly on development of commitments and increases in market share, commercial banks have come to appreciate the need to enhance their balance profitability, the rate used for the initial approx- sheet value and their operating margins. imation is the nominal interest rate. The decision on whether to invest in a specific 8.4.2. Risk Rating by Determining rd project thus has to meet all these considerations, The financial analyst faces the difficult problem largely intrinsic to the company and generally of translating the risk, established by means of unknown to the other private partners in the the project rating, into a remuneration require- project. And when a positive decision is reached, ment. That is, the analyst must determine the it is not unusual to notice significant differences risk premium, or the spread attached to the in the remuneration levels required by different project for the lenders on the understanding banks. This underscores the theoretical nature of that there are no guarantees other than the cash the approach described above and illustrates the flows produced by the project. complexity of the job of the financial analyst assigned to this kind of project. The spread is established by the lenders and accounts for: 8.5. Equity Remuneration Requirement • Intrinsic characteristics of the loan (matu- Assessing the equity remuneration requirement rity and repayment terms). in a port project is a difficult exercise. • Sovereign risk assessment. Undoubtedly the most commonly used approach in financial analysis is the capital • Diversification policy of the bank’s asset asset pricing model (CAPM), which is used in portfolio. assessing the risk-profitability profile. • Liquidity level in commercial banks when the financing is being structured. The equity remuneration requirement, re, is given by the formula: 8.4.3. Debt Remuneration Requirement Conclusion

Based on these various elements, it becomes a relatively easy task to determine the financial re = equity remuneration requirement debt remuneration requirements. However, these largely theoretical calculations must not rf = risk free rate

238 Financial Implications of Port Reform

β = equity beta parameter representing sensitivity These are complex questions requiring complex answers. As far as the risk premium is con- rm = market rate cerned, it is generally determined following nor- rm – rf = market risk premium mative approaches. These approaches consist of determining the beta parameter for each of the MODULE 5 α = sovereign risk factor sectors the project sponsors are involved in (contractors, terminal operators, cargo handling This method is based on the strong hypothesis companies, shipowners, shipping companies, that the risk in any financial security can be and so forth) and comparing them to the broken down into two categories: market risk parameter generally assigned to a port operat- (systematic or nondiversifiable risk) due to a set ing company. The value assigned to the project, of factors exogenous to the company (for exam- called asset beta, should logically be the highest ple, changes in the economy, tax system, inter- value uncovered in this process. Finally, the est rates, inflation), and specific risk (intrinsic determination of the equity beta stems from the or diversifiable risk) due to a set of factors difference that could exist between the specific endogenous to the company (all the risks previ- financial structure of the project (as determined ously mentioned under project risks). by the SPC) and the one observed in the normative approach. The CAPM translates the fact that the profitability required by an investor is equal to the “Differentiated” remuneration requirements risk-free money rate plus a security risk premi- depend on the type of shareholder. It should be um, that premium being equal to a market-risk remembered that the expected remuneration premium multiplied by the security’s volatility requirement levels of the project differ depend- factor. The market risk premium measures the ing on the type of shareholder concerned. This difference in profitability between the market as fundamental point can be explained by the dif- a whole and the risk-free asset. The current ferent outcomes sought by the various sponsors level market-risk premium in France is in the involved in the project: region of 3–4 percent. • Constructors or equipment manufacturers There are two questions that are essential for a will seek to maximize their margin in the financial analyst involved in a port privatization sale of the works contract to the SPC. project to pose: • The operator will seek to maximize its • How does one translate a risk quantifica- margin in the downstream supply of tion (achieved by establishing the afore- management services. mentioned ratings) to an equity and • The customer (shipper or shipowner) will quasi-equity remuneration requirement? seek a high quality of service in the long In this regard, what should be the risk term and a maximum reduction in the premium attached to the equity supplied cost of using the port. by the project’s sponsors? • The pure investor will primarily seek the • What dividend payment policy should be maximum financial return on investment recommended? In other words, how does in the project. one reconcile the necessarily antagonistic objectives and interests pursued by the There is also the difficult problem of differenti- lenders and shareholders (who want ating the remuneration requirement for the pure the cash flow from the project to exceed investor and the other types of sponsors, with the term of the loan) on the one hand, respect to which the SPC represents only a frac- and between the sponsors and the SPC, tion of their objectives in the project. Generally on the other? speaking, discussions relate to the optimal time

239 Financial Implications of Port Reform

for the pure investor to place its capital with the period, commensurate with the life of the long- SPC, given a traffic risk may be experienced. In term assets it financed, should not be seen as a this regard, should the investor come in as early departure from this principle. It would obvious- as the project set-up stage, at the beginning of ly be different if the capital market offered the operating stage, or when the operation of financing on a cycle equal to the investment the investment has shown its ability to produce cycle existing for port projects (25 to 50 years). sufficient revenue? This, however, is not the case today.

All of these questions, which are of interest not In conclusion, the financial constraints imposed only to the concessioning authority but also to by the market on this fragile public-private the lenders, are at the heart of the discussions partnership often leads to a sharing of financial

MODULE 5 surrounding the financial analysis of the project. commitments between the concessioning authority and the concession holder. The search 8.5.1. Sharing of Public-Private Financial for an equitable split is based on the need to Commitments: Arbitration between balance the socioeconomic profitability of a Financial and Socioeconomic Profitability project and the financial profitability. If the project offers both a positive discounted 9. FINANCIAL PROJECT socioeconomic net benefit and project NPV, it should be carried out because it is favorable for ENGINEERING the community and the concession holder alike. Capital markets are highly diversified. Whether Conversely, when both discounted socioeco- one should use such a source of finance is nomic net benefit and project NPV are negative, dependent on many criteria, such as its cost, the the project should not be carried out. These are type of assets to be financed, the guarantees fairly straightforward outcomes leading to rela- required, flexibility of use, and conditions of tively straightforward “go no-go” decisions. acceptability by the financial market. The financial engineering of a project consists of seeking The real challenge is how to reach a reasonable out the optimal terms and conditions of finance decision when the operation is profitable from and cover for the project based on analysis of the socioeconomic point of view but not from the financial constraints and risks of the market. the financial point of view. With port projects this is the most frequent situation given that Implementing financial engineering is a sensitive port infrastructure investments are discontinu- and complex exercise, sensitive because of the com- ous or “lumpy,” with a long working life. They mitment of the financial partners over periods that must therefore be designed from the start to can be very long, complex because of the multiplic- their definitive size, even if port traffic only ity and increasing sophistication of the financial builds up gradually. tools available in the market. It is also essential to understand that the financial project engineering As a result, it is not unusual for the government must first and foremost conform with a pragmatic to contribute to the funding of a project. This logic that is dictated by common sense and a thor- constitutes the value of the project to future ough understanding of the issues. It should not be generations, which is often difficult to ask the based on a desire to use sophisticated finance and customers of the present generation to bear cover mechanisms for their own sakes. without running the risk of increasing the cost of using the port to such a level that the port 9.1. Financial Structuring within loses its competitiveness. Even though proper remuneration of the benefits offered within a the Framework of a Project reasonable economic life of the project should Finance Set-Up be the rule, depreciation and remuneration of Once the financial profitability of the project the government’s contribution over a longer has been determined, the SPC must define the

240 Financial Implications of Port Reform structure of its liabilities, that is, the value of its less than the amount of external finance that equity and quasi-equity and the value of its the shareholders wish to obtain. In this case, the debts. loan will be split into several tranches differentiated according to the degree of recourse the

In project financing schemes, the structure of lenders want to be granted with respect to the MODULE 5 the SPC’s liabilities directly stems from the pro- project shareholders; this is called subordinated ject’s ability to service its debts. The main meas- debt or mezzanine debt. In this case, these ures being used in this respect are: financial resources are considered to be the • Capital structure ratio: The most com- same as the partners’ current accounts, namely monly used ratio to ascertain the financ- quasi-equity. ing structure is: (equity + quasi-equity) ÷ But, as always happens in financial analysis, the financial capital. Financial capital covers discounted value of a series is preferred to its all of the financial resources invested and average value because the time value of money placed under the company’s control by is taken into account. For this reason, we prefer the capital providers. In other words, it the NPV DCR, which is defined as follows: includes permanent financial resources NPV DCR = NPV of cash flow available for (equity and quasi-equity + medium- or servicing the debt ÷ outstanding debt. The dis- long-term financial debts) and bank count rate used in calculating the NPV is that of advances (short-term financial debts). the average interest rates of the financial debts. • Annual debt service cover ratio: The As regards the period over which the NPV is ADSCR is calculated as: ADSCR = avail- calculated, there are two possibilities: the length able cash flow for servicing the debt ÷ of the financing cycle, in other words the length annual debt service. This ratio is calculat- of the loan (the loan life cover ratio [LLCR]), or ed each year and therefore provides a the length of the investment cycle or concession continuous view of the project’s ability to contract (the project life cover ratio [PLCR]). If service its debt. It also enables the debt the debt is not repaid by the time the loan repayment profile to be changed if the agreement expires, subsequent cash flows will values obtained reveal too high a dispari- be used to pay it off. ty during the finance cycle. What are the minimum requirements for these • NPV debt cover ratio: The average of all ratios in the case of a port project? In practical the annual cover ratios, known as “aver- terms, it is difficult to suggest precise thresholds age debt cover ratio” is also used by for the foregoing ratios that could apply to all some analysts. This ratio enables, among projects. However, it seems reasonable to state other things, a comparison to be made the following, as far as project financing in between several methods of paying off Organisation for Economic Co-operation and the loan and provides a global view of Development (OECD) countries is concerned: the economics of the project. • A capital structure ratio below 15 percent These three ratios enable one to assess from the would likely lead the lenders to demand outset the amount of the debt with limited an increased equity or quasi-equity con- recourse that is acceptable to the banks. From tribution from the sponsors as a token of this flows the amount of equity and quasi-equity their commitment to the project. required to finance the project. • An annual ADSCR below 1.3 would If the shareholders’ aim in financing the project inevitably require restructuring of the is to enable the project to benefit from a nonre- financing set-up, likely along the lines of course or limited recourse loan, then this means an amendment of the loan amortization that the repayment ability of a project may be profile.

241 Financial Implications of Port Reform

• An NPV DCR below 1.7 would run the which the ability to generate operating income risk of deterring any potential private significantly lags behind project costs. This is investor; the project would then require usually the case with greenfield port projects. an increased public financial contribution to make it viable for the private partners. • Average length and loan duration: The average duration of a loan is usually used These thresholds are given only as potential as an instrument of comparison when the indicators and do not apply to all cases, nor do loan repayment profile is dependent on they take into account the country risk factor. available cash flow. Clearly, their final assessment is contingent upon the overall project risk analysis described The average duration of a loan is given by the in Part A of this module. formula: MODULE 5 9.2. Debt Structuring Debt markets are highly diversified. Consequently, in complex transactions, debt is Outstanding amount i represents the various often broken down into several tranches (seg- annual outstanding amounts of the loan over its ments) of different loans. The aim of structuring lifetime. A variation of average duration of the the project’s debt consists of seeking the opti- loan introduces the discount factor and repre- mum finance conditions for each of these sents the “center of gravity” of the finance tranches to reflect the requirements of the pro- flows over time. A credit sequence [F1, F2, ject’s various financial partners. ...,Fn] at a discount rate of t has a duration of: Debt financing is usually defined by a set of intrinsic characteristics. The four main ones are:

• Length or maturity of the loan: The date on which the last repayment of the loan or the tranches of the loan has to be This latter measure of duration is more often made by the SPC. used as an instrument for measuring and man- • Availability period: The closing date of aging the rate risk. validity of the loan, which limits the lender’s undertakings in time. 9.3. Long-Term Commercial Debt • Loan repayment terms: The repayment of To finance public service infrastructure, the first a loan must be tailored to the project for two methods that spring to mind are public which it was set up. There are three types budget finance and investment prefinancing by of repayment profiles generally used: the project sponsors. Both of these methods are referred to as corporate financing. This implies ~ Equal installments of principal. the inclusion of the amount of the investment in ~ Equal installments of interest and prin- the public accounts of the concessioning author- cipal. ity as well as in the company accounts of the ~ Installments depending on the available constructor, respectively. cash flow. These finance solutions have the major disad- Some terms include deferred repayment or a vantage of being a burden on the investment grace period, which means that over a certain capacity and balance sheets of the parties. This period (rarely more than two years) the borrow- is particularly true in the case of transport er pays only interest to the lenders. Deferred infrastructure where the sums to be financed are repayment may prove necessary for projects in large and the balance sheet ratios (see above)

242 Financial Implications of Port Reform are weak in the first few years of the project within the framework of terms offered by these due to the slow increase in revenue generating agencies. The fact remains that these agencies traffic. An alternative to these methods is proj- are themselves subject to term and cost con- ect finance. straints that must be taken into account (partic-

ularly the OECD Consensus for export credit MODULE 5 It is difficult to define the characteristics of a agencies). typical project finance set-up because tailor- made solutions are so important. However, the 9.3.3. Export Credits financial set-ups have one essential point in Export credits can prove very useful when the common: repayment of the loan is either prima- project is located in a developing country and rily or solely dependent on cash flows generated involves the contribution of foreign technology. by the project itself. In the first case, this is Among export credits, one must distinguish called limited recourse financing and in the sec- between supplier credits (credit granted directly by ond, nonrecourse financing. the exporter) and buyer credits. Buyer credits, the The two characteristics common to limited more common of the two, are granted by com- recourse financing are that the loan is repaid on mercial banks for a maximum length of two years the basis of cash flows generated by the project, to a foreign borrower to enable the borrower to and that the lender has no guarantees other pay cash to the supplier (the exporter) according than the assets of the project itself, which often to the terms of the commercial contract. Buyer are not financially recoverable for port projects. credits free the exporter from the financial risk of making a credit-based sale to the buyer. 9.3.1. Foreign Currency Loans When an export sale is supported by a buyer One way of reducing exchange risks is to obtain credit, two distinct cross-referenced contracts financing in local currencies. However, this type are signed: the commercial contract between the of financing quickly reaches its limits in devel- exporter and the foreign buyer, and the credit oping countries. In fact, the weakness or nonex- agreement between this same buyer (as a bor- istence of a national money market, high local rower) and the lending banks. The commercial currency interest rates, and the absence of contract spells out the respective obligations of investors willing to provide finance over periods the supplier and the buyer. It must indicate the compatible with infrastructure projects all com- payment modalities (in particular the down bine to exclude local currency debt or at least payment to be made before delivery and the restrict its use to a short-term revolving line of overall payment schedule) that will serve as a credit designed to finance operating expenses. basis for the buyer credit. The credit agreement Foreign currency debt also poses problems of is signed between the commercial bank and the exposure to the residual exchange risks of con- foreign buyer. Under this agreement, the bank vertibility and transferability. commits itself to pay the exporter and the buyer agrees to pay back the bank for all amounts 9.3.2. Guaranteed Commercial Debt paid to the supplier according to terms and modalities spelled out in the credit agreement. Export credits and financial credits with a multilateral “umbrella” export credit agencies Buyer and supplier credits can both benefit (ECAs) and multilateral agencies (MLAs) offer from public support for medium- and long-term guarantees or “cover” that can mitigate politi- export financing. This support, governed by the cal risks associated with port projects and there- consensus rules drafted by the OECD member fore open up new financing possibilities. When countries, can be expressed in two ways: the commercial banks are to a large extent freed from worrying about political risks, they can • Provision by credit insurers of cover for concentrate their efforts on the commercial risk political and commercial risks on foreign

243 Financial Implications of Port Reform

debtors (the SPC would be the foreign engineering or dredging), which is usually sub- debtor within the framework of a project contracted locally. To enjoy the export credit finance transaction). cover, the project must fulfill certain criteria. The first of these is that payments made under • Provision of a fixed rate for the loan, the contract concluded with the exporting known as the reference commercial inter- equipment manufacturer must represent 85 per- est rate (RCIR), for instance in the case cent of the share able to be repatriated (national of COFACE, the French export credit share + foreign share). Box 10 describes how agency. In Europe, such a rate stabiliza- the concepts come together in an example. tion mechanism is possible for loans in both euros and foreign currencies. It should be pointed out that while the principal

MODULE 5 Buyer credits are of three varieties: activity of export credit agencies is now to cover political risks, some of them have project • Administered credit is when the buyer financing teams and are beginning to consider credit benefits from public support covering the commercial risk in some projects. through a rate stabilization mechanism Furthermore, there is an increasing number of on top of a guarantee provided by an major project financing contracts in the form of export credit agency. Also, this type of multisourcing operations, in the sense that they loan is placed at a more competitive level are structured either by major multinational (fixed rates and long terms) than syndi- groups that can source from different countries cated financial loans or bonded debt. through their subsidiaries, or by multinational • Pure cover credit is when the buyer credit consortiums organized on a cocontracting or only benefits from a guarantee provided subcontracting basis. This change can be by an export credit agency. In this case explained by the fact that the ever increasing rates are neither stabilized nor enhanced. size of the investment level of the projects does They are freely established by the banks, not always coincide with the total commitment indexed on a reference index (EURIBOR limitations (geographic or sector) set by the or LIBOR, for instance), and can be vari- export credit agencies and governments within able, revisable, or fixed. the framework of their risk policy (see Box 11). • Financial credit or free credit is when the 9.3.4. Financial Credits with a Multilateral buyer credit is established without any Umbrella (A- and B-loans) public support and without any export Multilateral organizations, such as the World credit guarantee. The manufacturing risk Bank Group, through the International Bank is carried by the supplier and the credit of Reconstruction and Development (IBRD) risk by the bank. Because of the risk or regional development banks (European involved, it is in fact limited to the best- Bank for Reconstruction and Development known borrowers, and generally limited [EBRD], Asian Development Bank (ADB), and to down payment financing. Inter-American Development Bank [IDB]), Export credit agencies exist in most industrial- are also involved in these types of transactions ized countries: COFACE in France, SACE in alongside commercial banks and export Italy, HERMES in Germany, ECGD in England, credit organizations. This is referred to as CESCE in Spain, and Ex-Im Bank in the United cofinancing. States and Japan. Most of the time cofinancing is carried out in In a port project, this source of financing relates the form of parallel financing where the project more to port equipment (for example, handling is split into separate lots, each covered by a equipment, container gantries, and computer World Bank loan or a commercial debt granted systems) than infrastructure (for example, civil by a bank or a buyer credit covered by an

244 Financial Implications of Port Reform

Box 10: An Example of Export Cover by COFACE in a Port Project ssume there is a greenfield port con- of the value of the commercial contract, that struction project in China requiring the is, 70–85 million FRF in this example). The supply of quayside gantries. Let us fur- 15–0 percent of the value not covered cannot A MODULE 5 ther assume that the equipment manufacturer, be covered by additional insurance by the whom we shall call the “exporter,” identified for exporter. this service is French, and that the commercial During the credit stage, the extent of the contract concluded between the SPC and the export cover granted to the exporter’s bank industrialist represents an investment of 100 M amounts to 100 percent of the portion of the FRF broken down as follows: contract that can be repatriated (that is, the • French share, 50 M FRF (parts exported French share plus the foreign share, or 60 million directly from France). FRF). The amount of cover granted to the bank • Foreign share, 10 M FRF (parts manufac- is 95 percent of the extent of cover (the tured in Germany, for example, and exported remaining 5 percent cannot be covered by to China). additional insurance by the bank). • Local share, 40 M FRF (for the installation of In other words, the export cover granted by port equipment in China subcontracted COFACE in terms of cover for the political risk locally by the exporter). and rate stabilization only relates to an amount of 60 million FRF. The additional financing The proposed financing for this contract is a required for the port investment (40 million FRF buyer credit (structured by the exporter’s in this example) is then known as “straight French bank) with a request to COFACE for back-up credit.” It can be provided either by export cover against the political risk during the the exporter’s bank or by another commercial manufacturing stages (six months, for instance) bank (a local Chinese bank, for example). and credit (five years for this kind of investment according to OECD rules) with an application Generally speaking, finance structuring with for stabilization of the loan’s interest rate. The export credit leads to the credit being split into notion of export cover is a complicated one as two tranches: one guaranteed and the other will be illustrated by the following example. not guaranteed at market conditions (rate and duration). This can also be referred to as a During the manufacturing stage, the extent joint financing technique because each of of the export cover granted to the exporter is these tranches refers to one and the same 100 million FRF, for an amount of cover which investment. can vary (depending on the policies issued by the export credit agencies from 70–85 percent Source: Author. export credit agency. These cofinancing • Direct financing of the last installments methods, relating to financing of separate lots, of the loan granted by the commercial should not be confused with the technique of banks, usually translating into a 10–25 joint financing, which combines several sources percent participation. of finance in a single lot, according to a per- • Provision of a guarantee relating to the centage agreed to in advance. last installments, in return for a guaran- In practice, the involvement of a multilateral tee fee. agency in this type of set-up leads to the financial • Conditional participation of the World credit being structured at two levels (or in two Bank in variable rate credits, if the final segments): an A-loan granted by the multilateral charge corresponding to payment of organization itself, and a B-loan underwritten interest exceeds the repayment ability as by commercial banks under the multilateral originally assessed. umbrella. As far as B-loans are concerned, the notion of a The World Bank, through the IFC, can be multilateral umbrella does not mean that the involved in A-loans in three ways: multilateral organization gives the commercial

245 Financial Implications of Port Reform

Box 11: Principal Guarantees Offered by an Export Credit Agency for Project Financing: The COFACE Example COFACE insurance policies cover four cate- party country through which the payment gories of risks: must be processed. • Manufacturing risk: Materializes when the • Any other act or decision of a government of fulfillment of the exporter’s contractual obli- a foreign country preventing the guaranteed gations is suspended for at least a 6-month contract from being carried out. period, inasmuch as this situation results • Occurrence, outside of France, of war, revo- exclusively from factors spelled out in the lution or riot, or acts of nature such as hurri- insurance policy subscribed by the exporter. cane, flood, earthquake, volcanic eruption, • Credit risk: Materializes when the exporter’s tidal wave, or similar event. MODULE 5 commercial bank finds it impossible to • Political events and economic hardships recover all or part of the debt relating to the occurring outside France, or legislative or guaranteed contract, inasmuch as this situa- administrative measures taken outside tion results exclusively from factors spelled France, preventing or delaying the transfer of out in the insurance policy subscribed by the funds paid by the debtor or its guarantor. exporter. • Act or decision by the French government, • Performance bond and advance payment such as a ban on exports of the goods or reimbursement guarantee risk: Upon request services that are the object of the guaran- from the exporter, these guarantees and teed contract, or requisition of the goods in bond commitments may be included in the the course of manufacturing. scope of the manufacturing or credit risk Principal Guarantees Offered by an Export guarantees. Credit Agency for Project Financing: • Bid guarantee risk: Materializes when the Concepts exporter cannot recover from the beneficiary The risk definitions above, as well as the guar- of the bid guarantee all or part of the guarantee triggers, constitute the basis of the guarantee amount. antees offered by COFACE to its clients. In principle, COFACE also demands that to However, to get a good understanding of the cover the manufacturing risk, the credit risk scope of the guarantees offered, it is neces- must be covered, and that to cover the credit sary to grasp the following concepts: risk, in the case of progressive payments, that • Public buyer: An entity exercising the govern- the manufacturing risk must be covered. ment’s responsibility and which cannot be Facts Triggering Guarantees judicially bankrupt. When a public buyer bene- COFACE general conditions list eight factors fits from a letter of guarantee from its finance triggering a call on guarantees (manufacturing ministry, it is then called a sovereign buyer. or credit): • Private buyer: A buyer that does not meet • Arbitrary cancellation of the guaranteed con- the previous criteria, and which can there- tract by the debtor. fore be judicially bankrupt. • Mere carence of the debtor. • Political risk: Risk resulting from a political • Insolvency of the debtor, consisting of its fact, such as a war, revolution, or an act of incapacity to meet its financial commit- government preventing the contract from ments, resulting from: being carried out. It becomes an extended political risk when the event leading to the ~ A judicial act resulting in the suspension materialization of the risk is not of sovereign of individual lawsuits (as the judicial origin, but comes from a local community, a liquidation). public establishment, or similar organization. ~ An agreement reached with all creditors. • Commercial risk: Risk resulting from the ~ A de facto situation leading the insurer to financial instability of the private buyer conclude that any payment, even partial, is (insolvency). This implies that any payment unlikely. default by a public buyer, sovereign or not, • General moratorium enacted by the govern- exclusively results in materialization of a ment of the debtor’s country or of a third- political risk, or broad political risk.

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This option should not be confused with bond Box 11: Principal Guarantees Offered by an issues for public savings. Export Credit Agency for Project Financing: The COFACE Example (Continued) Issuing bonded debt (under what is referred to as Rule 144A) enables financial terms (margins Specificity of Risk Coverage by COFACE in MODULE 5 Project Financing and fees) to be obtained as well as maturities In project financing schemes, the borrower is that are more favorable than those available in the SPC. Therefore, in all cases, even when the banking market. This method of financing is the public partner would have chosen to take fairly recent, as it only took off in the early equity participation alongside the private 1990s and it has still not reached maturity. In sponsors, the borrower is considered a pri- fact, it is only in the last few years that the mar- vate buyer. However, COFACE will not cover, in principle, the SPC’s commercial risks, that ket has come to agree to cover financing is, insolvency resulting from an inadequate requirements during the construction period. It assessment of future traffic in particular. is therefore more a method of refinancing for Political risks are covered, both manufactur- banks than of financing for investors. ing and credit. As far as the extended political risk is concerned, the risks potentially eligible It should also be noted that using this type of must be measurable, and refer to specific claus- financing source can create problems for inter- es in the contract, the nonrespect of these claus- creditor relations. While the problem of seniority es allowing the SPC to terminate the contract between the debt categories can be easily solved, with a right to indemnity by the public partner. the ability of the various quorums to call in their This indemnity is defined to allow it to cover, as a minimum, the outstanding debt balance. sureties and the differences in the level of infor- Political risks refer to the public partner’s mation supplied to the protagonists poses major commitments to do or to pay, with specific problems (for example, a club of a few banks contents spelled out in the contract. In case of does not receive the same information as a large, noncompliance, this constitutes a breach of liquid syndicate of heterogeneous investors). contract. These may include availability of land, issuance of building or operating permits, 9.3.6. Structuring Equity and Quasi-Equity payment of investment or operating subsidies, fiscal measures initially granted, and so forth. Equity is a financial resource that is flexible Source: Author. enough to earn its return over a variable and unspecific time frame, without creating any risk of financial sanction by the equity holders. In banks any kind of guarantee on this credit. It other words, equity refers to financial resources simply means that the banks will feel reassured placed under the control of the company and by the participation of the multilateral organi- designed to cover the materialization of project zation because the host states are unlikely to risks. take detrimental measures against the project because of their presence. 9.3.6.1. Equity Provided by the Public Sector. Finally, although multilateral institutions are often There are many ways in which the public sector unwilling to bear certain risks, they have the can become involved in port investments. advantage of being able to offer much longer loan Which of these is applied depends to a large periods at fixed rates than the commercial banks. extent on the configuration of the project. In a nonexhaustive way, one can list the following 9.3.5. Bonded Debt options:

Bonded debt is a source of long-term financing • Contribution of assets: This solution has that is currently enjoying widespread popularity, the dual advantage of reducing the initial particularly in financing transport infrastructure. amount of the investment and possibly It is used extensively in the North American providing income during the construction market and is reserved for institutional clients. period. Within the framework of a port

247 Financial Implications of Port Reform

extension project, a contribution of assets With the exception of export credits, the benefi- could consist of entrusting the private ciary of this type of financing is the host state concession holder with the operation of of the project, which then retrocedes the credit, an existing terminal managed until then frequently granted on concessionary terms, to by a public port authority. In this way, the port authority concerned. While this tech- the financial profitability expected by nique has an undeniable advantage for the investors is reinforced by the assurance of lenders of avoiding the risk of a shortfall caused cash flows on signature of the concession by the local public authority, given that the agreement; this is known as backing. credit enjoys a “sovereign guarantee,” the fact remains that in some developing countries (in • Cash contribution: The concessioning pub- Africa in particular) this procedure of the state

MODULE 5 lic authority can invest cash in the project retroceding the credit is carried out on terms or provide operating subsidies. This increas- and conditions that are not always favorable to es the available cash flows for servicing the the local company, as the state wants to make a debt. For example, in the case of a green- profit on the transaction. field port project, investment subsidies are frequently required for financing swell pro- Financial analysts compare all of these public tection structures because of the discontinu- sector financial investments in the project to ous (lumpy) nature of this investment. equity, whether or not the concessioning • Guarantee contributions: The concessioning authority is one of the shareholders of the SPC. public authority offers a minimum revenue The risk that these resources will not be made guarantee, a guaranteed return on invested available to the private concession holder capital, or a guarantee to make good on lia- remains. This risk is an integral part of the bilities in the case of force majeure. political risk. One can therefore understand why the private concession holder (and the There are many financing vehicles for the public banks in particular) have tended to prefer sector to contribute equity to the SPC. The investment subsidies, payable right at the start intervention can take the form of: of the concession, to operating subsidies.

• Public financing drawn from the budget 9.3.6.2. Equity Invested by the Project’s of the concessioning authority or the host Sponsors. Equity contributed to the project by state of the project. its sponsors is paid into the SPC’s share capital. • Export credit (usually buyer credit) grant- This is determined according to the minimum ed to the concessioning authority by one required by legislation and the available funds or more export credit agencies (creating of the future shareholders. Banking require- subsovereign risk for the bank). ments are usually not too strict in terms of the amount of share capital required, as only the • Bilateral financing (for example, the value of the equity and of similar funds is sig- French Development Agency) or govern- nificant in terms of financing structure. The ment protocol (now renamed Emerging equity balance is usually given to the SPC by Country Reserve in France). the sponsors in the form of confirmed letters of • EU financing, which can come from the credit in the name of the shareholder. European Investment Bank (EIB) or the 9.3.6.3. Equity Invested by Multilateral European Commission (European Institutions. Some multilateral institutions have Development Fund financing in particular). financial tools that enable them to invest in • Multilateral financing from the World these operations as a shareholder of the SPC in Bank Group (IBRD or IDA) or regional the same way as the project’s sponsors. The best development banks. known of these institutions is the International

248 Financial Implications of Port Reform

Finance Corporation (IFC), a subsidiary of the reserved for highly specialized private investors, World Bank Group, which invests in private for example, pension funds, institutional companies in developing countries. It acts as a investors, or finance company subsidiaries of catalyst, in the absence of a government guaran- major groups. tee, by providing coinvestors with protection MODULE 5 against noncommercial, expropriation, and 9.4. Managing Exogenous profit repatriation risks. Financial Risk Exogenous financial risks are a category of mar- There are three ways in which the IFC can be ket risks as opposed to political risks. They involved: arise from the perpetual changes in the capital • Direct investment in the capital of the market. Such risks usually relate to interest SPC. rates, exchange rates, and counterpart risks. With regard to interest rate and exchange risk • Long-term subordinated loans granted to cover, there are two main families of markets the SPC and then considered as quasi- that although different, are also interdependent: equity in the financing structure. • The interbank market (forward), where • Shareholder advances granted to the proj- contracts are negotiated by private agree- ect sponsors, which are similar to part- ment and the bank usually acts as an ners’ current accounts and are also con- intermediary between several counter- sidered as quasi-equity. parts for a commission. This is also 9.3.6.4. Equity Invested by Bilateral Institutions. known as the over-the-counter market. Some bilateral institutions become involved in • The organized markets (futures), whose these projects by investing in the SPC. In main feature is the offer of standard con- France, this is the case with PROPARCO, an tracts, futures contracts, and option con- investment subsidiary of the French tracts continuously quoted on the inter- Development Agency (ADF). Established in national stock exchanges. Standardization 1977, PROPARCO (Société de Promotion et de relates to the nominal value (also known Participation pour la Coopération Economique) as the notional value) and the maturity has a mission to promote the creation and dates of those contracts. development of private enterprises in developing countries, particularly in Africa. PROPARCO’s While the cover principles are identical in both equity participations are to be sold after an of these markets, the methods employed in their average of six years, when the enterprise reaches operation are quite different. Three reasons a satisfactory growth rate. explain why:

9.3.6.5. Specialist Investment Funds. In some • Standardization of contracts (nominal cases, the use of specialist funds (geographic, value and fixed maturity dates) implies sector, or religious) can also finance major that the cover obtained in the organized projects. These sophisticated sources of finance markets is always imperfect for the are usually similar to quasi-equity because the investor, contrary to what happens in the invested capital is mostly supplied to the SPC in interbank market. Imperfect means that the form of mezzanine debt. the level of cover is only rarely an exact multiple of the nominal value of the This subordinated debt, which is junior in rank- futures contract. Similarly, it is almost ing to traditional bank debt, is frequently given equally as rare for the cover expiry date to the project for a long term and attracts a to correspond to the maturity date of the much higher rate of interest than traditional futures contract. Also, futures contracts bank debt. This type of financing is therefore provide only partial cover, and there

249 Financial Implications of Port Reform

continues to be a residual risk for the are without common measure in terms of dura- company. tion, a few years for construction and typically a minimum of 20 years for operation. Second, • In the organized markets, the vast majori- using such products requires an accurate prior ty of contracts do not involve actual knowledge of the amount of flows to be cov- delivery of the underlying securities. ered, an exercise that is much more difficult to These delivery and receipt undertakings achieve during the construction stage. are in fact offset before maturity by a transaction in the opposite direction to The principles of cover are based on the notion the original one. Conversely, in the inter- of transfer (and not removal) of the financial bank market, the obligation to deliver or risk to a counterpart. The counterpart agrees to receive the underlying security usually MODULE 5 bear the risk for payment of a premium because exists. In jargon, the futures markets are its cover need is the opposite of that required by said to be “paper contracts” as opposed the investor. In other words, all these mecha- to the “physical contracts” pertaining to nisms involve the notion of counterpart risk, the underlying security. which can be difficult to manage in the case of • Because the interbank market is an over- a project financing set-up. the-counter market, transactions are exe- The market sees new risk management and cuted principal to principal, which cover instruments every day. Their sophistica- implies a counterpart risk that is not tion is limited only by the imagination of the present in organized markets due to the financiers. It would therefore be futile to presence of a clearinghouse. attempt to deal with this field exhaustively. The The financial engineering of a project in terms goal of the following section is to make the of risk cover always has to be tailor made. As mechanisms understandable and explain the such, it must adapt itself to the configuration of issues, specifically within the framework of a the project and its environment, the cover project financing set-up. requirements sought by the investors, and the 9.4.1. Interest Rate Risk Management local conditions of the country. Also, the products available on the capital market are not As already mentioned, debt financing usually applicable to all developing countries. involves a variable interest rate, consisting of a Several previously described methods of financ- reference rate (variable) and a margin (fixed). ing already incorporate cover against certain As far as the SPC is concerned, the interest rate financial risks in their design. This is particular- risk occurs when the reference rate rises and, ly the case with guaranteed credits, which, along with it, the financial costs of the project. depending on circumstances, can offer the SPC Given that concession contracts are concluded exchange or interest rate guarantees. Also, for long periods, the concession holder’s main while it is easy to dissociate the method of concern is to try to cover itself against the risk financing a project from the cover for financial of rates rising in the long term. risks in theory, in practice it is more difficult. Several issues regarding interest rate risk man- Designing the financial engineering of a project agement merit further explanation. The risk must therefore fall within a global approach associated with rising reference rates (for exam- where the financing and the financial risk man- ple, EURIBOR or LIBOR) can result from two agement methods are dealt with simultaneously. independent sources, the first being an increase All of the cover products (detailed in the fol- in inflation in the countries in which the refer- lowing paragraphs) are used more during the ence index is calculated, that is, the developed operating period than the construction period countries. This creates a need to neutralize the for two main reasons. First, cover requirements negative impact of inflation on the cost of the

250 Financial Implications of Port Reform debt, since it will make the debt more expensive. than the construction period. It is harder to Neutralizing the effect of inflation is possible determine the rate risk and fix drawings on the only if the price indexing parameters laid down loan in time (dependent on the state of progress in the concession contract make provision for of the works) than to fix the repayments that this. Delaying the adverse affect of inflation is are stated in the loan agreement. MODULE 5 the existence of a lag factor, of varying length, between the time the real interest rates rise and 9.4.1.1. Interest Rate Swaps. The use of swaps to the time they are passed on in the concession protect against the risk of interest rate changes, holder’s interest charges. This increase might particularly long-term rates, has become popular lead to an increase in the project’s revenue if the over the last few years. Banks have played a lead project is carried out in one of the indexing role in the development of this market. A swap is countries, thereby partially offsetting the affects an exchange of interest rates between two deal- of increased inflation and interest rates. ers, the bank usually acting as an intermediary and charging a commission. A rate swap can also The second source is an increase in real interest be obtained where two counterparts are involved rates wherein the annual increase is not offset by a in different currencies. In practice, the SPC with parallel increase in available cash flow for servic- a variable rate debt pays the corresponding inter- ing the debt. This implies a corresponding rise in est and receives in return interest calculated on the cost of the debt. Consequently, the SPC bears the basis of a fixed rate. This effectively provides the whole brunt of the rate rise if no other cover the SPC with a fixed rate debt. mechanism was originally provided in the set-up. In project financing, it can be difficult to find a Conversely, interest rates could fall significantly counterpart who will agree to swap interest rates during the operating period. If the SPC had with the SPC, primarily for two reasons: first, the managed, either directly through the loans SPC can only offer the cash flows produced by granted to it or indirectly through the cover the project as a guarantee. Also, the credit risk instruments it contracted, to maintain a fixed attached to the SPC, which the counterpart will interest rate on its debt, it would experience have to accept, depends on the project configura- higher interest expenses than competitors with tion. In countries subject to significant political variable rate debt. This would imply that the risks, a possible but difficult to implement port’s customers would have to bear this sur- method consists of transferring this credit risk to charge through the prices they were charged. In the project’s sponsors by asking them to guaran- other words, setting up a fixed rate loan during tee the swap if the SPC were to fail. The second a period of falling rates would translate into a reason it is difficult to find a counterpart to swap less favorable competitive position for the SPC with is that a variable rate loan granted by a (compared to other competing ports or termi- banking syndicate usually has a repayment pro- nals that may have opted for a variable rate file based on the profile of the cash flows pro- loan), leading to a rise in the commercial risk. A duced by the project. It is extremely rare for this prudent mix of fixed and variable rate loans is to correspond perfectly to the counterpart’s cover therefore advisable, on the understanding that requirements. It is also common for the swap to there is no ideal formula. Although a 50-50 relate only to a fixed portion of the loan repay- ratio is often used as an initial approximation, ment (possibly smoothed out over the financing the final determination of this cover threshold is period), the balance remaining exposed to the an extremely complex exercise as it assumes the rate risk. This is known as a residual interest rate ability to forecast long-term rate trends over a risk. This technique enables the SPC to enjoy a 10-, 15-, or 20-year financing cycle. possible rate reduction on the uncovered portion of the loan, while at the same time enjoying Finally, let us remember that existing cover cover on the portion with the fixed rate in the instruments are used more during the operating event of a rise.

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9.4.1.2. Firm Financial Instruments in the Over- cised during the life of the option, that is, up to the-Counter Market. Two firm financial instru- the exercise date. If the option grants its holder ments exist on the over-the-counter market, a an option to buy, it is called a call option; if the forward-forward rate, which enables a compa- option grants its holder an option to sell, it is ny or an investor who wishes to borrow on a called a put option. In return for the right future date and over a set period to fix the cost resulting from the purchase of the option of borrowing now, and a forward rate agree- (regardless of whether it is a call or put), the ment (FRA), which enables a company or an purchaser pays the vendor of the option a pre- investor who wishes to borrow on a future date mium, which the vendor keeps whether the and over a set period to cover the rate position option is exercised or not. with a bank or financial institution.

MODULE 5 There are two main types of interest rate While these two products offer excellent protec- options available to an SPC fearing a rise in tion against rate risks, they differ on one essen- rates, one is a cap that enables borrowers to set tial point. The FRA completely dissociates the an interest rate ceiling beyond which they no rate guarantee transaction from the financing longer wish to borrow and will receive the dif- transaction, which is not so in the case of the ference between the market rate and the ceiling forward-forward rate. For this reason, FRAs are rate. This product is perfectly suited to the more frequently used in project finance, given cover requirements sought by an SPC, while at the diversity and specific nature of the loans the same time enabling it to benefit from a gain granted in these set-ups. in the event of rates changing favorably, which 9.4.1.3. Firm Financial Instruments in the in this case would translate into a rise in rates. The other interest rate option is a collar that is Organized Markets. In the organized markets, a combination of a cap and a floor (which futures are also able to offer efficient protection enables a borrower to set a floor rate). This against interest rate risks. The standard contracts product enables a dealer to set an interest rate traded in these markets are undertakings to fluctuation range outside of which it has to pay deliver (for the contract vendor) or to receive (for the difference between the market rate and the the contract purchaser), on a clearly defined date, floor rate and within which the counterpart will fixed-income financial securities with features have to pay the dealer the difference. strictly specified by the contract itself, at a price fixed on the day the contract was negotiated. Although these products exist on organized The general principle with these cover transac- markets, they are more commonly traded on the tions is to take a position in the contract market over-the-counter market, which offers the pur- opposite to that held in the cash market of the chaser of the option, the SPC, a product tailor underlying security, the loan transaction in this made to meet its requirements. case. In practice, an SPC wishing to cover itself The principal limiting factor in the use of these against an interest rate rise (particularly long- cover instruments is the sometimes extremely term interest rates) will sell forward standard high premium associated with them, that is, the contracts. The number of contracts sold is calcu- cost of the option. As the volatility of the under- lated in such a way that the duration factor, lying security depends on the exercise date of the defined in advance, is equal in both transactions. option, a cover application from an investor relating to a very long period of time will auto- 9.4.1.4. Conditional Financial Instruments (interest matically result in a rise in the return required. rate options). An option confers a right on its holder to buy or sell the underlying security of 9.4.2. Foreign Exchange Risk Management the option (for example, financial securities) at a rate fixed in advance (called the exercise price For a company investing in a foreign country, or striking price). This right can only be exer- the risk of a change in foreign exchange rates

252 Financial Implications of Port Reform traditionally materializes in two different ways: a forward transactions between banks occupy a consolidation exchange risk or asset risk that central position in the market. It would be arises when the financial results of a subsidiary wrong, however, to think that the foreign company (the SPC in this case) are included in exchange market is reserved for these interbank the consolidated accounts of the sponsors in dif- transactions. Since the beginning of the 1970s, MODULE 5 ferent currencies, or a transaction exchange risk new markets, the derivatives markets, have that arises when investments or operating income gradually developed. and expenditure involve several currencies. Within the derivatives markets, it is customary The consolidation exchange risk, although some- to make a distinction between standard contract times overlooked by financial analysts in privati- markets, which are located in stock exchanges zation projects, is a major concern for the pro- that have clearinghouses, and nonstandard con- ject’s sponsors. The ways of managing it relate to tract markets, which are a compartment of the the accounting and taxation details of the consoli- interbank market in which over-the-counter dation, which will not be dealt with here because deals are transacted. Within these standard con- there are large local disparities in these details tracts, there is a further distinction between between one country and another. We note simply futures and options. that the consolidation risk is usually approached from the point of view of tax optimization of the All of the methods relating to interest rate risk project and is dealt with once the methods of cover also exist for exchange risk cover. Thus, financing and risk cover have been set. the cover products available on the derivatives markets are: As far as the transaction exchange risk is concerned, several risk management methods were • Forward currency sales on the interbank mentioned in the section devoted to risk man- market. agement. These techniques are intended to elim- • Currency futures on the organized markets. inate the risk by pricing the port services in foreign currencies (the project is then said to be • Foreign exchange options in both com- foreign currency generating) or obtaining a loan partments of the foreign exchange market. in local currency or transfer the exchange risk As a rule, investors involved in project finance to public entities by obtaining an exchange rate set-ups tend to prefer the over-the-counter mar- guarantee over the period of the concession ket, which is more flexible in terms of the from the host country’s central bank (at the choice of amount to be covered (which may request of the ministry of finance), which con- exactly match the expected amount of flow), verts the exchange risk into a political risk. maturity dates, and exercise prices in the case of These techniques, although highly desirable for foreign exchange options. the concession holder, are a challenge to imple- With regard to the options market, there exists ment. Depending on circumstances, the SPC an “option option,” which has proved to be a will have to bear a part of the exchange risk. particularly interesting product for the investor Against the backdrop of an international econo- at the stage of bidding on a tender. The project my characterized by floating currencies and profitability calculations carried out by the com- wide fluctuations in currency rates, managing pany are based on certain assumptions about the foreign exchange risk is a necessity for an exchange rates even though the company is not SPC. Consequently, it will strive to transfer this certain of winning the contract. If it wins the risk to a counterpart expert in dealing in the contract after the invitation to tender, it is not foreign exchange markets. uncommon for the market to have shifted signi- The foreign exchange market is the most chal- ficantly in the meantime. Also, an option option lenging segment of the capital market. Spot and gives the option holder the right to buy a foreign

253 Financial Implications of Port Reform

exchange option whose exercise price is close to The need to cover the counterpart risk in a the reference exchange rate used, thereby cover- project financing set-up stems principally from ing itself as early as the tender stage. If the com- a requirement of the bank syndicate that struc- pany is not successful, it doesn’t exercise its tured the loan and wishes to satisfy itself as to option option. Also, it is worth mentioning that the solvency of the various sponsors of the proj- since the volatility of the price of an option is ect (for example, builder, operator, supplier, less than the volatility of its underlying security owner, or shipper). To satisfy itself that these (in this case the foreign currency), the price of parties will honor their financial contractual the option option tends to be low. commitments, which might be expressed in terms of contract penalties, the bank syndicate Finally, the use of these cover products, as in may require the establishment of guarantees

MODULE 5 the case of rate risks, requires an accurate, prior known as performance bonds. These are usually knowledge of future foreign currency cash issued by one of the party’s “friendly” banks, flows. This is referred to as the company’s “net which must also have an acceptable rating. The foreign exchange position.” Determining this bank syndicate is then confident of being position is a difficult exercise, particularly dur- indemnified if any of the project’s sponsors ing the operating period. Assessing the value of become insolvent. This is also a good way for the basket of currencies to be covered can there- the arranging banks to limit their liability, by fore only be a “guesstimate.” Nevertheless, it is only accepting projects with top ranking part- important to estimate these flows carefully dur- ners as sponsors. ing the financial modeling of the project. This point will be discussed further at a later stage. Counterpart risk cover instruments also include 9.4.3. Counterpart Risk Management and credit derivatives that are beginning to appear Performance Bonds in the project financing market. For the moment, however, they are still handicapped by All of the techniques mentioned in the Part A of a certain lack of liquidity and a small choice of this module relating to risk management are based available counterparts. on the principle of risk sharing in project financing set-ups: to minimize the costs of covering risks, As far as the other financial counterparts of the they must be borne by the party in the best posi- project are concerned (banks, insurers, and spe- tion to assume it. This involves transferring each cialist financial institutions), the use of credit identified risk to a private counterpart. The risk risk cover products is still not common today. In that any of these counterparts may disappear is fact, project financing set-ups remain a reserve what is called the counterpart risk or credit risk. of a small number of players of international stature who usually have an excellent rating. The counterpart may be directly involved in the project and therefore belong either to the SPC 9.5. Financial Engineering and or the bank syndicate. But, it may also take no Political Risk Management direct part in the project other than through the Political risk is an expression that covers all risk it agrees to take on, either because it count- risks resulting from unfavorable and unilateral er balances an opposite cover requirement or decisions taken by the public authorities of the because it expects payment for doing so. host country of the project, whether they are Also, with regard to counterpart risk manage- the state, local authorities, or port authorities. ment, a distinction must be made between the Financial engineering of political risk manage- credit risk relating to the sponsors of the project ment consists of setting up adequate insurance and the credit risk resulting from the other products to mitigate any financial consequences counterpart, as the financial cover instruments that may result from a public decision that is used are of a totally different kind. detrimental to the viability of the project.

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The separate presentation of political risk and Multilateral Investment Guarantee Agency or market risk (the exogenous financial risks pre- MIGA; its goal is to “encourage investments for sented in the previous sections) within the productive purposes between member countries framework of this module needs to be distin- of the World Bank Group.” In this sense, it is in guished. The risks of nontransferability and a position to guarantee the SPC’s investments MODULE 5 nonconvertibility of the local currency, which against losses that may result from noncommer- are components of foreign exchange risk, can be cial risks, including: used as an example. While it is clear that fluctu- • The risk of nontransferability as a result ations in foreign exchange rates are partly due of restrictions imposed by the host gov- to market dealings, the fact remains that they ernment. are also dependent on the monetary policy either set by the national central bank or the • The risk of loss as a result of legislative government. It is impossible to determine with or administrative measures or omissions precision the exact split between these two of the host government that effectively classes of risk and, hence, to design the optimal deprive the foreign investor of ownership cover arrangement. This example illustrates a rights or the ability to exercise investment “grey” area that makes the financial analyst’s control. challenge a little more complex. • The risk of breach of contract by the host The financial treatment of political risk manage- government in relation to the investor. ment harks back to the notion of investment • The risk of armed conflict and civil dis- guarantee, which poses the difficult question of turbance. knowing under which balance sheet headings to place this cover. While the answer may seem Since 1994, the World Bank (Bank or IBRD) obvious with regard to the guarantees offered by has promoted the use of political risk mitigation secured loans (which were dealt with in the sec- guarantees to address the growing demand from tion covering the financial structuring of the sponsors and commercial lenders contemplating project), existing insurance products relating to financial investment in the infrastructure sectors investment guarantees can, depending on the of developing countries. The Bank’s objective in type of policy, relate either to a guarantee of mainstreaming guarantees is to mobilize private equity invested by the sponsors or a guarantee capital for such projects on a “lender of last relating to all the project’s assets. This distinc- resort” basis while minimizing the host govern- tion, which is fundamental in terms of its poten- ment’s requisite indemnity to the Bank as a con- tial consequences, is difficult to grasp in practice. dition of providing the guarantee.

The calling in of these guarantees and indemni- Bank guarantees are provided to private lenders ty procedures provided by insurance policies in for infrastructure financing where the demand the event of default is not without problems. for debt funding is large, political and sovereign Without going into detail, it should be men- risks are significant, and long-term financing tioned that the notions of “events of default” critical to a project’s viability. and “subordination of rights” between an The Bank offers commercial lenders a variety of investment guarantee and a secured loan in guarantee products: partial risk, partial credit, practice prove to be particularly complex and enclave and policy-based guarantees in IBRD difficult to manage for all private partners. countries, and partial risk guarantees in IDA- 9.5.1. Guarantees Offered by Multilateral only countries. Broadly speaking, all guarantees Agencies provide coverage against debt service default arising from sovereign risk events. Each guaran- The best known of the multilateral agencies tee is tailored to match the specific need of an offering investment guarantees is the individual transaction.

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IBRD guarantees are offered for projects in defaults arising from specified sovereign risks, IBRD-eligible countries, with the exception of including government breach of contract, for- certain foreign exchange earning projects in eign currency convertibility, expropriation, and IDA-only countries. IBRD guarantees can be political violence. both partial risk and partial credit in nature. Bank guarantees are generally available for Partial credit guarantees cover all events of non- projects in any eligible country, irrespective of payment for a designated portion of the financ- whether the project is in the private or public ing. While these guarantees historically have sector. The Bank may, however, at times limit been used to encourage extension of maturity the availability of guarantees in certain coun- by covering the later years of the financing, the tries, for example in countries undergoing debt Bank recently structured a partial credit guaran-

MODULE 5 restructuring. tee to cover a single coupon interest payment on a rolling basis throughout the life of the IBRD partial risk guarantees ensure payment in facility, plus the final principal repayment. the case of debt service default resulting from the nonperformance of contractual obligations Enclave guarantees are highly selective partial undertaken by the government or their agencies credit guarantees structured for export-oriented in private sector projects. Sovereign contractual foreign exchange-generating commercial projects obligations vary depending on project, sector, operating in IDA-only countries. Enclave guar- and circumstances. The obligations typically antees may cover direct sovereign risks such as include: expropriation, change in law, war, and civil strife, but may not cover third-party obligations • Maintaining an agreed regulatory frame- (such as those of an output purchaser or input work, including tariff formulas. supplier), nor will it guarantee transfer risk. In all cases, the scope of risk coverage under the • Delivering inputs, such as fuel to a pri- guarantee would be the minimum required to vate power company. mobilize financing for a given project. • Paying for outputs, such as power or water purchased by a government utility. Bank guarantees facilitate the mitigation of risks that lenders cannot assume, catalyze new • Compensating for project delays caused sources of finance, reduce borrowing costs, by political actions or events. and extend maturity beyond what can be Partial risk guarantees may also cover transfer achieved without the bank guarantee. They risks that may be caused by constraints in the also provide more flexibility in structuring availability of foreign exchange, procedural project financing. Clearly, within the World delays, and adverse changes in exchange control Bank Group, IFC, and MIGA are the preferred laws and regulations. sources of support to the private sector. As such, sponsors and financiers should consult Partial risk guarantees are used in IDA member with IFC and MIGA concerning their potential countries in sectors undergoing significant interest in financing or covering the project. reforms. IDA guarantees are offered on a pilot IFC supports private sector projects through basis to private lenders against country risks equity and debt financing, the syndicated B- that are beyond the control of investors and loan program, security placement, and under- where official agencies and private markets cur- writing and advisory services. MIGA provides rently offer insufficient insurance coverage. IDA political risk insurance primarily for equity guarantees are available selectively, where an investments, but it can also cover debt financ- IBRD enclave guarantee is not available. IDA ing as long as it is also covering equity finance guarantees can cover up to 100 percent of prin- for the same project. These agencies cannot cipal and interest of a private debt trench for accept host government guarantees.

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9.5.2. Guarantees Offered by Export Credit 10. FINANCIAL MODELING OF Agencies THE PROJECT Export credit agencies also issue guarantee poli- 10.1. Construction of the

cies covering investment operations abroad. MODULE 5 Economic Model These instruments usually provide a guarantee for the SPC against the political risks of an Constructing the economic model of a port attack on shareholders’ rights and nonpayment project consists of identifying, from the SPC’s and nontransfer of the payment, or nontransfer point of view, all of the forecasted cash flows to of the investment or of the indemnity provided be generated by the investment. They fall into in the concession contract, in the event of three main categories: capital expenditure, oper- nationalization. ating revenue and expenses, and tax-related matters. The guarantee package (with a cover ratio in the region of 90–95 percent) relates not only to 10.1.1. Capital Expenditure Types the initial investment, but also to the self- Investment breakdown. The production of a financing produced by the project, that is, the capital expenditure (Capex) statement requires profits to be reinvested and the profits to be the gathering of data that are usually fixed and repatriated. Generally, there is a ceiling on the set out in the various contracts defining the basis of cover relating to the self-financing pro- project: the concession contract, construction duced by the project: in the case of COFACE in contract, equipment supply contract, and so France, the cumulative limits are respectively forth. The investment breakdown must be suffi- 100 percent (with respect to profits to be rein- ciently detailed. The total amount of the invest- vested) and 25 percent (with respect to profits ment should be broken down by type of to be repatriated) of the initial investment. homogenous assets; that is, assets that have similar working lives and methods of depreciation. Finally, it should be noted that securing such a Capex categories relevant to port projects might guarantee is conditional on the existence of a include buildings, open areas, port equipment, bilateral investment agreement between the infrastructure, superstructures, and dredging country of the export credit agency and the host work. The categorization of Capex must also country of the project. take account of the type of work envisaged; for 9.6. The Use of Private Insurers for example, refurbishment of existing structures Covering Political Risks and/or new works. Private insurers sometimes offer viable alternatives Investment phasing. Traditionally, determining to public insurers for covering political risks. The the investment phasing at the set-up stage satis- cost of this insurance may be quite high, but it is fies two requirements: it records the Capex sometimes the only alternative for making financ- flows required by the project in the economic ing of projects in difficult countries possible. model and it fixes the value of the basis of the instruments providing cover against exogenous A private insurer covers the banks against the financial risks (rates and foreign exchange). occurrence of a political risk causing the loan to Also, investment phasing enables the financial default. Private insurers are sensitive to the analyst to structure the project as accurately as monitoring procedures that the banks put in possible according to its ability to support its place to assess the political risk and its develop- method of financing. Investment phasing also ment. The banks must therefore provide evi- allows the analyst to reassess the appropriate- dence of their ability to assess and avoid politi- ness of the investment decision by testing real cal risks during the project set-up stage; this is a options, for example, to defer the execution of condition of underwriting the policies. the project, to defer progress of the works, to

257 Financial Implications of Port Reform

abandon the project, to reduce activity, or to results at the beginning of the investment cycle make the project more flexible. and an overevaluation at the end of the cycle.

Investment currencies. The amount and the In the case of port projects, understanding the required currency of payment by the SPC must notion of depreciation is complicated by the correspond to each item on the investment nature of the assets entered on the SPC’s bal- statement. The equivalent of this amount in the ance sheet. If the depreciation methods seem model’s reference currency can be found by cal- easy as far as port equipment or new infrastruc- culating the exchange rate initially set in the ture works are concerned, the fact remains that macroeconomic hypotheses. The foreign curren- the question of the length of ownership or of cy breakdown of the Capex thus enables the the potential life of the refurbished assets is far

MODULE 5 SPC to ascertain its exposure to exchange risks from obvious. For example, what is the residual throughout the life of the concession contract, working life today of a fully refurbished 30- that is, allowing its net exchange position to be year-old concrete quay? calculated. Similarly, the distinction that must be made Economic depreciation and tax allowances state- between appropriations to depreciation, which ments. A depreciation statement must accompa- by their nature are not cash flows (referred to ny the Capex statement for each of the identified as calculated charges), and maintenance headings. It is based on knowledge of the period charges, which are cash flows, is not always of depreciation of each asset and the method of easy. For example, should one depreciate dredg- depreciation authorized by the tax legislation of ing works, and if so by what method, when the the host country of the project, for example, maintenance charges relating to maintaining straight-line or double-declining balance. depths close to the quay or in the access channel are already included in the charges account Confusion often arises between the notions of of the profit and loss account? Prevailing prac- amortization, depreciation, and tax allowances. tice, in fact, is not to depreciate dredging works This confusion usually stems from the improper and access channels. use of the same expression to express three different financial concepts. Amortization refers to Residual value of the investment at the end of the capital repayments of financial loans. the concession. There is always an “exit” for any Depreciation is designed to adjust the economic investment, whether it is liquidated, ceded to the value of an asset according to the loss of eco- concessioning authority, or sold. Thus, inevitably nomic value it undergoes with time. there is a need to assess the residual value of the Appropriations to depreciation appear in the investment. There are several methods based on profit and loss account, while accrued deprecia- the notion of value in use or replacement value. tion appears on the balance sheet, which gives In the port sector it is very difficult to assess the as true as possible an account of the assets of residual value of infrastructures that do not have the company. Tax allowances represent the a true market value at the end of the concession. deductions that the tax authorities allow on the Therefore, when a residual value methodology is investments the SPC makes. While they are, not defined by the project (for example in the generally speaking, based on the depreciation of concession agreement) Use of the book value of the asset, considerations of economic policy the assets at the end of the term or project hori- also enter into the equation for tax allowances. zon is recommended. This is to encourage investors by allowing them 10.1.2. Operating Revenues and Expenses to write off their assets over periods shorter than the economic life of the asset. In terms of It should be noted that the word “operating” is financial analysis, this overdepreciation leads to used here as opposed to the word “construction.” an underevaluation of the entity’s financial This distinction enables one to identify all the

258 Financial Implications of Port Reform revenues contributing to the formation of the • Revenue from administrative operations. gross operating surplus, the true balance of the • Miscellaneous, for example, equipment operating account. The summary statement of rentals. operating revenues and expenses includes:

The main items making up operating charges MODULE 5 • An item-by-item breakdown of operating include maintenance charges, personnel charges, revenue and expenses. The same project and the operating royalty due under the conces- may produce very different types of sion contract. income. It is therefore important to know the various revenue headings according to 10.1.2.2. Operating Finance Requirement. the type of creditors and any interde- Traditionally, a company’s operating finance pendence between them. requirement is determined from an analysis of the company’s operating cycle: production, stor- • A fixed (annual percentage that does not age, and marketing. In the case of a terminal depend on the level of production) and operator, the operating cycle is simply the deliv- proportional (amount per production ery of the service rendered to its customers. It unit) breakdown for each of the various corresponds to the cash advance or working headings. This exercise, which is difficult capital that the company must have at its dis- to perform in practice, is fundamental in posal between the time it begins operating and terms of financial analysis for determin- the time it begins receiving payment for its serving the company’s economic break-even ices. There are four factors that determine a point and for assessing the level of risk company’s need for working capital: attached to the formation of the gross operating surplus. 1. Volume of business (the more turnover increases, the higher the need). • The foreign currency or currencies for each of the revenue and expense headings. 2. Length of operating cycle (the longer the cycle, the higher the need). 10.1.2.1. Operating Revenue and Charges in Terminal Management Operations. The various 3. Customer or supplier credit policy (the sources of revenue produced by the operation longer the customer payment time, the of a port project stem directly from the contents higher the need; the reverse is true with of the concession granted by the port authority. regard to supplier credit policy). The revenues break down into categories within 4. Operating cost structure (the more oper- the framework of a port project: ating costs increase, the higher the need). • Port dues, which are distributed between 10.1.2.3. Operating Account Balance. The gross dues on ships and dues on cargoes and operating surplus (GOS) is the first indicator of typically cover the use of the port’s basic revenue produced by the operation of the SPC. infrastructure. It is measured by subtracting operating charges • Services to ships, for example, piloting, from operating revenue. In practice, it forms the towing, stores, bunkering. balance of the operating account. In jargon, the SPC is said to achieve basic equilibrium if its • Estate revenues, which constitute a signif- GOS is positive. Changes in the operating icant source of revenue for port authori- finance requirement should be deducted from ties and an operating charge for terminal the calculated GOS. One then gets the operating operators. cash surplus (OCS), which is a cash flow, unlike • On-board and on-land services to car- the GOS, which is an accounting aggregate. The goes: for example, cargo handling, stor- OCS will subsequently be included in the cash age, and packaging. flow statements.

259 Financial Implications of Port Reform

10.1.3. Tax Flows Equity-related capital expenditure refers to increases in capital granted to the project by Tax flows are all the cash flows resulting from shareholders on the one hand and a return paid the impact of the tax system on the project. In on the invested capital on the other. With addition to the deductibility of financial regard to the latter, this is directly related to the charges, which will later need to be built into dividend payment policy decided upon by the the financial model (cash flow statements), the shareholders and accepted by the lenders. tax flows relate to taxes on company profits and the (total or partial) carrying over of tax The most commonly used method for modeling losses from previous years. dividends consists of distributing the maximum profit (after tax and any reserve obligations) up Traditionally, corporation tax is calculated by

MODULE 5 to the value of the available cash. Models usual- multiplying a rate, which can vary from country ly provide what are called reserve accounts, the to country, by a basis of taxation, which is purpose of which is to freeze any cash flow sur- determined according to the type of investment plus from the project until the total value of made. While it is easy to obtain the rate of cor- these accounts reaches a certain minimum level poration tax, calculating the basis of taxation is (usually set by the banks). This minimum level difficult as it requires principles of accounting is usually set at six months of debt service. established by the tax legislation of the host country. Capex related to financial debts and quasi-equity is entered in a flow statement called a debt Tax losses from previous years can be carried service account. Traditionally, there are five forward over a number of years depending on headings in this account, which are: national legislation. Losses carried over in this way can then be considered as a tax credit • Balance at beginning of period. granted to the SPC. In the financial model, this • Drawings on the credit. calculation is important to include to avoid overestimating the impact of corporation tax on • Financial costs (including interest on cap- the net profitability of the investment. ital paid during the construction period).

10.2. Construction of the Financial • Repayment of loan principal. Model • Balance at end of period. A financial model of the project traditionally The order of subordination of the loans must be involves the production of three financial state- clearly shown in the model. ments: the cash flow statement, the income statement, and the balance sheet. In virtually all tax systems it is common to allow the deduction from income of the finan- 10.2.1. Cash Flow Statement cial charges of the SPC. These financial charges represent the interest paid by the company on Cash flow statements show all the company’s the loans it takes out. However, repayment of incoming and outgoing cash flows. They there- the loan principal, which relates to the project’s fore include all the cash flows involved in the assets, has already been depreciated in the oper- establishment of the operating cash surplus and ating profit/loss and is not a deductible expense. all Capex. 10.2.2. Profit and Loss Account (income Capex stems directly from the choice of the statement) financial resources needed to accumulate financial capital. It refers to equity and debt invested The purpose of the profit and loss account is to in the company by capital providers (sharehold- determine the amount of corporation tax, the ers and lenders). net profit/loss, and to model dividend payments

260 Financial Implications of Port Reform to shareholders. The main stages of the calcula- Flora, J., and S. Holste. 1994. “Public/Private tion enable the principal interim financial bal- Partnerships: Roadway Concessions.” Transport ances to be determined: Division, World Bank. IAPH (International Association of Ports and

• Gross operating surplus. MODULE 5 Harbors). 1999. Institutional Survey. • Operating profit/loss. Martinand, C. “L’expérience FranÇaise du • Financial profit/loss. Financement Privé des Equipements Publics.” Economica. • Current pretax profit/loss. • Corporation tax. Nevitt, P. K., and F. Fabozzi. 1995. Project Financing (sixth edition). Euromoney Publications. • Net profit/loss. Peters, H. J., and M. Juhel. “Changing Role and It should be stressed that an extraordinary prof- Functions of Ports: Addressing the Reform it/loss forecast is fairly exceptional in this type Agenda.” TWUTD, World Bank, Washington DC. of operation. Shaw, N., K. Gwilliam, and L. S. Thompson. 1996. 10.2.3. Balance Sheet “Concessions in Transport.” TWUTD, World Bank, Washington, DC. The SPC’s balance sheets enable the company, investors, and others to monitor the changes in Stoffaës, C. 1995. Services publics, question d’avenir. the financial structure of the company through- Rapport de la commission du Commissariat Général du Plan, Editions Odile Jacob/ La out the life of the project. It should be remem- Documentation Française. bered that, unlike an accounting balance sheet, the items on the asset side of a financial bal- World Bank Group. “Procurement for Private ance sheet are shown at their gross value. The Infrastructure Projects.” World Bank Group, deduction of the accrued depreciation of these Washington, DC. gross values appears under the liabilities of the UNCTAD (United Nations Conference on Trade and SPC. Development). 1998. “Guidelines for Port Authorities and Governments on the Privatization of Port Facilities.” UNCTAD.

REFERENCES Reviews and Articles Publications Behrendt, D. K., and W. Thomson. 1997. “Port Ownership: Public Responsibility or Private Benichou, I., and D. Corchia. 1996. “Le Financement Enterprise.” Ports and Harbors (October.) de Projects.” Editions ESKA. Chapon, J. 1998. “Réflexion pour une politique por- Cass, S. 1996. Port Privatization: Process, Players and tuaire européenne.” Progress. Cargo System IIR Publications Ltd. Chapon, J. “Partenariats public/privé en matière Chance, Clifford. 1991. “Project Finance.” portuaire.” Conférence CIMER 98, Saint Denis Cohen, E., and C. Henry. 1997. Service public , de La Réunion. 1999. Published in Transports Secteur public. Conseil d’Analyse Economique, La No. 394 (March–April). documentation Française. ENPC. “Gestion and analyze financière, Suivi finan- Courtot, H. 1998. “La gestion des risques dans les cier des contrats long terme.” module. projects.” Economica. Euro News. 1997. “Engineering Consultants: Denoix De Saint Marc, R. 1996. Le service public. Where Would Europe Be Without Them?” Rapport au Premier Ministre, Collection des rap- Special edition, No. 27, Project Financing, EFCA ports officiels, La documentation Française. (September).

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Juhel, M. H. 1999. “Global Challenges for Ports Rezenthel, R. 1996. “Les régimes portuaires and le and Terminals in the New Era.” Ports and droit de la concurrence.” NPI, 30 December. Harbors (March). Rezenthel, R. 1997. “Les concessions portuaires.” Martinand, C. “Politiques de transport.” ENPC Module. Gazette du palais (September). Monpert, J. Y. 1998. “Le contexte des privatization Rezenthel, R. 1998. “La délégation de service public and les acteurs: motivations and attentes des opéra- and les concessions portuaires - Doctrine.” DMF teurs—le point de vue de SAGA / BOLLORE.” 583 (June). AFD Conference, 19/10/98.

Mountford, R. 1997. “Financing the Development of Smagghe, J. 1999. “L’évolution institutionnelle des Ports.” Ports and Harbors (November). ports.” Colloque Africa Port 2000, Lomé (January) MODULE 5 Orsini, J. A. 1995. “L’appréciation des risques 1996. “Major issues in transport and communica- inhérents au projet.” Paper presented at Le tion: Concepts and Guidelines for the montage des Financements de Projects Implementation of the Commercialization and Seminar, Management Global Information Privatization of Ports.” Ports and Harbors (November). (April).

PdI (Port Development International). 1994. “A 1998. “Major issues in transport, communication, Private Affair.” Privatization supplement, PdI tourism and infrastructure development: (September). Commercialization and Private sector Involvement in Ports.” Ports and Harbors (November) Ratheaux, O. 1996. “Options de gestion des ports maritimes, Cas des ports africains.” AFD 1998. “Les financements internationaux d’infra- Rezenthel, R. 1996. “Les régimes portuaires dans le structure: la fiscalité des BOT.” Les ECHOS 12 monde.” NPI, 30 December. May.

262 Financial Implications of Port Reform

APPENDIX: RISK CHECKLIST— Poor/fair/good PRINCIPAL RISKS IN A PORT => Prediction reliability: poor/fair/good PROJECT Customers Identified major customers

I. Country Risk “Atomized” market MODULE 5 A. Government/Administration Competition/captive traffic Stability Present situation Reputation (negotiations, administrative Competitor terminal in port? inefficiency) Competitor terminal in country? Links established Competitor corridors? Concessioning authority Traffic volatile or stable? Political risk: low, medium, high Future situation B. Currency Contractual guarantee of exclusivity? Revenue in foreign currency? Entry barriers? Revenue in local currency? Risk of changes: low, medium, high Stability of local currency over last few Risk of competition: low, medium, high years B. Obligations Convertibility of local currency Public service obligations => Exchange risk: low, medium, high Technical C. Social Minimum capacity Does the operation induce a major reduc- Performance standards tion in personnel? Tariffs If so, is a redundancy scheme planned? Free rates Funded? By whom? Price cap Must a proportion of local personnel be Escalation formulas taken on? Exemptions? Qualification of local labor? Fee payable to concessioning authority => Social risk: low, medium, high Up-front fee? D. Taxation Fixed annual part: fixed amount, judg- Level of knowledge ment criterion? Profits tax? Variable annual part: fixed amount, Sales tax? judgment criterion? Withholding on dividends or intragroup Concessioning authority subsidy transactions? Investment Stability of fiscal system Fixed annual part: fixed amount, judg- => Tax risk: low, medium, high ment criterion? II. Traffic Risk Variable annual part? A. Market Guaranteed traffic? Cost + fee? Activity C. Guarantees Traffic established? (stable, sharp fluctua- Extra franchise port services tions, or steady growth) What port services do my customers New traffic require? Growth factor Who is in charge? (me, public or private General economic activity port authority, potential problem) Sector/domain activity Level of service guaranteed? Acquisition of market share Level of service satisfactory? Previous quality of service Price levels satisfactory? Nonexistent Pilot service

263 Financial Implications of Port Reform

Berthing services Work and supply contracts Haulage Concessionaire-employer Buoying Approval of concessioning authority Maintenance of access required? Maintenance of basins Call for tenders obligatory? Thresholds? Maintenance of protection structures Maintenance standards imposed? Other Construction period/commissioning date Operating hours for these services Underestimated Degree of sensitivity to inspection Reasonable Customs Comfortable Veterinary and phytosanitary Penalty level MODULE 5 MODULE 5 Other Operation Vessel waiting time Public suppliers (water, electricity, and so Priorities granted forth) Land transport Safety rules What modes of transport are used for my Subcontracting authorized/approval traffic? IV. Contractual Risks For each mode: Status of project company Capacity of operators State or concessioning authority has Quality of service of operator(s) (time blocking minority interest? taken, security, and so forth) Proportion of capital reserved for local Obstacles to the work of these opera- investors? tors (regulatory, political, and so forth) Contracts with third parties III. Project Risks What contracts taken over by conces- Investment amount sionaire? Dredging Concessioning authority’s approval Infrastructures required for signature of new contracts? Buildings Bonds Facilities Nature of bonds Missions Amount Design Call conditions Construction/installation Consequences of legislative regulatory Rehabilitation/repair changes Maintenance (infrastructure, superstruc- Borne by concessioning authority ture, and dredging) Borne by concessionaire or not Operation specified Security Possibilities for recourse Obligations relating to investments Contract revision Functional specifications Instigation of concessioning authority Technical specifications Instigation of concessionaire Functional specifications related to a No provision threshold (future subject) Force majeure Information supplied and technical speci- Causes fications imposed Procedures Investigation campaigns Early termination Contractual information? Concessioning authority’s request: Preliminary design causes, procedures Detailed design

264 Financial Implications of Port Reform

Concessionaire’s request: causes, VI. Tender Assessment Criteria procedures Preselection Disputes Technical assessment Possibilities for claim Financial assessment

Contract law MODULE 5 Arbitration clause V. Financial Aspects Franchise period Project IRR over this period Payback period

265

PORT REFORM TOOLKIT SECOND EDITION

MODULE 6 PORT REGULATION MODULE

THE WORLD BANK MODULE 6 O:10.1596/978-0-8213-6607-3 DOI: 0-8213-6608-4 978-0-8213-6608-0 eISBN-13: eISBN: 978-0-8213-6607-3 ISBN-13: 0-8213-6607-6 ISBN-10: [email protected]. fax202-522-2422, USA, DC20433, Washington, 1818 HStreetNW, World Bank, pleasecontacttheOfficeofPublisher, includingsubsidiaryrights, For allotherqueriesonrightsandlicenses, The World Bankencourages disseminationofitsworkandwillnormallygrant permissionpromptly. withoutthepriorwrittenpermissionof World Bank. orinclusioninanyinformationstorage andretrieval system, recording, includingcopying, electronicormechanical, No partofthisworkmaybereproducedortransmitted inanyformorbymeans, Copyrightisheldbythe World Bankonbehalfofboththe WorldThe materialinthisworkiscopyrighted. BankandPPIAF. World Bankconcerningthelegalstatusofanyterritoryorendorsementacceptancesuchboundaries. andotherinformationshownonanymapinthisworkdonotimplyjudgmentthepartofPPIAFor denominations, colors, Theboundaries, Neither PPIAFnorthe World Bankguarantees theaccuracy ofthedataincludedinthiswork. governments theyrepresent. of Public-Private Infrastructure Advisory Facility (PPIAF)ortheBoardofExecutiveDirectors World Bankorthe andconclusionsexpressedhereinarethoseoftheauthor(s)donotnecessarilyreflectvie interpretations, The findings, All rightsreserved. © 2007 The InternationalBankforReconstructionandDevelopment/ The World Bank ws MODULE SIX CONTENTS 1. Introduction 267 2. Regulatory Concerns When Formulating a Port Reform Strategy 268 2.1. How Ports Compete 270 MODULE 6 2.2. Assessing Port Sector Competition 271 2.2.1. Transport Options 272 2.2.2. Operational Performance 272 2.2.3. Tariff Comparisons 273 2.2.4. Financial Performance 274 2.3. Costs of an Inadequate Regulatory Framework 274 3. Strategies to Enhance Port Sector Competition 277 3.1. Structural Strategies 277 3.2. Structural Remedies 279 3.3. Regulatory Strategies 280 3.4. Decision Framework for Selecting Port Competition: Enhancement Strategies and Remedies 282 4. Designing a Port Regulatory System 283 4.1. Step 1: Specify Regulatory Objectives and Tasks 285 4.2. Step 2: Conduct a Legal Review of the Regulatory System 286 4.3. Step 3: Determine Institutional Arrangements for Regulatory Oversight 286 4.4. Step 4: Determine Degree of Regulatory Discretion 293 4.5. Step 5: Identify Appropriate Regulatory Tools and Mechanisms 294 4.6. Step 6. Specify Operating and Financial Performance Indicators 296 4.7. Step 7: Establish an Appeal Process and Procedures 299 4.8. Step 8: Incorporate Regulatory Details into Laws and Contracts 299 5. Summary and Conclusions 302 Annex A. Port Tariffs: General Structure, Items, and Flow of Charges 304 Endnotes 308 References 310 BOXES Box 1: Intraport Competition in Buenos Aires, Argentina 271 Box 2: Port Sector Competition Factors 272 Box 3: The Case of Israel: From National Monopoly to Port Monopoly 275 Box 4: Potential Anticompetitive Behavior in the Port Sector 276 Box 5: Predatory Pricing and Service Bundling in Cartagena, Colombia 276 Box 6: Competition Enhancement 277 Box 7: Dividing the Port into Terminals to Induce Competition 279 Box 8: Terminalization in Limited-Volume Ports: The “Overlapping Competition” Strategy 280 Box 9: Subsidy Bids for Management Contracts in Low-Volume Ports 281 Box 10: Checklist for Port Sector Restructuring or Unbundling 281 Box 11: Decision Framework for Port Competition Enhancement 282 Box 12: Reviewing Port Regulatory Responsibilities in Victoria, Australia 287 Box 13: Establishing a Port Sector Regulatory Agency in Colombia 288 Box 14: A Simple Port Regulatory Structure for Sri Lanka 290 Box 15: Safeguards for Creating an Independent Regulatory Body 292 Box 16: Reconciling Independence with Accountability 293 MODULE 6 o -:Pr hre nMai lrd 306 307 301 297 300 304 305 295 302 Box A-5:PortCharges inCartagena,Colombia 305 Box A-4:PortCharges inMiami,Florida Box A-3:Transaction ComplexitiesPre- andPostprivatization Box A-2:RelationshipbetweenPortCharges andtheLocationWhere theCharge isIncurred Box A-1:RelativeWeights ofDifferent PortCharges Box 21:ChecklistofRegulatoryItemsforPortOperatingContracts Arbitration Box 20:International Box 19:PortPerformanceIndicators Box 18:PortProduction Process Regulation Box 17:PriceCapversusRate-of-Return MODULE 6 y Julian of the World Bank Transport Division. Transport Bank World y Julian of the . g .or .ppiaf The Public-Private Infrastructure Advisory Facility (PPIAF) Infrastructure Advisory Facility Public-Private The the quality improve countries facility assistance aimed at helping developing PPIAF is a multi-donor technical sector involvement. private of their infrastructure through on the facility see the information more For site:Web www The Netherlands Consultant Trust Fund Trust Netherlands Consultant The Ministry Affairs French of Foreign The Bank World The (USA) MaritimeInternational Associates TEMPO),Mainport known Consultancy as (formerly Holding Rotterdam Municipal Port Rotterdam Management (The Netherlands) (The Maritime Group Rotterdam The Netherlands) Holland and Knight LLP (USA) ISTED (France) (USA) Nathan Associates (Chile) Latin America and the Caribbean for Commission Nations Economic United (USA) Consulting PA The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technical the financing thanks to and elaborated was prepared Toolkit Reform of the Port Edition First The organizations. following of the contributions We wish to give special thanks to Christiaan van Krimpen, Christiaan van to special thanks give wish to We John Koppies, of the Rotterdam Veldman and Simme Maritime Group, of ITF,and this work. to formerly Marges Kees their contributions for Marios Meletiou of the ILO Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure Trust and Infrastructure Transport Netherlands The from a grant through provided was also assistance Financial Transport, Ministry (Netherlands Fund of Works, of the the enhancement Management) for Public Water and content,Toolkit’s contracted. Maritime (RMG) were Group the Rotterdam of which consultants for Acknowledgments from of a grant assistance with the financial has been produced Toolkit Reform of the Port Second Edition This TRISP,a partnership the U.K.between Bank,World Department and the Development International for learning for and sharing of knowledge of transport in the fields infrastructure services. and rural The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel, Toolkit Reform and publishing of the Port preparation The Ronald Kopicki,“Bert” Cornelis Kruk, and Bradle welcome. are Comments Help Desk. Transport Bank World the Please send them to Fax: 1.202.522.3223. Internet:[email protected]

MODULE

6 MODULE 6 Port Regulation: Overseeing the Economic Public Interest in Ports SECOND EDITION

1. INTRODUCTION here is a strong public interest in ensuring that ports operate efficiently and safely, that fair and competitive services are provided, and that Tports support and foster economic development locally and nationally. The public interest in ports stems from the vital role that ports play as gateways of economic trade and commerce for most nations. In 2004, international seaborne trade totaled approximately 6.7 billion tons of international commerce, which corresponded to 27,635 billion ton-miles of maritime activities (Review of Maritime Transport, 2005 UNCTAD). With the globalization of the world economy, a nation’s economic competitiveness is linked increasingly to its ability to ship raw materials, intermediate goods, and final products efficiently and economically. Excessive port costs or delays can prompt investors to locate new production facilities in other countries or regions. In many countries, high port costs have an economic impact similar to a generalized import duty, increasing the cost of all imported goods.

The public is also interested in having ports that, without proper systems and safeguards, operate safely and with minimal environmental can result in serious and sometimes fatal injury impact. An oil spill within a port’s harbor can to port laborers or third persons present in the damage the coastal environment and devastate port. local fishing and tourism sectors for several years. Port operations involve the use of heavy Ensuring the efficient and competitive function- machinery and handling of dangerous cargo ing of a port in a context of limited or weak

267 Port Regulation: Overseeing the Economic Public Interest in Ports

competition is the purpose of economic regula- to changing demand. The module provides tion of ports. Economic regulation typically guidance on how to: involves intervention in the functioning of markets in terms of setting or controlling tariffs, • Identify regulatory requirements and revenues, or profits; controlling market entry or issues to be considered when developing exit; and overseeing that fair and competitive a port reform strategy. behavior and practices are maintained within • Design a port regulatory system. the sector. The determination of when economic • Formulate an institutional strategy for regulation of ports is necessary and how to tai- establishing the regulatory structure and lor the intervention to the particular port com- capabilities to perform the relevant regu- petitive environment is the principal focus of

MODULE 6 latory functions. this module. • Select appropriate regulatory techniques While not discussed at length in this module, and instruments under a spectrum of port there are other public interest concerns regard- reform options and competitive condi- ing technical, environmental, and social aspects tions. of port operations. These other areas include: • Prepare a checklist of items that need to • Technical oversight of port operations and be included in port reform concession or services, such as navigation and safety operating agreements. (for example, licensing of pilots, berthing • Specify operational and financial infor- rules, or emergency plans). mation necessary for monitoring per- • Environmental oversight of the disposal formance of terminal operators. of dredging spoils; discarding of haz- Public officials can use the module when initially ardous materials and liquids used in port formulating a port reform strategy or for estab- operations and maintenance; contingency lishing an effective postreform port regulatory planning for environmental and safety system. incidents; ensuring sound land-use planning and coastal preservation; and moni- 2. REGULATORY CONCERNS toring compliance with international WHEN FORMULATING A PORT standards for vessel wastes (for example, the International Convention for the REFORM STRATEGY Prevention of Pollution from Ships The decisions about reform strategy, industry [MARPOL]). structure, and regulatory frameworks are close- • Social or administrative oversight of the ly linked. Therefore, regulatory issues, options, equitable and just treatment of port and their consequences should be considered at workers, and review of labor contracts, the early stages of the reform process, and not health benefits, and working conditions. left until other key decisions about reform strategy have been made. As demonstrated by the In most instances, guidelines and procedures for reform experience in other sectors, to do so can oversight of these elements of the public interest increase the regulatory burden and cost, restrict have already been established and their effec- the range of options that may be available to tiveness is not materially altered by port the regulator, and risk incongruity between reg- reforms, although they need regular adaptation ulatory requirements and institutional capacity. and updating. Governments do not need to undertake detailed This module is intended to assist public officials design of the regulatory framework when they in designing an economic regulatory framework are first considering private sector participation. that will keep ports cost-effective and responsive However, they should take regulatory needs and

268 Port Regulation: Overseeing the Economic Public Interest in Ports costs—and their own regulatory capacity—into need to be addressed on a transaction- account when making choices about private sec- specific basis. tor participation. And when embarking on the All of these purposes are closely related. For first private sector participation in ports, it is example, as was shown in the Malaysian experi- important to consider whether the regulatory MODULE 6 ence at Port Klang, the failure to have an ade- system proposed for the first transaction will quate legal framework in place prior to the pri- preclude the regulatory options that might be vatization effort can impose substantial delays as most appropriate as private sector arrangements legislators debate legislative actions to facilitate become more common. A government that fails the privatization process. The continuing refusal to get the structural and regulatory package of the Sri Lankan government to corporatize or right from the outset can face an immensely privatize its publicly owned container terminal costly, time-consuming, and acrimonious in Colombo has delayed the necessary port process to rectify matters later. expansion for years. And Colombia’s failure to Considering regulatory issues before formulat- properly define anticompetitive behavior before- ing the framework of the contract has a number hand led to the need for the regulator to con- of important purposes: stantly solicit legal opinions before intervening.

• To avoid legal challenges to the privatiza- In many countries, the broad regulatory frame- tion program or transaction. work may not adequately support a private sector arrangement. Private sector ownership of • To identify any constraints in the law port assets may be prohibited by the legal sys- that would limit the ability to transfer tem. Tariff setting responsibility may reside services to private providers or the range within an operating port authority that would of options that might be available for the compete with the private operator. But govern- privatization approach. ments can still make private sector participation • To define the regulatory role of the gov- in ports work by taking one or both of the fol- 1 ernment in the reform and postreform lowing actions : effort and related institutional frame- • Choose a private sector arrangement that work. reduces the risks associated with deficien- • To anticipate the competitive environ- cies in the regulatory framework. For ment (the extent of competition) of the example, a fee-based management con- port sector and the need for competition tract may bring in technical capability monitoring or economic regulation. and management expertise if investment risks rule out a private sector interest in a • To consider the potential for restructur- concession. ing the port sector to make it more conducive to regulation by competitive forces • Develop appropriate regulatory capacities. rather than government oversight. For example, if the national law gives responsibility for asset ownership and • To determine the range of strategies that service provision to a level of government might be available to the regulator to that has limited capacity to regulate or is induce competition or discourage anti- vulnerable to short-term political interests, competitive behavior. consider separating ownership from regu- • To identify the form of interventions that latory oversight and locate the regulatory the regulator may take when anticompeti- body at a higher level of government. tive behavior occurs. Prior to undertaking port sector reform, the • To determine what issues not specifically public interest in ports has typically been vested addressed in the existing or proposed law in a public port authority. In a traditional port,

269 Port Regulation: Overseeing the Economic Public Interest in Ports

the public port authority provided all basic port (for example, the stevedoring companies services and functions (for details see Module 3). Estibadora Caribe and COOPEUNITRAP in There was no need for a separate regulatory Port Limon, Costa Rica). However, this type of agency as the public port authority was the insti- competition, applied within the framework of tution charged with operating the port as a pub- the tool port system, in general does not result lic monopoly consistent with the public interest. in stable labor relations and optimum port development (see Module 3). Under port sector reforms, many ports have evolved into landlord port authorities where Competition also helps ensure that the private facilities are leased to private operators, who in sector passes savings on to users and reduces turn directly provide their services to carriers opportunities for monopolistic abuses. A pri-

MODULE 6 and shippers. In this situation, private operators vate terminal operator can be presumed to be may provide services previously provided by the more tempted than a public port authority to public port authority, such as pilotage, tug exploit any market power that it may have. But assist, vessel stevedoring, cargo handling, stor- one should not forget that experience has age, and yard services. Private operators will be shown that public sector monopolies are often motivated by profit maximization objectives. stronger, more authoritarian, and noncompro- They may not necessarily provide facilities or mising than private sector monopolies. services that are of economic, environmental, or Moreover, they are often more difficult to fight social value if doing so would conflict with as they are either claimed not to exist or to be profit maximization. This creates the need for justified for the public good. As long as a mar- regulatory oversight to ensure that the public ket is competitive, private operators cannot interest is upheld. price much above their long-run marginal costs; 2.1. How Ports Compete they may be able to do so in the short run if demand temporarily outstrips supply, but only Generally, port-related competition can be for as long as it takes to provide additional defined as one of three types: interport, intra- capacity. If the markets are noncompetitive, port, and intraterminal. Interport competition however, public port or terminal operators are arises when two or more ports or their termi- often able to sustain prices well in excess of nals are competing for the same trades (for marginal costs whether they are located in example, New York and Halifax; Hong Kong developed or developing countries. In practice, and Singapore; Los Angeles, Long Beach, and governments consider such ports as “cash Oakland; or Rotterdam, Hamburg, cows” and are often reluctant to limit or lower Bremerhaven, and Antwerp). Interport competi- port tariffs and terminal handling charges. tion may be for origin-destination traffic or for Private terminal operators will equally be transit traffic. Intraport competition refers to a tempted to raise their tariffs above the level that situation where two or more different terminal is economically reasonable. In such a case, tariff operators within the same port are vying for the regulation by an independent regulator is the same markets (for example, Stevedoring answer, although the history of government reg- Services of America, Evergreen, and Hutchison ulation attests to difficulties in preventing mis- International Terminals in Manzanillo- use of the dominant position of such operators. Cristobal, Panama). In this case, the terminal operator has jurisdiction over an entire terminal When effective competition can be established area, from berth to gate, and competes with and maintained in the relevant markets and other terminal operators in the port. See Box 1 activities, privatization has proven to have great for a similar example of intraport competition potential for reducing costs and improving serv- in Buenos Aires, Argentina. Intraterminal com- ice quality. Without competition, privatization petition refers to companies competing to pro- can still bring some improvements, but the vide the same services within the same terminal gains are relatively limited.

270 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 1: Intraport Competition in Buenos Aires, Argentina ollowing the Ports Law of 1993, the to be met before the port authority imposed Argentine government decided to offer financial penalties. This percentage would concessions for six terminals at the increase in stages to 60 percent and 80 per- F MODULE 6 Puerto Nuevo Port Authority facilities. Bidders cent in subsequent years. In return, the termi- submitted separate technical and financial pro- nal operators would get the use of the public posals linked to anticipated tonnage. facilities, could provide whatever services they Essentially, those guaranteeing the most traffic wanted, and could set tariffs as they saw fit as with the best technical proposal would win. long as the tariff structure adhered to the one Five concessions were awarded, but only two prescribed by the port authority. concession holders would control facilities While great attention was drawn to the ter- capable of handling containers. minals within the confines of the city, another Single operators were charged with operat- port facility was being developed in South ing their respective terminals, controlling the Dock, just outside the city under the jurisdic- entire berth-to-gate operation. Upon the take- tion of the Province of Buenos Aires. Bidders over of the terminals by the successful bid- at Puerto Nuevo were aware of this site and ders, the terminal operators had to plan, had discounted the possibility that it could be finance, and commission extensive civil struc- converted to a full-fledged container terminal. ture improvements and undertake heavy However, a consortium of local and foreign equipment investments. Meanwhile, they investors was granted a 30-year concession became immediately liable for their payment for South Dock by Buenos Aires Province on obligations to the port authority. As part of terms far more favorable than those afforded their concession obligations, terminal opera- the Puerto Nuevo operators by the federal tors had to pay the port authority concession government (see also Module 4, Box 20). payments based on $4 per ton for imports and The Puerto Nuevo bidders were obviously $2 per ton for exports. They were also prohib- concerned with the entry of another competitor. ited from pricing collusion, and would have to Container growth was projected to be some- adhere to safety and environmental legislation. what modest given available capacity, so com- And, in an effort to mitigate the impacts on for- petition had already developed to a high level. mer port authority employees, the terminal Due to labor cost savings and lower wharfage operators had to agree to employ some of the fees, the South Dock facility had lower costs former employees or, alternately, provide a than Puerto Nuevo operators at $40 per move.a severance payment program. As a result, the In 1997, the South Dock terminal handled terminal operators all began operations with 366,000 TEUs, compared to 600,000 TEUS overstaffed work forces. handled at Puerto Nuevo facilities. The concession agreements contained per- Source: Author. formance guarantees; in the first year, 40 per- a 1997. “Terminal velocity.” Containerization International cent of established target volumes would have June, p. 95.

2.2. Assessing Port Sector anticompetitive behavior may occur. When these Competition conditions exist, the framework serves effectively as a red flag to indicate to the regulatory This section presents a conceptual framework authority that the situation should be closely for assessing the extent of competition within a monitored. Alternatively, the framework could port sector. The conceptual framework may be be applied when complaints are received to used when deciding the optimal form and scope determine if in fact there may exist sufficient of port modernization or in determining whether grounds for the complaint. Factors indicative of regulatory intervention may be warranted after the extent of market competitiveness include: modernization. The framework is not intended to determine definitively that a particular port or • Transport options. terminal operator is engaged in anticompetitive behavior. Instead, it indicates conditions where • Operational performance.

271 Port Regulation: Overseeing the Economic Public Interest in Ports

• Tariff comparisons. the market power of this port (or its capability to increase the price) would be limited if other ports • Financial performance. could provide an attractive alternative and keep Box 2 presents an overview of the key elements competitive pressure on the other port’s prices. of a conceptual framework for considering these factors. Each of the framework’s salient The availability of competitive options is based features is described below. not just on the existence of a physical service alternative, but on overall transport system costs 2.2.1. Transport Options (land and port). Thus, the first step in assessing the competitiveness of the port and transport sys- The most important indicator of competition is tem is to identify the lowest cost option. Then, the degree to which a shipper has transport

MODULE 6 the competitiveness of each option is determined options (substitutes). The choices or options by comparing it to the lowest cost option, available to a shipper or consignee largely deter- defined here as cost proximity. A cargo flow that mine the extent of competition within the port moves through a system with many options and sector. In examining options, one should analyze possessing close cost proximity (small cost differ- a specific cargo flow as defined by cargo type, entials) faces a highly competitive market setting. shipping characteristics, inland point, and direc- Conversely, if there are few options and the cost tion (import or export). The number of options differentials among the options are large, the is defined according to the technical capabilities market setting is defined as noncompetitive. of the ports and their available inland connections. For example, there may be situations in 2.2.2. Operational Performance which one port has already captured a large share of the cargo market. One might, therefore, Operational performance indicators can be used label this as a noncompetitive market. However, to assess the relationship between supply and

Box 2: Port Sector Competition Factors

Hinterland Tariff Port Cost Financial Analysis Analysis Analysis Analysis

Analytical Hinterland Port Model Port Port Financial Modules Transport Charges Tariffs Costs Performance

Indicators of Port Congestion

Transport Berth Port Inputs for Profitability the model Alternatives Performance Costs/Tariffs

Evaluation Multiple Acceptable Reasonable Acceptable Criteria Options Performance Costs Levels

Results Only One Congested Very High or Negative Option Port Low costs Finan. Eval.

Source: Author.

272 Port Regulation: Overseeing the Economic Public Interest in Ports demand for port services in a particular country. operational reports. The ship waiting indicator Presumably, a chronic shortage in supply indicates is calculated as the average waiting hours per a possible tendency toward monopolistic practices ship, by type of commodity. Average waiting by a port or terminal operator. However, using the time is also sometimes compared to average supply-demand relationship itself as an indicator time at berth to produce the ship-waiting rate. MODULE 6 may be inadequate because of difficulties in direct The various elements contributing to the wait- estimation of these two market factors. ing time should be analyzed to allow the port authority to precisely identify cases whereby it Instead of the throughput-capacity (supply- was the result of nonavailability of port facili- demand) ratio, two measures that can indicate a ties or equipment. Practitioners should be aware potential shortage in supply of port services can be that terminal operators are increasingly seeking used: berth occupancy and ship waiting for berth. to acquire the ability from port authorities to Both measures are, in fact, two different aspects of offer guaranteed priority berthing windows to one phenomenon, port congestion. Berth occupan- secure long term contracts with some of the cy has a direct relationship to capacity utilization larger main line vessel operators. in ports where the berthage is the limiting factor of terminal capacity. This, however, is usually not Berth occupancy and utilization and wait time the case in container terminals, where the limiting are strong indicators of undercapacity, which in factor is often the container storage capacity of the turn may indicate the absence of significant yard. Nevertheless, even in container terminals, competition. berth occupancy provides a good indicator for 2.2.3. Tariff Comparisons capacity utilization. To provide a more telling picture of a port’s operational performance, berth The objective in examining tariffs is to determine occupancy should be complemented with the if the tariff level of a port is within a reasonable berth utilization ratio, which compares the range. Presumably, abnormally high tariff levels amount of time ships are worked at berth to the in a port indicate a tendency to exert market total time that the berth is occupied, and with the power and employ unfair trade practices. This berth productivity ratio, relating berth occupancy inflates total port costs, which include charges to time and berth throughput. shipping lines and cargo. The calculation of port costs should be based on a representative basket Ship waiting has a direct relationship with berth of basic services and their respective charges. occupancy. When occupancy is low, there is usually no (or minimal) ship waiting. However, An indication of whether tariff levels are within at a certain occupancy level, waiting begins to a reasonable range can be based on three com- increase very rapidly. Thereafter, a small parisons. The current rates of the port under increase in the level of berth occupancy results consideration are compared with: (1) historical in congestion and long waiting times for ships. rates of the same port, (2) rates (tariff differen- Although these two indicators are closely relat- tials) at other ports in the same country, and (3) ed, both can be examined to obtain a more theoretical rates based on model port costs. comprehensive assessment of port congestion. Historic rates measure the difference in port costs between the time of analysis and the past, The input data for berth occupancy are typical- either in the previous year or before a recent ly readily available from operational reports rate increase. Differences in port costs (tariff generated by the ports or terminal operators. differentials) are examined by comparing a spe- The occupancy indicator should be calculated cific port with the average of the country’s ports separately for container, general cargo, and bulk that handle the same cargo (including the port ships. For vessel waiting time, the input data under consideration). Model port costs measure are also typically available from port (usually the difference between the actual and theoreti- the harbormaster’s office) or terminal operator cal costs of a specific port based on a port cost

273 Port Regulation: Overseeing the Economic Public Interest in Ports

model that generates the model costs for a benefits of free trade associated with reduction of country’s ports in general. import duties and removal of trade barriers may be offset by the inefficiencies of an improperly reg- 2.2.4. Financial Performance ulated and noncompetitive port sector.

A variety of financial performance measures can In some instances, port reform efforts have be used to examine whether a port has been transferred public ports to single private opera- earning abnormally high profits. The assump- tors, thereby creating private monopolies for local tion here is that abnormal profits may indicate port services. This type of transfer does nothing a noncompetitive market setting and the possi- to lessen the vigilance governments must maintain bility that a port is engaged in anticompetitive if abuses of market dominance are to be avoided. behavior (taking advantage of dominant market MODULE 6 Box 3 presents the experience of Israel, which power). Economic theory maintains that suppli- dissolved its national port authority in favor of ers possessing monopoly power tend to charge individual port operating companies for its three prices that exceed marginal and average costs. ports. Similarly, in Mexico terminal operations at the ports of Veracruz and Manzanillo were trans- Ideally, a competitive assessment should be based ferred to private operators. However, due to the on the comparison of price and marginal cost. lack of interport or intraport competition, port However, direct measurement of the difference users have repeatedly complained about high between price and marginal cost is impractical. tariffs and have requested that a regulatory The financial profit (net income and earnings) of institution be established to limit the monopolistic a port is used as a proxy for the difference position of terminal operators.3 between market price and marginal cost. Presumably, abnormally high profits indicate a Due to the nature of the sector, it is common that noncompetitive setting that, in turn, suggests the even when competition for port services is strong, possibility of anticompetitive behavior. The level there may be only two or three direct competitors. of profit is usually compared to some measure of Thus, market shares and concentration ratios investment. Two common indicators that relate measured by traditional antitrust techniques profit to investment are return on equity and would typically be high. In most circumstances, a return on assets, and both are typically found in high industry concentration indicates that condi- port financial statements or can be calculated tions are such that they may encourage anticom- from data readily available from the port.2 petitive practices (see Box 4). For example, having 2.3. Costs of an Inadequate few competitors invites pricing collusion, agreements to allocate customers or geographic Regulatory Framework territories, or the establishment of cartels or Failure to provide an adequate economic regulato- boycotts, all of which are typically prohibited in a ry framework can be very costly in terms of ineffi- country’s antitrust legislation. Having one domi- cient and high-cost port services. In many coun- nant firm may also encourage predatory pricing, tries, excessive port costs function like an addi- another practice that is typically prohibited. tional import duty on all goods entering the country and a tax on exports. Excessive port costs After pressure from the European Union, reduce the competitiveness of a nation’s products Maersk Line (APM Terminals) and P&O in world markets and can stifle economic growth Nedlloyd were allowed to operate two compet- and development. In fact, shipping lines or confer- ing terminals. The take-over of P&O Nedlloyd ences may further compound the unfavorable by Maersk Line however, has created the next effects inefficient ports have on a nation’s economy problem, as these large terminals are now by imposing penalty surcharges to offset the carri- owned by one common shareholder which, er’s operating costs and disruptions to its service again, might violate EU competition rules. In rotation or itinerary. Unfortunately, the anticipated Antwerp, competition between the original

274 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 3: The Case of Israel: From National Monopoly to Port Monopoly srael’s Shipping and Port Authority Act of The law also created a Shipping and Port 2004 introduced a new port management Authority as a governmental unit within the structure with the objective of introducing Transport Ministry. Its responsibilities include I MODULE 6 more competition in the country’s port sector. advising the minister on port service levels, The existing Israel Ports Authority, owner and infrastructure planning and development, and operator of Israel’s three commercial ports, systems and port facilities, and the drafting of was disbanded and various new port authori- port regulations. ties were established. In addition to the above, the legislation and The main elements of the new law included: subsequent ministerial regulations created the • All Israel port authority assets were returned position of port manager with (harbormaster’s) to the government (including ownership of responsibilities such as vessel traffic control, port port land, financial assets, equipment, mate- clearance, aids to navigation, and marine works. rials, and superstructure). Analyzing this port management structure it • All existing employees were transferred to is evident that: newly created government companies (see • The various port companies in Haifa, Ashdod, below), with existing salary and working and Eilat are virtually monopolists within their conditions guaranteed. respective port areas, and in practice they will • Port property rights were transferred to the allow only limited intraport competition. Israel Ports Company (100 percent owned by • The development of the ports still is a nation- the government), which would lease or con- al issue under the Israel Ports Company, cession port land to port operators while the which acts as a national landlord. legal ownership remains with the government. • The port companies are also responsible for • All movable assets and facilities and out- marine operations, which may give rise to a standing obligations and liabilities were conflict of interest in the event that more transferred to the appropriate companies in intraport competition is allowed in the future. the various ports. • The functioning of the port manager is highly The new government-owned (limited liability) impaired as the marine department’s activities port operating companies, one for each port are part of the respective port companies. (Haifa, Ashdod, and Eilat), were tasked with • The entire structure will generate many com- the management of the existing terminals as petence problems. well as the maritime services, including traffic • Fair competition within this structure is limited. control, pilotage, and towage. Source: Author three major container operators (Hessenatie, September 2005. All in all, major global termi- Noord Natie and Seaport/Katoennatie) has nal operators and shipping lines acquired a sub- always existed, but because of the need to gain stantial stake in Antwerp’s container terminal in scope and scale, the two main operators have business, thus enhancing intraport competition. merged into Hesse-Noord Natie. To cope with growth, Antwerp has built a new tidal contain- It is the growing scale of the users that makes er port, the Deurganck dock, on the left bank, larger scale operations in ports imperative. With doubling its handling capacity. On the west side this pressure for increased size, one might ask of the Deurganck is Antwerp International whether any regulatory framework can ensure Terminal – operated by PSA Hesse-Noord Natie the continued existence of more than one con- – which started operations in December 2005 tainer terminal operator. One should keep in and will be fully completed by 2007. To the east mind that in the early years of 2000, the top is the Antwerp Gateway Terminal – operated by two Antwerp terminal operator consortiums DPW-owned P&O Ports, Cosco Pacific, P&O mentioned above, Hesse-Noord Natie and Nedlloyd (now owned by Maersk), CMA-CGM Seaport/Katoennatie, handled more than and Duisport – which started work in 1,000,000 and more than 2,000,000 TEU per year

275 Port Regulation: Overseeing the Economic Public Interest in Ports

respectively. Thus, the nominal size of their cial behavior requires a regulatory institution throughput does not explain the merger in itself. to prevent the acquisition and exploitation of excessive market power. Even without In an unregulated market, profit may be sought cartelization, wherever there is a financially through the creation of a stevedoring company strong incumbent in a market, there is a danger cartel to exclude competitors from access to that anticompetitive behavior will occur facilities. Controlling anticompetitive commer- (see Box 5).

Box 4: Potential Anticompetitive Behavior in the Port Sector n the absence of economic regulatory over- tending to foreclose competitors from need- sight, a port operator with a dominant or ed resources or outlets. MODULE 6 Imonopoly position could attempt to engage • Raising rival’s cost: Increasing the cost of in the following anticompetitive practices, services required by a rival to place it at a driving out potential competitors and increas- competitive disadvantage. ing costs to port users and the economy at • Exclusive dealing: Requiring suppliers to sell large: only to them and not to any potential com- • Price gouging: Using monopoly power to petitor. An example would be restricting a charge excessive tariffs for port services. tugboat company from providing service to • Service bundling: Extending monopoly a rival terminal. power in one area of port operations to • Predatory pricing: Selling services below another potentially competitive area (also cost to induce a rival’s exit from the market, referred to as tying arrangement). For deter future entry, or dissuade a rival from example, a terminal operator’s extension of future competition. An example would be a monopoly position in the provision of temporarily lowering container handling cargo handling to require use of their charges below long-run marginal costs to tug assist services rather than obtaining force a rival out of business. those services from an independent • Price discrimination: Similar to predatory provider. pricing in that selective price discrimination • Increasing entry barriers: Constructing hur- by a powerful seller can eliminate competi- dles to increase the share of the market tion or otherwise entrench the discriminating needed to operate at maximum efficient seller’s monopoly power. scale, raising absolute costs of entry, or by Source: Author.

Box 5: Predatory Pricing and Service Bundling in Cartagena, Colombia aw 1 of 1991 placed the responsibility for The Cartagena Society felt compelled to the direct administration of Colombia’s offer stevedoring services as their own busi- L public ports in the hands of regional port ness because that is what its nonregional port societies, which were private sector entities with society competition was doing. For example, a the state entitled to up to 30 percent of the total private port in Cartagena (El Bosque) offered shares of the society. To induce investment in pilotage, tug assist, stevedoring, and storage gantry cranes, the Cartagena Society received services, and could thus price the services at permission to provide cargo handling services in an all-in-one price. It was later alleged that El addition to the provision of crane services. This Bosque was offering tug assist and pilotage at would mean that not only would they compete no cost to the carrier to attract their business. with the already existing stevedoring companies, If true, this bundling could constitute a preda- but that also they had a clearly advantageous tory pricing practice in Colombia, which the position: they could bundle their service charges port superintendent would resolve by setting for an array of services offered from berth to the prices for all of the pilotage and tug com- gate, a strategy that could not be matched by panies in Cartagena. the stevedoring companies since they could Source: Author. offer relatively limited services by comparison.

276 Port Regulation: Overseeing the Economic Public Interest in Ports

3. STRATEGIES TO ENHANCE intended to improve efficiency by correcting PORT SECTOR COMPETITION various market imperfections; essentially, they are aimed at forcing ports to behave as if they The previous sections presented the important were competing in a competitive market. Due to considerations for determining conditions in high market concentrations, some form of regu- MODULE 6 which anticompetitive behavior may exist. The lation is often appropriate regardless of the lack of transport options, congested facilities, rela- structural strategy.4 Box 6 shows how structural tively high prices, and high profits alone or in and regulatory approaches give rise to potential combination may encourage terminal operators competition enhancement strategies. and other port service providers to breach the threshold of what may be regarded as acceptable 3.1. Structural Strategies competitive behavior. This section provides a dis- Experience suggests that many of the benefits cussion of port sector restructuring strategies that from involving the private sector stem from com- can be used to enhance competition within the petitive pressures, not just the presence of a pri- port sector, an overview of regulatory strategies vate owner.5 Competitive pressures also affect the and remedies to enforce port competition stan- amount and appropriate form of sector regulation dards, and a decision framework for selecting port needed: the more competitive pressures are competition enhancement strategies and remedies. brought to bear on private operators, the less reg- Port sector reformers have two general ulation may be required. So governments—even strategies to choose from when considering how those with substantial regulatory capacity—stand to enhance port sector competition (Box 6): to gain a great deal from introducing as much structural and regulatory. Clearly, the preferred competition as the port’s traffic and facilities allow. strategy is the one that results in more competitors. In a perfect market, characterized by a Competition becomes increasingly likely as an large number of buyers and sellers, the extent of industry becomes more disaggregated. The more competition is optimized so prices reflect market the system can be structured to allow entry at efficiencies. Therefore, port sector reformers, in different levels, the more competitive pressure contemplating port reform, should strive can be introduced. And the more competitive toward structural enhancements that increase pressure there is, the less the need for regulatory the number of competitors before resorting to intervention.6 As discussed later, extensive regulatory enhancements. Regulatory enhance- unbundling may mean sacrificing efficiencies the ments (particularly economic regulation) are operator may gain through the bundling of

Box 6: Competition Enhancement

Competition Competitive Enhancement Enhancement Strategy Remedies

Structural S1-Introduce new berths/terminals S2-Divide existing port into terminals S4-Short-term operating agreement/ Competition lease/management contact Diagnosis

R1-File/monitor tariffs Regulatory R2-Set tariffs/profitability limits

Source: Author.

277 Port Regulation: Overseeing the Economic Public Interest in Ports

services, particularly within the terminal area handling techniques most often do not actually (defined as the area between the berth and the allow for efficient intraterminal competition. gate). For this reason, “terminalization,” where Even though the private sector investment a single operator controls the berth-to-gate would normally be greatest under these compet- operation, is frequently the preferred approach itive circumstances, the private sector also has (with the level of economic regulation depend- the ability to capture a wider range of revenues. ing on the competitive setting, either within the For example, in interport competition, ports port itself or coming from the outside). will compete for the entire handling charge of perhaps $200 per container, which captures Establishing competition for port services revenues from the sea buoy to the gate. The requires three steps. The first step is to examine value of the handling charge when intraport

MODULE 6 closely the structure of the sector, assessing competition is present might decline to perhaps market conditions and how the services may be $150 per container (berth to gate), and even restructured. The next step is to implement the further to $100 per container when intratermi- port sector restructuring, creating opportunities nal competition (berth only) is present. for competition in one or more segments of the Competitors in an interport context have a port sector. If unfettered competition is possible, much greater span of pricing strategies for the process ends. If only limited scope for capturing their markets, meaning that at the competition exists, the third step involves estab- lowest level (intraterminal competition) rivals lishing regulatory oversight to maintain fair will have a much smaller range of pricing flexi- competition and to protect port users. The bility when it comes to their ability to formulate extent of restructuring, the exact nature of com- strategies for capturing the activity. In short, petition, and the objectives of regulation depend competition at this level is vying for a much upon the physical, institutional, and market smaller piece of the pie. characteristics of the sector. Also from an efficiency standpoint, having a Port restructuring involves trade-offs. Where single operator per terminal tends to be prefer- economies of scope exist, it may be cheaper for able because of the direct control the operator a single terminal operator to produce and deliv- would have over the range of activities from er two or more terminal services jointly than for berth to gate. In addition, because of greater separate entities to provide services individually. revenue capturing ability, a greater investment A bundled sector, where all services are organ- can be leveraged from the operator assuming a ized under one umbrella, also known as a mas- concession period adequate for full investment ter concession as discussed in Module 4 of the cost recovery. However, if cargo volume is Toolkit, allows exploitation of economies of sufficient to support only one operator, then scope and eases coordination and efficiency government has to weigh the trade-offs between among intermediate input suppliers and final granting a monopolistic position to the sole service providers. An argument against restruc- operator versus the potential loss of efficiency turing also applies when a single provider bene- resulting from intraterminal competition. For fiting from economies of scale is split up to the intraterminal competition option, mainly induce competition. However, even in such prevailing in the tool port system (see Module cases, gains from economies of scope and scale 3) for general cargo traffic, revenues are collected need to be weighed against benefits of cost-min- only from vessel stevedoring. In France, imization due to competitive pressures.7 intraterminal competition was promoted and terminal areas were dedicated to different oper- Typically, the private sector would prefer to ators. The result, however, was a very inefficient engage in interport or intraport competition operation. Ultimately, because of competition rather than intraterminal competition, and this from more efficient European ports, this is understandable because modern cargo arrangement was abandoned.

278 Port Regulation: Overseeing the Economic Public Interest in Ports

3.2. Structural Remedies Box 7: Dividing the Port into Terminals to There are a number of actions governments and Induce Competition port authorities can take to enhance competi- port can be divided into terminals tion. Several key issues are discussed below.

through the allocation of berths (for MODULE 6 example, one terminal per berth). Berth One way to improve competition is to introduce A length in older ports may not allow for this, new berths or terminals. The availability of this however, depending on the characteristics of option is largely dependent on the existence of a vessels calling at the port. For example, suitable site for port expansion as well as suffi- assume that an older port consists of two cient volumes to justify capacity expansion. Many berths, each having a berth length of 122 ports do not have expansion possibilities adjacent meters. The two berths together can accommodate 2,400 TEU vessels, the typical feeder or in close proximity to existing facilities for a vessel size today; but one berth alone cannot variety of reasons, including limitations imposed accommodate such vessels, thereby negating by terrain or urban encroachment, or lack of suf- the possibility of dividing the port into sepa- ficient land. Alternative expansion possibilities rate terminals. The anticipated future fleet may also be relatively costly, requiring substantial characteristics, therefore, are important factors in deciding whether to divide a port into cargo volumes for cost recovery. This is particu- separate terminals. larly true if the port expansion is to be achieved To overcome this limitation, the port can still via land reclamation, or if the new facility is a be divided into terminals, say one for container, greenfield, requiring additional investments in and the other for breakbulk, where priority is land access and utility infrastructure. given to one type of operation over another. For example, the breakbulk operator under the Dividing an existing port into competing termi- terms of its contract could be required to for- nals, or terminalization, is another way of feit its rights to its berth area when a container vessel calls. Typically, container vessels are enhancing competition. Terminalization given first-berth rights in ports due to their involves dividing existing port facilities into sep- relatively high cost of operation, the higher arate terminals, each leased or concessioned to revenue impact on the port, and the sensitivity a different operator. The facility’s configuration of delays on their remaining itineraries. and structure may limit the ability to pursue Source: Author. this option, particularly for purposes of establishing gate access for each operator, and building heavy load bearing structures8 and berths nation or could bar the incumbent from rebid- (Box 7). This measure, of course, generally ding at contract expiration. assumes there is sufficient volume to support more than one terminal handling the same Where markets consist of large cargo volumes, cargo type (for example, two dedicated contain- countries will not encounter difficulty in gener- er terminals). For further information, Box 8 ating interest in concessions by the international presents an example of how the terminalization maritime community. While there is a relatively may be implemented when traffic volumes do small number of companies today engaged in not justify two container terminals, and Box 9 operating terminals outside their native coun- discusses how subsidy bids may be used for tries, there are also instances of smaller compa- management contracts when low cargo volumes nies within a region that are seeking investment would not otherwise generate bids. opportunities elsewhere. For example, smaller- scale companies from Argentina and Colombia Competition from the market occurs when pri- are seeking port investment opportunities else- vate sector operators bid for a concession, lease, where in Latin America. At the same time, both or management contract. Indeed, contracts typi- large international companies as well as their cally contain minimum performance standards, smaller regional counterparts will often seek which if breached, may result in contract termi- local joint venture partners due to political con-

279 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 8: Terminalization in Limited-Volume Ports: The “Overlapping Competition” Strategy any ports may have facilities that are breakbulk operator can encroach successfully well suited for pursuing a terminaliza- on the container business. Why? Because to Mtion strategy. Whether this strategy can reduce the cargo handling charges, a vessel be executed depends on the size of the mar- with its own gear may prefer to call to a termi- ket for a particular cargo type. Large container nal not offering gantry services. Moreover, the markets, for example, of 1.5 million TEUs can load-bearing capacity of most breakbulk termi- typically justify five single-berth terminals nals can accommodate mobile cranes; many served by two gantry cranes each. But how ports today have the mobile cranes working can a port induce competition where the vol- alongside the ships’ gear. Though overall han- ume (for example, 150,000 TEUs) can only jus- dling productivity is not as high as gantry serv- tify one container terminal? One method is to ices, it is sufficient to divert some cargo from MODULE 6 use the “overlapping competition” strategy. fully dedicated container terminals for vessels Here’s an example of how it can work: The not requiring the more expensive handling port’s facilities can be divided into two single-berth equipment. Though not commonly done, it is terminals; one can be dedicated to container han- also possible for the container terminal to dling and the other to breakbulk. Each terminal is encroach on the breakbulk business. If the concessioned to an operator. The concession container terminal has excess capacity and agreements can be structured so that either oper- low berth utilization, it can fill the revenue void ator can handle the other’s cargo. Certainly, each by handling breakbulk cargoes as long as it terminal’s cargo will be dominated by the type of does not interfere with its core business. cargo for which the terminal is dedicated. Source: Ashar, Asaf, and Paul E. Kent. 1996. Diseo de Plan Nevertheless, the breakbulk operator can attempt de Expansin Portuaria en Buenaventura (Design of a Port to compete for the container business as well. Expansion Plan in Buenaventura). Sociedad Portuaria Regional de Buenaventura, Buenaventura, Colombia (this Although most breakbulk facilities are not strategy was recommended as part of an effort to induce designed to accommodate gantry cranes, the competition at the Port of Buenaventura, Colombia).

siderations as well as the local partner’s clearer pricing discrimination: in the former, terminal understanding of the peculiarities of the local operators owned by carriers (or their holding law, culture, and operating environment. companies) may offer preferential berthage rights to their own carriers, while in the latter case they Because of the mutual benefits accrued from may offer discounts to their own carriers. More joint local-international partnerships, govern- importantly, a carrier-operated terminal will have ments should encourage such partnerships by access to proprietary data (for example, cargo minimizing overly stringent prequalification cri- manifests) that identify shippers (importers and teria. For example, some countries have in the exporters) served by another carrier calling at the past imposed the same qualification criteria on terminal. Carriers are thus reluctant to call at car- all parties of a joint venture when, in fact, it is rier-operated terminals if other options (other ter- only necessary for one of the partners to satisfy minals) exist. Governments should be aware of the minimum qualification standard. such potential practices of carrier-operated termi- Countries should also be aware that vessel opera- nals and can discourage such behavior in the con- tors might emerge as part of the responding bid- cession agreements (for example, operator billings ders. Today, increasing numbers of carriers are being subjected to audits). Box 10 presents a sum- emerging as terminal operating companies (for mary of some of the key issues and analyses that example, Maersk, COSCO, MSC, CMA-CGM, should be addressed when preparing a strategy for and APL). Although these carriers may create sub- port sector restructuring. sidiaries to operate terminals, there is an inherent conflict of interest in their participation in both 3.3. Regulatory Strategies shipping and terminal operations activities because Even when structural strategies are employed to there is the potential to engage in service or enhance competition in the port sector, regulatory

280 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 9: Subsidy Bids for Management Box 10: Checklist for Port Sector Contracts in Low-Volume Ports Restructuring or Unbundling nder certain circumstances, cargo vol- he following are issues to consider when

umes may be so low that solicitations will assessing the suitability and potential MODULE 6 Unot generate any responses to tenders. T benefits of port sector restructuring: Regulators in these circumstances can take a • Is there current or potential interport com- lesson from the approaches used in the utility petition? sector where the government awards a conces- • Is there a specialized private port facility sion for utility services in a low demand environ- nearby that could compete for public traffic ment (for example, telephone services in rural if granted permission to handle general areas) through what is called a “subsidy” bid. cargo or containers? In the port sector, management contracts • Is the inland transport network adequate to typically obligate the port authority to pay a provide competition from another regional charge per unit cargo handled by the operator. port? The port authority bills the shipper and carrier, and these revenues would be used to offset the • Is port traffic sufficient to permit intraport cost of paying the operator. But in low-volume competition? Is any of the terminal owned or ports, the revenues derived may not be sufficient operated by a shipping line that might not for the operator’s full cost recovery plus profit. provide universal service to other carriers? Under these circumstances, port authori- • Is there more than one firm capable of pro- ties may have received subsidies to cover the viding cargo handling services? cost of their operation (particularly true for • Can licensed, private operators provide life-line service or cabotage and interisland vessel services such as pilotage, towing, service ports). Therefore, the solicitation may and berthing? consist of two bid items: the first setting out • Can private providers compete for cargo the charges the operator would impose on handling and storage contracts? shippers and carriers on a per unit or volume • Is the port layout sufficient to support com- basis, the second setting out the subsidy peting yard operations? payment that the operator would expect from the port authority. Offers consisting of a com- Source: Author. bination of the lowest charge and subsidy would be awarded the contract. Source: Author. operational setting and market outlook. Establishing a productive relationship between regulators and planners can be problematic measures may still be required. Economic regu- given the sense of ownership that many port latory measures typically used within the port authorities have over their facilities. The port sector fall within two categories: planner’s most efficient operational strategy • Tariff filing (or R1 in Box 6) would be may run counter to the antitrust concerns of the required by the regulator to monitor for regulator. At the same time, the port planner anticompetitive behavior.9 and potential operators should be made aware of the regulatory environment that they can • For other operational settings, setting tar- expect after contract award. The ultimate strat- iffs10 (or R2 in Box 6) may be necessary egy selected would logically reflect a balance if there is a high risk of monopolistic between the need to promote operational effi- behavior. ciency (the planner’s perspective) and the need In contemplating the need for regulation, it to avoid antitrust behavior (the regulator’s per- should also be emphasized that regulators spective). This, in turn, reflects the conflict should communicate with port planners to between the goal of efficiency gains from the determine what regulatory and operational scale of economies (size) versus increasing the measures are most appropriate given the port’s number of competitors by dividing them into

281 Port Regulation: Overseeing the Economic Public Interest in Ports

smaller units (for example, single port operator ures that should be undertaken given the versus multiple terminal operators). port’s operational environment and extent of competitiveness. 3.4. Decision Framework for Selecting Port Competition: Each of the elements of the decision framework is discussed in more detail below. Enhancement Strategies and Remedies Setting. This is the port’s operational and physi- Box 11 presents a decision framework for cal environment as it pertains to the port’s rela- selecting port competition enhancement strate- tive size, the scale of its facilities, and the cargo gies for a variety of port conditions and com- volume handled. The scale of facilities is present- petitive environments. The decision framework ed in terms of number of berths, but it should be MODULE 6 includes three major elements: emphasized that this is intended to represent only an order of magnitude. That is, while a port with • “Setting” refers to the operational envi- only one to three berths is certainly small, a five- ronment in which the port exists, specifi- berth port could be small as well. Similarly, a 22- cally regarding the port’s relative size, berth port can be considered large, but so is a number of berths, and cargo volume. 50-berth port. The competitive conditions • “Diagnosis” refers to the criteria described encompassed in the three elements are the same, earlier in this module that serve as indica- be it a 22-berth port, or a 50-berth one. tors for measuring the extent of competi- For example, in determining if the relative vol- tiveness existing in the sector. These include ume of a port is low, the port planner will transport options, berth utilization, tariff know the extent of excess capacity (if any) the competitiveness, and profitability. port may have in quantitative terms given the • “Solutions” refer to the previously existing throughput and projected outlook for a described structural and regulatory meas- specific cargo type (for example, containers).

Box 11: Decision Framework for Port Competition Enhancement

Setting Diagnosis Solutions Operational Environment Competitiveness Indicators Competitive Port Facility Transport Berth Relative Tariff Port Remedies Setting Setting Volume options utilization competitiveness profitability Structural Regulatory

1 berth low 1 low N/A low S4 R1 small 1 berth medium 1 medium N/A medium S1 R1 port 2 berths high 3,4 high N/A high S1 R1 3 berths high 1,2 high N/A high S2 R1 S2 R2 3 berths medium 1 medium N/A medium S2 R1 12 berths low 1,2 low N/A low S2 R1 medium 12 berths medium 1,2 medium N/A medium S2 R1 port 12 berths high 1,2 high N/A high S2 R1 12 berths high 3,4 high N/A high S1,S2 R1 12 berths high 5 low similar rates medium S2 N/A 22 berths high 1 low N/A low S2 N/A large 22 berths high 3,4 high N/A high S1,S2 R1 port 22 berths low 3,4 low N/A low S2 R1 22 berths medium 5 medium similar rates medium S2 R1 22 berths low 5 low lower low S2 N/A

Transport option codes: Structural codes: Regulatory codes: 1 - No other ports or intermodal options S1 - Introduce new berths-terminals R1 - Fle/monitor tariffs 2 - No possibility for facility expansion/construction of a new port S2 - Divide existing port into terminals R2 - Set tariffs/profitability limits 3 - Possibility to expand existing facility S4 - Short-term operating agreement/lease/ 4 - Possibility to construct a new port/terminal nearby management contract 5 - Other port or intermodel options Source: Author.

282 Port Regulation: Overseeing the Economic Public Interest in Ports

If there is significant excess capacity, then cargo the need to even close some berths and volume is low relative to the port’s capacity and place them into reserve. Placing excess is so described in Box 11. If there are, or poten- capacity into reserve status reduces the tially could be, capacity shortages, then cargo port’s maintenance costs while at the volume is described as high. same time facilitating ease of entry as vol- MODULE 6 umes increase. Diagnosis. This identifies the most important criteria for assessing the extent of competition that • The situation changes in a scenario of a exists. Recall from earlier in this module that the medium-sized port with a high-volume lack of existing or potential transport options, setting and interport or intermodal com- high berth utilization (as a measure of congestion), petition, excess capacity (as indicated by high tariff levels (relative to competitors), and high low berth utilization), competitive rates, port profitability are conditions that may indicate and medium profitability. Here, the pre- or encourage anticompetitive behavior. ferred solution is to divide the port into competing terminals. Solutions. The diagnosis of the competitive • A large port with no competition, high environment in light of the port’s setting defines volume, low berth occupancy, and low the potential operational and regulatory solu- profitability points to terminalization tions for enhancing port sector competitiveness. (again, with possible berth closures) with- This represents the course of action that the out the need for tariff filing as the excess port planner and regulator may take. capacity allows for easy entry if pricing The decision framework can be used to select becomes monopolistic. port competition enhancement strategies and • A setting with medium volume, medium remedies. Referring to Box 11, consider a small berth occupancy, medium profitability, port consisting of three berths and high volume. and similar rates to competitors’ offers the This is the only port serving its particular hinter- possibility to terminalize the port with land; there is no potential for adding capacity, complementary tariff filing requirements. and there are no intermodal options. Berth occupancy is high and profitability is high. Here, we As demonstrated, the decision framework can have a classic monopolistic setting—high volume, be a useful tool for the port sector reformer to high berth occupancy, high profitability, and no optimize the design of a competitive setting. It competition. The preferred strategy is to divide can also serve to curtail the government’s natu- the port into terminals (indicated by solution S2) ral inclination to tightly regulate in circum- and to impose tariff filing and limits, with the stances where it is not needed. Overregulation possible need for tariff monitoring (solution R2). would have the unintended consequence of con- straining efficiency. Indeed, as Box 11 shows, Looking at the other extreme, a one-berth, low- only rarely is it necessary to actually set tariffs volume setting, with low occupancy, no compe- or profitability limits (solution R2) because of tition, and low profitability suggests entering the structural remedies that are available. into a short-term operating or management contract (solution S4), with the possibility for a 4. DESIGNING A PORT subsidy bid. REGULATORY SYSTEM

Other scenarios include: The shift in the role of the public sector from port services provider to landlord and regulator • For a medium-sized port with a low-vol- will require that the public sector develop new ume setting and a lack of existing or skills, institutional capabilities, and practices. potential transport options, low berth These include regulating unfair or anticompetitive occupancy and low profitability point to practices; designing and negotiating contracts

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with private providers of port services; monitor- • Responsibilities for regulation of port ing performance and enforcing compliance with operations13 and competition should be general standards; and creating processes for formally separated. Because of the risk of wider participation in developing and imple- “agency capture” and the potential con- menting transport policies and programs.11 flict of interest between the two forms of regulation, they should be separated and Changing the role of governments from having assigned to two different entities. direct control over state-owned and operated ports to exercising indirect guidance through • In the event that economic regulation is appropriate regulation and pricing policy is imposed, regulators will need to have a likely to put greater demands on institutional reasonable understanding of the cost structure of the operation; this means MODULE 6 capabilities in developing and transition economies than can be satisfied immediately. In that regulators will need proprietary some cases, improving regulations is largely a financial information and will have to matter of strengthening the existing monitoring weigh the tradeoffs between the need for and enforcement capability. In other cases, it information and the burden of the report- 14 involves setting up participatory development ing requirements on the operators. and appeal processes. In yet others, whether • When a determination is made that eco- there is a need for transport-specific institutions nomic regulation is not necessary, but will depend on how these issues are dealt with instead tariff monitoring or approval is 12 at an economywide level. warranted, then the regulator will need to clearly set out the tariff reporting require- Regulation, however, must not become a strait- ments, the review process, and impose a jacket that stifles initiative. This would be a time limit on itself as to when an return to the past, where the port authorities approval decision is to be made. were often so heavily regulated by the supervising authority that they could not take any ini- • The entire competition regulation policy tiatives or soon lost their drive to innovate, should be conveyed to the port and ship- invest, and improve efficiency. ping community, as should the disposition of antitrust cases and regulatory pol- To help design an economic regulatory policy icy decisions. and avoid the pitfalls of heavy handed regulation, the following guidelines will be helpful: • Policy and case deliberations should include the opportunity for affected par- • Government should have a clear under- ties to present their views. standing of the competitive environment • Any decisions made by the regulator should of the port sector. be enforceable with recourse for appeal. • A decision on economic regulation should In designing a port regulatory system to protect be based on the risk of anticompetitive customers and the general public interest, gov- behavior or on evidence that monopolis- ernments need to keep several broad principles in tic behavior is occurring and that other mind. First, it is important to be realistic; a bal- methods of intervention (for example, ance must be struck between what is ideal (that cease and desist orders, sanctions, or is, as close as possible to perfect competition) fines) are not feasible, adequate, or and what is achievable. Second, regulation appropriate. should not be too restrictive or controlling. • The regulator should clearly define what Overly restrictive regulation could deter private form of economic regulation (for exam- companies from providing services or limit their ple, rate of return or tariff setting) is to ability to introduce innovative and efficient prac- be applied and under what circumstances. tices. Regulation that seeks to control in detail

284 Port Regulation: Overseeing the Economic Public Interest in Ports how the private port operator runs its business • Protection or even promotion of competi- risks defeating the central purpose of private section, including protection of those com- tor participation—improving service delivery at peting against a dominant operator. the lowest possible cost to the user. Third, a reg- • Prevention of pricing or service discrimi- ulatory system must be consistent with the insti- MODULE 6 nation. tutional capabilities and resources of regulators. • Protection of investors against unfair or Designing a port regulatory system to accom- unreasonable government action. modate private sector participation can be broken down into eight basic steps15: The primary purpose of economic regulation is to control anticompetitive behavior resulting Step 1. Specify the essential regulatory objec- from shortcomings in the marketplace. It should tives and tasks. be distinguished from technical, safety, environmental, and other forms of regulation, although Step 2. Determine how far existing laws go in practice these may often be intertwined.16 toward assigning these tasks. Regulators typically have the power to adjudi- Step 3. Determine institutional arrangements for cate disputes between port operators or regulatory oversight. between port users and operators. This may be the most important function of a regulator Step 4. Consider how much regulatory discre- when a sector is liberalized and an operator tion should be allowed. engages in anticompetitive behavior.

Step 5. Consider what regulatory tools and Competition regulators are normally in charge mechanisms will be used. of verifying and enforcing compliance with antitrust legislation. Monitoring compliance Step 6. Specify port operating and financial per- with concession and lease terms and conditions formance indicators. is normally assigned to the port authority as the Step 7. Establish an appeal process and proce- lessor of the facilities (or land). The port dures. authority is also given the power to enact general norms and regulations governing operational Step 8. Incorporate regulatory details into laws practices within the port. and private sector contracts. The competition regulator’s legislated powers Presented below is a discussion of issues to be typically authorize the regulator to require peri- considered in completing these steps, along with odic submittals of tariff, financial, operational, checklists and illustrations to provide guidance and any other data necessary to support the for the design of a port regulatory system. regulator’s industry monitoring responsibilities; receive and issue complaints about alleged anti- 4.1. Step 1: Specify Regulatory competitive behavior; compel operators to pro- Objectives and Tasks vide proprietary and other data during inves- Economic regulation of the port sector may tigative (discovery) proceedings; deliberate over have multiple objectives. These include: cases of alleged violations of antitrust legislation; and impose remedies in the event that the • Promotion of efficiency. regulator determines a violation occurred. • Satisfaction of demand, notably by pro- The objectives of regulation in most developing moting investment. and transition countries, however, frequently are • Protection of consumers and users, par- different. The level of profits earned by the private ticularly against monopolistic or other operator should be of secondary importance. The abuses by the operator(s). main challenge in many underdeveloped markets

285 Port Regulation: Overseeing the Economic Public Interest in Ports

is to meet existing and latent demand for servic- • Contract and concession law. es. Hence, the primary objective of regulation • Labor law. should be to ensure that the operators (public or private) meet minimum performance standards, The minimum requirement for effective regula- thereby taking action to close the gap between tion is a framework of law pertaining to prop- supply and demand. Consumers in most of these erty rights, liability, conflict resolution, and con- countries often prefer a high-priced service to no tracting. There must also be capacity to enforce service at all. Furthermore, distributional objec- the laws and credible assurances that the laws tives or concerns can, if needed, be addressed will not be changed by political whim. through subsidies or other mechanisms. Box 12 presents the review and revision of port

MODULE 6 Depending on the objectives to be met, regula- regulatory responsibilities in the state of tion may focus on tariff policy; direct and indi- Victoria, Australia. Further discussion of the rect subsidies; access to congested facilities; legal aspects of the port regulatory system is investment levels; performance targets; service presented in Module 4 of this Toolkit. quality and continuity; and so on. Most countries use a range of regulatory instruments 4.3. Step 3: Determine Institutional (including specific stipulations in concession Arrangements for Regulatory agreements or licenses and general rules) to gov- Oversight ern the award of licenses, the oversight of the A key element in the design of a port regulatory licensees, and more generally, the rights and obli- system is determining the appropriate institu- 17 gations of users, competitors, and other parties. tion or institutions that should have primary responsibility for competition oversight. Items 4.2. Step 2: Conduct a Legal that need to be considered include: Review of the Regulatory System In assessing how the broad regulatory frame- • Should the regulatory entity be multisec- work will affect the design of a port reform toral or specific to the port sector? regime and the attractiveness of that regime to • How can the regulatory entity best the private sector, governments need to consider encourage direct participation or input a wide range of constitutional provisions, laws, from port users? rules, regulations, and activities of government • Should it be centralized or decentralized? agencies. These include: • How can the regulatory entity’s inde- • The constitutional and legislative division pendence be protected from short-term of responsibilities for service among political pressures and from the undue national, regional, and local govern- influence of port operators and service ments. providers? • Responsibilities and relationships of rele- • How should the regulatory entity coordi- vant government entities. nate with other regulatory institutions? • General legislation affecting private sec- • How can requirements for staffing and tor involvement, including by foreign technical capabilities be met? companies. Should governments set up a regulatory body • Issues relating to land use titling. for the port subsector, as has been done in Argentina, Colombia (Box 13), and the United • Competition law, and competition or Kingdom; a single agency for the transport antitrust enforcement agencies. sector as in the U.S. Surface Transportation • Environmental laws. Board; or a multisectoral agency for all or

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Box 12: Reviewing Port Regulatory Responsibilities in Victoria, Australia n January 1995, the State of Victoria was necessary to ensure that a framework for announced its intention to reform Victoria’s regulation of the ports was in place prior to ports. Until 1993, the chairmen of the port their sale, out-sourcing, or reorganization. First, I MODULE 6 authority boards were also the chief executive it was necessary to provide for the orderly officers of the port authorities. As a prelude to retirement of the port authorities’ existing func- port reform, so-called “reorganizing boards” were tions and powers as these were superseded by established for each port authority, and the posi- the new legislation. Second, new entities would tions of chairman and chief executive were sepa- have to be created to provide for the manage- rated under the State Owned Enterprises Act of ment of the Port of Melbourne and the shipping 1992. The port authorities continued, however, to channels, since it had been determined that the exercise their considerable statutory powers to channels should remain under public manage- regulate, administer, and fund the operation of ment but with a commercial focus. Third, envi- each port. In essence, while they remained under ronmental and occupational health and safety government control, the port authorities were issues would need to be devolved to the most regulating both their customers and themselves, appropriate government body. Fourth, land and and the Minister for Roads and Ports, to whom planning statutes would need to be altered to many of the statutory powers were deferred, was make possible the definition of each of the both the “regulator” and the “shareholder” of the ports as a saleable entity or an entity whose businesses the port authorities conducted. operation could be outsourced. The revised Examination of the statutes indicated that responsibilities for regulation of the ports under significant shifting of regulatory responsibilities the port reform regime are summarized below.

Responsible Authority Revised Responsibilities

Regulatory powers relating to harbormasters, The Marine Board: Significant amendments to the direction of shipping, maintenance of certain Marine Act of 1988 enlarged the powers and aids to navigation, promulgation of standards for responsibilities of the Marine Board, making it the the dredging of channels, and responsibility to principal point of reference for navigational safety coordinate compliance. and containment of marine pollution. Some of these powers were transferred from the various port authorities in anticipation of the repeal of the port authority statutes.

Pollution of waters. The powers previously residing in the port authorities under the POWBONS Act were transferred to the Environment Protection Authority.

Economic regulation of marine services. The Office of the Regulator-General.

Transfer, handling, and storage of dangerous The Victorian Work Cover Authority. The goods. Dangerous Goods Act of 1985 was extended to cover the transfer, handling, and storage of dangerous goods in ports.

Management of the Port of Melbourne. Creation of Melbourne Port Corporation and Melbourne Port Services.

Management of channels in port waters, including Creation of the Victorian Channels Authority. dredging and maintenance of navigation aids.

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Box 12: Reviewing Port Regulatory Responsibilities in Victoria, Australia (Continued)

Responsible Authority Revised Responsibilities

The Governor-in-Council, on the recommendation Revocation of reservations, surrender of Crown of the Minister for Conservation and Lands, to land, issue of freehold title. issue title to the relevant port authority. The Minister for Planning was given facilitative Amendment of planning schemes. powers to prepare specified amendments to the planning schemes so far as they affected the port areas. MODULE 6 Source: McCallum, Elizabeth. 1999. “Privatising Ports: A Legal Perspective.” Privatisation International, November, pp. 53–55.

Box 13: Establishing a Port Sector Regulatory Agency in Colombia uring its prereform days, Colombian 4. Establish technical norms for port operations. ports were known for low productivity The SGP became part of the Ministry of Dand poor efficiency. Average length of Public Works and Transport as an independ- stay for a vessel was twice that of other ports ent entity with financial and administrative in the region. Colombia’s institutional frame- autonomy. Its costs are covered through the work was typical of the prereform situations in assessment of a supervision fee to be paid Latin America. The port sector was highly cen- by the port societies and port operators. tralized in an organization known as In exercising its supervisory function, SGP COLPUERTOS, whose responsibility included established offices at the regional port societies’ the administration, operations, management, facilities. Total SGP employees originally num- and planning of the country’s four primary bered just over 100, including employees ports: Cartagena, Santa Marta, Barranquilla, charged with monitoring operations at each and Buenaventura. Private terminals were per- port. By 2000, SGP employees had increased mitted, but could not be offered as public use to more than 200. Regional port societies have facilities. COLPUERTOS also controlled the the freedom to issue subcontracts for port serv- tariffs for each of these ports. In addition to ices. For instance, in Cartagena, more than 25 having separate administrations for each port, private stevedoring companies licensed by the COLPUERTOS had a central administration SGP compete for contracts with ship agents. office in Bogotá. The total number of public The approach to port sector reform in sector employees was nearly 11,000. Colombia created a competitive environment Law 1, passed in 1991, sought to liquidate that goes beyond the competition between COLPUERTOS and create the stevedoring companies. Interport competition Superintendencia General de Puertos (SGP) to: for container cargo was promoted among the 1. Oversee COLPUERTO’s liquidation. Atlantic Coast ports of Cartagena, Santa 2. Implement a new system of port societies Marta, and Barranquilla. Law 1 also permitted and operating concessions. privately owned terminals to become public use facilities and to compete with the regional 3. Prevent monopolistic abuses among the port port societies. societies and operators (primarily through tariff review, tariff setting, determining the Source: Kent, P., and A. Hochstein. 1998. “Port Reform and Privatization in Conditions of Limited Competition: The number of concessions to be awarded, and Experience in Columbia, Costa Rica, and Nicaragua.” imposing fines and sanctions). Journal of Maritime Policy and Management 25(4): 313–333.

most infrastructure sectors, as in Australia? Zealand, where the Commerce Commission, On the other hand, perhaps there should be no the national competition agency, is in charge special regulatory body at all, as in New of economic regulation of the infrastructure

288 Port Regulation: Overseeing the Economic Public Interest in Ports sectors on the basis of the country’s general the impact of corrective or enforcement action competition rules. within one sector on another. Moreover, antitrust monitoring and enforcement is dis- A strong case can be made for a multisectoral tinctly separated from other sector-specific regu- regulatory agency. A multisectoral agency latory aspects; this assures neutrality or objec- MODULE 6 should contribute a greater degree of coherence tivity and reduces the possibilities of regulatory and consistency in the regulation of different capture sometimes associated with sector-specif- sectors. It also allows lessons from one sector to ic regulatory agencies. be applied to others, creates administrative economies of scope, and may limit the risk of In spite of such advantages, having an antitrust corruption or undue influence by a particular agency responsible for all sectors is a significant enterprise or ministry. It is particularly well burden on the agency itself because of the array suited for countries that lack the necessary of cases that it may need to pursue. Moreover, financial, human, and administrative resources specialists assigned to particular cases may not to equip separate agencies. Some argue that that have specific industry expertise; specialists with it does not promote the development of in- backgrounds in commercial advertising prac- depth sector expertise, but this can be addressed tices, for example, may be assigned to pricing by a degree of technical specialization within collusion cases related to the automobile indus- the agency. Basic legal, economic, and financial try; individuals who are experts in grocery store skills and experience are, in fact, largely com- pricing practices may be assigned to maritime mon to various infrastructure sectors. terminal operator cases. This approach means that a cadre of specialists will not be developed A new generation of transport agencies is being to the extent that assurances can be given that introduced, inspired by the integrated U.S. they will make a decision based on analyses model and led by Bolivia and Peru. Both coun- reflecting a thorough understanding of the sec- tries have regulatory agencies that are much tor. An alternative approach, therefore, could be more independent from policy makers. The to establish an antitrust practices office within agencies cover all transport sectors and have an agency already responsible for planning, their own sources of funding. They rely on this development, and regulation of the sector, but funding to subcontract for skills that they do with ratemaking independence. not have in house. To ensure good coordination between the agency monitoring competition and How can the regulatory entity best encourage the transport regulator in Peru, one of the mem- direct participation or input from port users? bers of the Transport Regulation Board is also a member of the Competition Commission.18 Consumers, both individuals and businesses, are not typically heavily involved in the port regulato- A typical regulatory approach is one in which ry process, even though their input can be critical countries monitor the port sector through an to efficient service when the regulator has only agency established to monitor and enforce limited means of acquiring information. Final antitrust law generally. Mexico, for example, has consumers are often the best monitors of service the Federal Competition Commission as the quality. Ways to obtain consumer feedback agency with primary responsibility for competition include establishing user advisory boards or hav- law. The Swedish and British counterparts are the ing user representatives on port authority boards. Swedish Competition Authority and the Office of the Director General of Fair Trading, while in the While providing a formal basis for user feedback United States it is the Federal Trade Commission. can be useful to operational regulators, applying it to an antitrust regulator should be discour- The nonsectoral emphasis of these countries aged. User input, or input by other interested assures uniform application of competition poli- parties, will often be sought by regulators during cy across all sectors and allows consideration of the investigation associated with an alleged

289 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 14: A Simple Port Regulatory Structure for Sri Lanka s part of the port modernization process and/or storage of goods, regarding the way undertaken in Sri Lanka in 1998-1999, a public services are being provided by SLPA Asimple but effective proposal was for- and to direct under threat of penalty that mulated and embedded in the signed conces- SLPA correct the way it provides public sion agreement for Queen Elizabeth Quay, services. which includes the establishment of a small The Commission will consist of six regulators regulatory Commission to resolve competitive who will serve a single, six-year term. The issues concerning public and private port terms of the regulators shall be staggered so operations.The establishment of the commis- two new regulators will be appointed every sion in a period of 5 years (before 2003) will two years. The Minister for Ports, provide private port operators and private sec-

MODULE 6 Rehabilitation and Construction will appoint tor participants/investors with reassurance that the regulators based on nominations received. a fair and transparent process would be avail- The Chairman and one regulator shall be able to resolve competitive issues. The objec- appointed from lists nominated by the Sri tives of the Commission are: Lanka Ports Authority; one regulator each • To encourage and promote fair competition from nominations by a representative organi- between all port operators, be it public or zation of shipping agents, an organization of private, and to create an atmosphere of con- private terminal operators, the Sri Lanka fidence for investors in port services and Chamber of Commerce and the Arbitration facilities; Institute of Sri Lanka. • Upon complaint of any interested party, to Proceedings will be advocative. Interested judge disputes concerning these parties in parties shall have an opportunity to present an impartial and non-discriminatory manner facts and arguments in support of their inter- taking into account the particular conditions ests before regulators. Proceedings will be of Sri Lanka, principles of equity and equal open to the public and transcripts of evi- opportunity, revenue adequacy and common dence presented and discussions held during practices in the industry and other criteria proceedings will be maintained for public the Commission shall deem appropriate; review. The decisions of the Commission will • In response to complaints from interested be reached by majority decision. Each parties, to regulate tariffs of port services decision will be accompanied by a set of based on transparent and objective criteria findings that explain the basis of the ruling of rate reasonableness, in the event that and clarify issues of administrative law and specific tariffs are proven before the precedent. Commission to be incompatible with the Decisions are binding on parties to dis- principles of fair competition or with the putes. An appeal of the findings and directives common practice of the industry. The may be submitted to the Chairman of the Commission would not interfere, at its own Commission; the sole basis for appeal shall initiative, in the tariff setting of public or pri- be the failure of the Commission to uniformly vate commercial legal entities carrying out and equally apply its principles of its own activities in any port area in Sri Lanka; administrative law. The Commission shall • To act upon complaints from users of Sri have the power to apply civil sanctions and Lanka port facilities that carry out legal penalties which devolve from the power of commercial activities related to shipping, the Minister for Ports, Rehabilitation and transport of passengers and transport Reconstruction.

violation. Under these circumstances, alleged this creates the potential for a user to sit in judg- violators, complainants, and other interested ment over a customer or another competitor, parties are typically given the opportunity to giving rise to conflicts of interest (Box 14). express their views and present evidence during the case disposition process. If a port user sits as a Advisory bodies should be considered seriously regulator, as the Sri Lankan legislation proposes, as sources of input to the port regulatory entity.

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They offer a degree of transparency and inject in a privatized setting, along with other func- analysis and debate in discussions that previously tions associated with its ownership of facilities would have taken place in the secrecy of a (for example, infrastructure maintenance, lease ministerial cabinet. The advisory body can see management, and monitoring for compliance). its role and influence increase when the authority MODULE 6 competent to make a specific decision is not Today’s modern port authorities have a certain only forced to seek its advice and take it into degree of independence, many having the account, but also to justify any departure from authority to engage in contracting and leasing, such advice. Furthermore, for certain matters, setting their own capital and operating budgets, the competent authority may not be allowed to tariff setting (for port authority charges), and reach a decision going against the opinion or hiring and firing, all without the need for advice received. approval from other government entities. In the discharge of many of these duties, port authori- How can the regulatory entity’s independence ties are in contact with port operators on a fre- be protected from short-term political pressures quent basis. and from the undue influence of port operators and service providers? The independence of a Similar independence can be accorded the com- regulatory body is worth little unless it is petition regulation agency. Box 15 enumerates a upheld against undue influence by the regulated number of strategies that can be used to ensure industry or by unreasonable political interven- a more independent agency culture. Two of the tion. Cases of regulatory capture by the indus- most critical factors are independence relative try are not uncommon. The problem is particu- to budgeting and case disposition. As Box 15 larly acute when regulatory agencies are set up notes, it is imperative that the competition as part of the civil service in countries where agency develop budget independence, as the staff is not adequately compensated. By remov- power and independence of the agency can be ing regulatory staff from civil service con- limited by the budget process itself. Agencies straints, governments may remunerate them in require funds to operate, and executive and leg- ways that better protect them from industry islative review can exert powerful influence over capture and that allow the agency to attract agency actions. Retribution, in the form of qualified candidates, hence enhancing the “pro- budget cuts, can be taken against regulators if fessionalization” of the regulatory function. their decisions or functions are politically unpopular. It is possible, therefore, for the com- Rules need to be laid down concerning poten- petition regulatory body to enhance its inde- tial conflicts of interest among the regulator’s pendence by securing at least a portion of its staff (for example, by prohibiting former staff budget from fees assessed on port operators. of the regulatory agency from working for a regulated operator for a specified period after A critical aspect of regulatory independence is leaving the agency). If independence from the ability to reach decisions on cases based on undue industry influence is to be achieved, then a fully developed public record. Such decisions competition and operational regulation should should only be affected by the evidence and be assigned to two different entities. data collected in the course of the agency’s Traditionally, a public port entity had full monitoring responsibilities and in investigating responsibility for administration and operation complaints, which may include testimony as of the port sector. This included regulating oper- well as data collection and review of propri- ational practices applicable to navigation and etary information that may be requested of the vessel calls as well as providing the full range of alleged violator. This suggests also that the cargo handling and vessel services. In a priva- industry need not be informed of which profes- tized setting, the port authority (landlord form) sionals within the agency are assigned to do the will retain operational regulation responsibility analysis of a particular case, although the

291 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 15: Safeguards for Creating an Independent Regulatory Body reating an independent agency, no easy commission, stagger the terms of the task in any setting, is even more chal- members. Clenging in countries with a limited tradi- • Exempt the agency from civil service salary tion of independent public institutions and lim- rules that make it difficult to attract and ited regulatory experience and capacity. retain well-qualified staff. Measures that can aid in establishing an inde- • Provide the agency with a reliable source of pendent agency include: funding, usually earmarked levies on regulat- • Provide the regulator with a distinct legal ed firms or consumers. mandate, free of ministerial control, with an In addition, persons appointed to these posi- independent board. tions must have personal qualities to resist MODULE 6 • Establish minimum professional criteria for improper pressures and inducements. And appointment. they must exercise their authority with skill to • Involve both the executive and the legislative win the respect of key stakeholders, enhance branches in the appointment process. the legitimacy of their role and decisions, and • Appoint regulators for fixed terms and pro- build a constituency for their independence. tect them from arbitrary removal. Source: Smith, Warrick. 1997. “Utility Regulators—The Independence Debate.” In The Private Sector on • Stagger terms so that they do not coincide Infrastructure: Strategy, Regulation, and Risk, p. 23. with the election cycle, and for a board or Washington, DC: World Bank.

agency would assign a contact person during a constraint, at least in the short and medium the course of case disposition. This anonymity term, contracting out of regulatory tasks should can contribute toward the independence of deci- be considered. sions related to a case and reduce the opportu- Governments and regulators can, and often do, nity for industry and political forces to unduly hire consultants, advisers and experts to assist influence them. them in all aspects of their regulatory tasks. Independence needs to be reconciled with meas- Such contracting out can be taken one step fur- ures to ensure that the regulator is accountable ther and formalized through, for example, per- for its actions. Checks and balances are formance audits or certifications performed by required to ensure that the regulator does not independent verification companies under con- stray from its mandate, engage in corrupt prac- tract with the regulator. Auditors could be tices, or become grossly inefficient (Box 16). asked to certify that information provided by the regulated port operators (including perform- How can requirements for staffing and techni- ance targets) is fair and reliable. The verifica- cal capabilities be met? Many developing coun- tion company will base this opinion on checks tries confront a challenge in assembling experi- that they have performed and on their assess- enced professionals to staff a regulatory agency. ment of the systems the companies established Regulatory agencies have limited resources and to produce the required information. In addi- are often unable to attract qualified people. The tion, they could be asked to certify that the reg- ability of independent agencies to sidestep civil ulated company is in compliance with the legis- service salary restrictions and to have access to lation in effect, and if not, to determine the earmarked funding makes it possible to recruit degree of noncompliance and the factors that and retain better-qualified staff and to hire exter- may have contributed to it. Their task could nal consultants. Much of the work traditionally also include surveys of port user satisfaction. performed by regulators lends itself very well to contracting out to private experts. Complex reg- Finally, verification companies could measure ulatory functions need to be performed profes- the regulated companies’ performance against sionally. When limited administrative capacity is key parameters, prepare time series showing

292 Port Regulation: Overseeing the Economic Public Interest in Ports

their participation or raise the price of their Box 16: Reconciling Independence with involvement. A delicate balance needs to be Accountability struck between allowing regulatory discretion triking the proper balance between and developing very tightly specified contracts

independence and accountability is that will have to be renegotiated when unex- MODULE 6 notoriously difficult, but the following S pected changes occur. measures to do so have been adopted by a growing number of countries: Once a contract has been awarded to a private • Mandating rigorous transparency, including company, it is that company’s job to run the open decision making and publication of decisions and their rationale. business. This may seem an obvious point, but experience suggests that great care is needed to • Prohibiting conflicts of interest. ensure that regulators do not interfere in the • Providing effective arrangements to appeal the agency’s decisions. day-to-day management of the port. • Providing for scrutiny of the agency’s budg- Regulations should focus on desirable public et, usually by the legislature. interest outcomes, not on the specific steps • Subjecting the regulator’s conduct and effi- taken to achieve these outcomes. For example, ciency to scrutiny by external auditors or it is the regulator’s task to monitor whether the other public watchdogs. stated performance standards are met. It is the • Permitting the regulator’s removal from operator’s task to decide what technical meas- office in cases of proven misconduct or ures and operating practices are needed to meet incapacity. the standard. When a government specifies the Source: Smith, Warrick. 1997. “Utility Regulators—The regulator’s duties and decides on the appropri- Independence Debate,” In The Private Sector on Infrastructure: Strategy, Regulation, and Risk, September, ate staffing and skill mix for the regulatory p.23. Washington, DC: World Bank. agency, it must have a clear understanding of the dividing line between regulation and operational management. trends, and compare these results with international norms. But, performance comparisons When discretion is retained on tariffs or other require highly knowledgeable experts to do issues of concern to investors, the challenge is proper performance benchmarking. For exam- to manage it in a way that minimizes the risk of ple, to explain why a terminal achieving 20 misuse. The exercise of discretion needs to be container moves per hour may be a much better insulated from short-term political pressures performer than a terminal achieving 25 contain- and other improper influences and to be based er moves per hour requires in-depth knowledge on competent analysis. Entrusting regulatory of the business and full availability of all discretion to ministers with broad authority required information.19 None of these functions often will not meet these tests, particularly imply any discretionary decision making on the when the government continues to own other part of the auditor. What such audits would do, port enterprises. In this case, there will be no however, is provide the decision makers with a arm’s-length relationship between the regulator sound analytical basis for their decisions. 20 and the government-controlled firm, and there may be concerns that, in exercising discretion, 4.4. Step 4: Determine Degree of ministers will favor the state enterprise over Regulatory Discretion rival private firms. But even if the government A key question in designing a port regulatory has no ownership role, ministers will still be system is to determine how much discretion subject to short-term political pressures and should be granted to regulators. Discretion helps changes in regulatory policy. Restrictive civil regulators respond flexibly to changing condi- service rules in many countries also make it dif- tions, but it also creates regulatory risks for pri- ficult for ministries to attract and retain well- vate partners and may, therefore, discourage qualified professional staff. What is required is

293 Port Regulation: Overseeing the Economic Public Interest in Ports

an agent at arm’s length from political authorities, Traditionally, governments have relied on rate- regulated port firms, and consumers. of-return regulation as the primary instrument Organizational autonomy helps to foster the of economic regulation. In other words, govern- requisite expertise and preserve those spatial ments have generally guaranteed to port opera- relationships.21 tors that they would recover their costs (within very general guidelines) and get a mark-up to Before they can calculate the price they are reward investors; thus, the label cost-plus prepared to offer, investors will want to know regime. These regimes, however, do not give the regulatory system under which the compa- strong incentives to operators to cut costs. The ny will operate. They will also form a view on introduction in the United Kingdom (U.K.) of how this regime can be expected to evolve in price caps changed this by showing that the reg-

MODULE 6 the years ahead. To reassure investors, the ulatory regime could be designed to minimize government may have to promise not to alter costs. Price caps allow the operators to keep a the regulatory system substantially, or at least portion of the cost savings they realized, with not to do so to the detriment of the investors. part of these savings being shared with port To be effective, however, this commitment users, and sometimes governments. In many needs to be credible. Credibility could be countries, hybrid systems have been developed, enhanced by provisions in the privatization which result in some degree of immediate rent agreements allowing the company to automat- sharing at the beginning of the period for pri- ically adjust its tariffs based on a given formu- vate sector operations.22 la, or by a provision that the government will compensate the operator for any negative Rate-of-return regulation allows the regulated impact that results from government rejection company to charge prices that would cover its or delay of a contractually agreed tariff operating costs and give it a fair return on the increase. fair value of its capital. While rate-of-return regulation gives operators little incentive to cut 4.5. Step 5: Identify Appropriate costs, it protects investors in risky environments Regulatory Tools and Mechanisms and may persuade some of them to bid for deals The pricing regime, particularly the tariffs and they would not otherwise have considered. A their adjustment formula, is typically a corner- problem with this regime is its demanding infor- stone of the economic regulatory system. It will mation requirements. To allow regulators to determine the return investors can expect and determine reasonable rates of return, the regime the incentives they may receive to provide quality places them in a position to make decisions service. about the wisdom of investments and operating procedures, confusing the role of managers and The chosen tariff formula must be one that can regulators.23 Box 17 presents a comparison of be effectively applied by the competent authority. the benefits of price caps and rate-of-return reg- This presupposes, in particular, that the infor- ulation. mation needed by the authority to perform its function is available, that the authority can Price-basket controls such as the RPI-X formula require the regulated enterprise to disclose such used in the U.K. limit tariff and price increases information, and that it can check its accuracy to the increase in the retail price index (RPI) of and reliability. The degree of complexity of the a 12-month period minus a percentage that price adjustment mechanism thus account for takes into account expected productivity gains. the regulatory agency’s technical resources and capacity. In other words, the regulatory mecha- One difference between the RPI-X and the rate- nism should be tailored to the specific charac- of-return formula is that the administrative teristics and constraints of the country and burden of the former is lighter because it is less sector concerned. dependent on information supplied by the

294 Port Regulation: Overseeing the Economic Public Interest in Ports

regulated enterprise itself, it requires less Box 17: Price Cap versus Rate-of-Return verification on the part of the regulator, and it Regulation allows the regulator’s discretionary interven- n practice, price cap and rate-of-return reg- tions to be spaced more widely. Some argue, on

ulation have differences and similarities. the other hand, that the administrative burden MODULE 6 First, a rule such as RPI-X considers only I of price caps may be higher rather than lower how prices should be changed from year to year; it doesn’t tell a regulator how to set them because in the end regulators need to perform in the first year. A regulator wanting to use the same analysis as required for rate-of-return price cap regulation for a new service would regulation and they must forecast productivity need to set the initial price in some way, and improvements over the next four or five one obvious option is to consider the price the years.24 firm needs to charge to earn a satisfactory rate of return. Second, a price cap needs to In many ways, the biggest difference between be periodically reviewed; a regulator cannot price controls and rate-of-return regulation is reliably predict what changes in productivity one of emphasis. Regulators must not ignore will be possible in say, 10 years. In the United Kingdom, price caps typically are reviewed the rate of return when they reset a company’s every five years. And during a review, the regu- price cap, but the price cap is an indirect, rather lator naturally takes into account the regulated than a direct, control on the rate of return. utility’s rate of return. If it is too high, the price Rate-of-return regulation has depended on for- cap is likely to be reduced; if it is low, the mulae designed to ensure that the regulated price cap may be relaxed. company receives the right amount of revenue, But as long as price cap reviews are suffi- and it has often been bogged down in legal ciently infrequent (say, every five years), price cap and rate-of-return regulation should have arguments. The formulae are only a guide to different effects on the behavior of regulated the level of the price control, however, and still firms. In particular, a price cap regime sub- leave room for judgment. The regulator must jects businesses to more risk. For example, decide whether to set prices so that they equal under price cap regulation, if a firm’s costs the company’s predicted costs at the end of the rise, its profits will fall because it cannot raise its prices to compensate for the cost increases review period or over the period as a whole. at least until the next price review, which may The regulator may look at the company’s cash be several years away. Under rate-of-return flow, as well as the discounted value of its costs regulation, however, the business would and revenues. The regulator may use formulae seek—and typically be granted within a year to check the impact of alternative assumptions or so—a compensating price rise, so its about factors such as the growth of demand, profits would not change much. But if the firm’s costs fall, the price cap regulation is and might adopt a price control that seems more advantageous to the firm than rate-of- slightly generous on the base case because oth- return regulation because it would retain more erwise the company would be in a difficult posi- of the resulting benefits as profits. Thus, tion if the alternative assumption became true. under rate-of-return regulation, consumers Finally, if a company knows that a formula will bear some of the risk that firms bear in price cap systems. The difference in impact means be used in a mechanistic manner, it will have an that firms subject to price cap regulation have incentive to attempt to manipulate the inputs to a stronger incentive to lower their costs the formula. It may be that giving some discre- because they keep more of the cost savings tion to the regulator can reduce this incentive. than they would if they were subject to rate- This discretion should not be excessive, howev- of-return regulation. But the increased risk er, because the company must remain confident they bear tends to raise their cost of capital. that it can recoup its investment, but it should Source: Alexander, Ian, and Timothy Irwin. 1997. “Price Caps, Rate-of-Return Regulation, Risk and the Cost of also allow the regulator to use its judgment of Capital,” In The Private Sector on Infrastructure: Strategy, what is fair under a particular set of circum- Regulation, and Risk, pp. 33–34. Washington, DC: The World Bank Group. stances, rather than simply blindly following a set of rules.25

295 Port Regulation: Overseeing the Economic Public Interest in Ports

Revenue-yield controls allow the regulated com- ways to replicate the conditions that discipline pany to set tariffs as long as the total revenue competitive behavior. One of these ways is or revenue per unit of activity stays within lim- through regulation of service performance. its established by the regulatory body. An advantage of this approach is that the regulator Regulators, typically through provisions in con- does not have to specify or review individual cession, operating, or lease agreements, will port tariffs. Disadvantages include the possible incorporate performance standards (or mini- fluctuation of tariffs as the regulated firm seeks mum thresholds) expected of the concession to earn the maximum revenues permitted, the holder during the life of the agreement. These complexity of setting the maximum allowable thresholds may change in accord with the revenue per unit of activity, and the difficulty in investment obligations scheduled during the

MODULE 6 forecasting demand if the upper limit is based term of the agreement. For example, when a on total revenues.26 facility is first turned over to the operator, performance standards should consider the tech- If several ports or companies within a port are nology available in the port at the time of the regulated together, the regulator may be able to agreement. This effectively means that the per- make “yardstick” comparisons among them. If formance standards should be regularly recon- all entities face the same operating conditions, sidered and possibly revised. they could, in theory, achieve similar levels of costs. The regulator then could calculate the When considering the use of performance stan- average cost among them (either over the whole dards, it is helpful to view port services as a group or among the most efficient companies) production process. This process refers to the and set price limits based on this level (although range of services provided to the vessel and one should take into account that terminals cargo from the port’s entrance buoy to the have very different sizes and hence very differ- berth and on to the gate, and then from the ent unit costs). Each company, then, has an gate to the berth and back out through the incentive to reduce its costs, since this will not port’s entrance buoy. Box 18 shows the produc- affect its allowed revenues. tion process for a typical port. At the port’s buoy, the marine pilot will board the vessel, 4.6. Step 6. Specify Operating and which may or may not anchor, depending on Financial Performance Indicators berth availability. The vessel then proceeds to In an ideal competitive setting, market dynam- the berth, where a tug will assist in the vessel’s ics will force ports to offer efficient services at berthing operation. Line handlers stand ready the lowest possible costs. But in many cases, to tie the vessel to the berth, following which port competition may be insufficient to induce a gangs will appear to provide the vessel with positive effect on port performance. For reasons stevedoring and quay cargo handling services. explained elsewhere in this Toolkit, a variety of Once the loading and discharging and lashing factors, particularly limited cargo volumes and operations are complete, the line handlers will the required levels of specialization (that is, lim- reappear to untie the lines, the vessel will ited cargo volumes for the different terminals or receive a tug assist once again in the deberthing port facilities), will affect a country’s options to operation, and a pilot will reboard the vessel to encourage competition. Low cargo volumes guide it to the entrance buoy for the vessel’s generally will either greatly restrict the number departure from the port. of terminal operators providing services, or may enable competition for vessel stevedoring while The vessel may be delayed at each step in the retaining the public sector’s monopoly over the production process, which in turn affects the yard or storage operation. Therefore, in envi- total time (referred to as port time) a vessel ronments where “ideal” levels of competition spends in the port. For example, on arrival at cannot be established, regulators must seek the entrance buoy, the vessel may have to wait

296 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 18: Port Production Process

port time (t8-t1)

gross berth time (t7-t4) MODULE 6

net berth time (t6-t5) buoyout

anchor in anchor out first line gang onboard gang offboard last line buoy in buoy shipment

t1 t2 t3 t4 t5 t6 t7 t8

1st box handled delays/indirect activities last box handled shift start unlashing shift end loading/ loading/ gang finishes gang starts late discharge discharge early

t9 t10 t11 t12

labor time net-net gang time

net gang time (t11-t10)

gross gang time (t12-t9) Source: Author.

for the pilot’s arrival, a berth may not be avail- cators that reflect the degree of efficiency at able for the vessel, a tug may not be readily each step of the port operation. As Box 18 available for the berthing operation, stevedoring shows, the times at which each step starts and and cargo handling gangs may not be standing stops are documented, allowing for the calcula- ready at the vessel’s assigned berth, a crane may tion of a variety of parameters, also shown in not be available for the vessel’s hatch removal, Box 18, that the industry uses to calculate per- a crane may break down during the loading or formance. discharge operation, there may be nonoperational times (that is, times when work cannot There needs to be a clear nexus between the proceed because gangs cannot be recruited as, parameters being measured and the tasks being for example, in ports where only one or two performed by and under the control of the shifts per day are worked or where no work is operator. The scope of services provided by the carried out Sundays), and so on. Each of these operator is dictated by the concession agree- events is associated with times, which, when ment. In exceptional cases, an operator may be summed, will result in the vessel’s total time in given a concession covering all of the services port. In addition to these, the vessel may be vul- between the entrance buoy and the gate. This nerable to a number of uncontrollable factors means that the operator will provide pilotage that may substantially increase the vessel’s port and tug assist as well as all of the services con- time, such as having to wait for high tide at the ducted within the confines of the terminal. This entrance channel, inclement weather, or labor would suggest that the regulator can reasonably disruptions.27 apply indicators that include these services. The regulator, therefore, must be careful in its selec- In the port planning process, analysts will fre- tion of performance measures. The regulator quently assess the relative performance of their should be sensitive to what is controllable and ports against other ports in the region. They do what is not from an operator’s point of view. this by developing a series of standardized indi- For example, the “port accessibility” parameter

297 Port Regulation: Overseeing the Economic Public Interest in Ports

may be affected by the government’s efficiency terminal, depending on the operator’s responsi- for clearing ship’s documentation. The time bility). As earlier noted, the clauses should also spent for this purpose can greatly skew the per- recognize the responsibility and span of control formance of the operator, who is responsible for accorded to the operator in the concession other elements that define port accessibility, agreement. For example, a terminal operator such as pilotage and tug services. Therefore, should not be penalized if port time was less what is acceptable performance from the regu- than desirable because of inefficiencies associat- lator’s point of view should consider only the ed with pilotage (which the operator does not factors that the operator can control. On the provide) and not the operation at the berth. other hand, the terminal operator may be given responsibility only for services rendered Regulators should be concerned with a vessel’s

MODULE 6 between berth and gate, meaning that the regu- time in port, regardless of the operator’s responsi- lator would exclude port accessibility as a bility, if for no other reason than to have the abil- parameter. One should not lose sight of the fact ity to ascertain the causes of undue vessel time. In that indicators will only work if they have been terms of imposing performance standards on set for specific tasks or operations and take into operators, however, the regulator should focus on account the many factors that can influence per- what occurs at the berth, as the vast majority of formance. countries that have undertaken port privatization have awarded concessions to operators for activi- An important factor for a country’s shippers is ties at the berth and within the terminal’s backup vessel service availability, which comprises con- area. Indicators that focus on berth performance nectivity and frequency. Connectivity refers to also reflect what is happening on the vessel (while the number of times a shipper’s cargo is trans- at berth) as well as in the backup area of the ter- ferred or otherwise handled en route to its des- minal.28 Such measures should be general in that tination. Generally, the greater number of trans- the regulator is concerned with the operator’s shipment moves the cargo undergoes, the more overall productivity, and not with the productivity time the cargo will take to reach its final desti- of every subactivity and the incremental times nation. Frequency refers to the number of calls associated with them.29 a vessel makes to the port within a prescribed period of time, usually referred to as weekly, For concession agreements, the regulator should twice-weekly, biweekly, fortnightly, or ten-day consider incorporating gross berth productivity, services (in the case of liner and feeder service which refers to the number of moves (in the case trades). Increasingly, to maximize the utilization of containers) or tons (in the case of bulk car- of their largest and most expensive vessels, ship- goes) handled in a unit of time, usually expressed ping lines use a system of feeder vessels and in moves per hour or tons per hour. In addition transshipment ports to sort and redirect cargo. to the time in which the vessel and its cargo are From a shipper’s perspective, this may improve actually worked, gross berth time includes the (increased frequency) or degrade (increased time the vessel waits for the gang, lashing and transit time and damage) service. unlashing time, and other times associated with the preparation required to perform each activity. Assuming volumes justify it, a port may benefit from both connectivity and frequency if it can The technology used is an important factor in minimize the vessel’s port time. If the carrier is determining what the number of moves per subjected to congestion or delays, then it may hour should be. For example, a terminal with avoid a call, minimize its calls, or impose penal- no ship-to-shore crane must rely on the ship’s ty charges as part of its freight bill to shippers. own gear to handle the cargo. In the container Therefore, performance clauses within the con- trades, acceptable productivity levels may be on cession agreement should focus on indicators the order of 10–12 moves per gross hour per that address the vessel’s time in port (or at the crane for such operations. In a port with mobile

298 Port Regulation: Overseeing the Economic Public Interest in Ports cranes, expected productivity can be 15–20 legal traditions of a country. Courts may play moves per gross hour per crane, while gantry a role where they have or can reasonably cranes can operate at 20–30 moves per gross acquire the expertise, integrity, and efficiency hour per crane and higher. needed to settle appeals on regulatory matters.

Generally, in the design of a regulatory frame- MODULE 6 Establishing such thresholds for bulk handling work, the interests of speed and certainty facilities is more difficult. There is a plethora of (which lead to denying appeals against regula- technologies available for solid bulk handling tory decisions or limiting the grounds and time that offer a wide productivity range. For this frame for filing such appeals) should be bal- reason, the regulator may consider regulating in anced against those of fairness toward regulat- accord with berth congestion factor or ship ed entities (and consumers) and accountability waiting rate, which compares the time a ship of the regulator.30 had to wait for a berth compared to the time it actually spent at berth. Simply put, berth occu- In situations where private port investors and pancy denotes the total time a berth is occupied operators are concerned that local conditions as a function of total available berth hours. An may not provide a competent, fair, and impar- accepted standard would be a waiting rate that tial appeal, the regulatory framework may spec- does not exceed 5 percent for a full container ify that such appeals will be adjudicated by an vessel, does not exceed 10 percent for a general agreed-on international arbiter (Box 20). cargo or breakbulk vessel, and 10–20 percent for a bulk vessel. In the event an operator 4.8. Step 8: Incorporate Regulatory exceeds this threshold, the operator could be Details into Laws and Contracts required to invest in more productive technolo- Often, a concession agreement or management gy to reduce the time that vessel would have to contract contains most of the regulatory provi- wait for a berth. sions governing the performance of the private sector partner to the contract. In deciding what The performance threshold used by the regula- regulatory elements the contract should cover tor should, therefore, take into account the and in what depth, two questions arise31: Is it technology available at the port, or envisioned possible and desirable to encompass all the nec- as part of the required investment program essary regulatory provisions within the con- incorporated into concession agreements. In this tract? If so, what degree of regulatory discretion regard, it is conceivable that the same agree- should be available? ment may have different performance thresholds by berth in accord with the port’s capabili- Though it is sometimes argued that a tightly ties at different stages of an investment pro- written contract can remove the need for gram. This is because a port may have different direct regulation, this is rarely the case. Even technologies available at different berths at dif- for a short-term management contract, some- ferent times during the concession period, or one needs to be able to monitor performance vessels may simply choose not to use gantry against the contract, have the authority to cranes, which are relatively costly for smaller allow minor variations in contract specifica- vessels. Box 19 lists some of the more common tions, and arbitrate disputes between the com- indicators used to measure port performance pany and its customers and between the gov- and that may be appropriate for inclusion in ernment and the contractor. And for longer- concession agreements. term concession and build-operate-transfer (BOT) contracts, it is usually neither possible 4.7. Step 7: Establish an Appeal nor desirable to have highly specified con- Process and Procedures tracts, especially in countries undergoing The design of an appeals regime should be a rapid social, political, or economic change function of the specific institutional set-up and (although one should aim to have as much

299 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 19: Port Performance Indicators ome of the more common indicators of port operating and financial performance included in management contracts and concession agreements are presented below. Often separate val- Sues for indicators will need to be specified corresponding to different major categories of port traffic and vessel types (containers, breakbulk, dry and liquid bulk).

Operating Measures

Average ship turn around time Total hours vessels stay in port (buoy-to-buoy time) divided by total number of vessels. Average waiting rate Total hours vessels wait for a berth (buoy-to-

MODULE 6 berth time) divided by total time at berth. Gross berth productivity Number of container moves or tons of cargo (for breakbulk and bulk cargoes) divided by the vessel’s total time at berth measured from first line to last line. Berth occupancy rate Total time of vessels at berth, divided by total berth hours available. Working time over time at berth Total time of vessels being serviced at berth divided by total hours at berth. Reasons for non- working time may include labor agreements and work rules, rain, strikes, equipment failure, port operating schedules, and holidays. Cargo dwell time Cargo tons times days in port from time of unloading until the cargo exits the port, divided by cargo tons. Ship productivity indicator Total number of moves (for containers) or tons handled (for breakbulk and bulk cargoes) divided by total hours in port. Tons per gang-hour Total tonnage handled divided by total number of gang-hours worked. TEUs per crane-hour Total number of TEUS handled divided by total number of crane-hours worked. Tons per ship-day Total tonnage of cargo handled divided by total number of vessel days in port.

Financial Measures

Operating surplus per ton handled Net operating income from port operations divided by total tonnage of cargo handled. Charge per TEU Total charges for container handling divided by total TEUs handled. Collected charges per billed charges Total collected charges as a percent of accounts billed (with 30-day lag). Source: Author.

detailed specification in the contract as rea- Detailed, unambiguous, and very specific contract sonably possible, therefore limiting the degree conditions do have advantages, especially in coun- of uncertainty for investors, users, and gov- tries that do not yet have fully developed maritime ernments alike). and port legislation (see Box 21). In particular,

300 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 20: International Arbitration nternational arbitration is a form of dispute • In some limited circumstances, arbitration settlement under which the disputing par- may be an alternative to creating a separate ties agree to abide by the ruling of inde- regulatory agency. The key requirements I MODULE 6 pendent arbitrators, who are typically select- would include that: ed for their technical expertise in particular ~ The dispute in question relates to the areas as well as their reputations for integrity. interpretation and enforcement of a spe- International arbitration has a long history in cific obligation, rather than the need to international trade and investment, where exercise a broader regulatory discretion in proceedings are typically held in a neutral the public interest. third country. While the cornerstone of arbi- ~ Political acceptance of the decision does tration is the consent of each party, to be not require participation by a broad range effective the decision or award needs to be of interests in addition to the disputing enforceable in the country where the losing parties. party holds assets. This is generally achieved by treating the award as equivalent to a judg- ~ The dispute in question does not require ment of a local court. urgent attention. International arbitration is a potentially ~ Compliance with the arbitrator’s orders important part of the legal and regulatory does not require ongoing supervision. framework for infrastructure privatization in In some circumstances, arbitration may be three main contexts: adopted as an appeal mechanism for deci- • Foreign investors will typically feel more sions of regulators. As in the previous case, a comfortable submitting contractual disputes key requirement will be that there is some rea- to a neutral and expert forum than to local sonably objective standard that can be applied courts, which may be perceived to be in determining the appeal. biased toward local parties, prone to political Source: Kerf, Michel, and Warrick Smith. 1996. “Privatizing direction, slow, less expert, and sometimes Africa’s Infrastructure: Promise and Challenge,” p. 44. corrupt. Technical Paper No. 337, World Bank, Washington, DC.

they help protect the private company from politi- the face of significant uncertainty. The challenge cally motivated and frequent changes in service is to develop and incorporate rules that are fair requirements. By reducing revenue risk, such and have reasonable information requirements. protection may help attract more bidders for the This is one of the advantages of price cap regu- contract, reduce the cost of capital, and help the lation. government strike a more advantageous bargain. The control of prices charged by a regulated The experience generally has been that weak reg- firm is often characterized as a contest ulatory bodies have been given too much discre- between the regulator and the service provider tion without sufficient policy guidance to make in which the two players do not share the decisions on matters left out of the contracts. In same information. The asymmetry of informa- developing countries, the combination of weak tion places the regulator at a disadvantage. regulatory bodies and poorly written contracts Thus the regulator must define its information has resulted in an extremely large percentage of requirements and data processes early in the contracts being renegotiated. The losers in these design of the concession contract and negotiations have usually been the taxpayers, as transaction. And it should take advantage of governments often end up granting the private the government’s leverage during bidding to parties significant financial concessions.32 extract information from concessionaires as well as commitments to continue One solution is to use rule-based contracts providing flows of information to aid tariff because they tend to make regulation easier in reviews.

301 Port Regulation: Overseeing the Economic Public Interest in Ports

Box 21: Checklist of Regulatory Items for Port Operating Contracts 1. Are the rules for establishing the level and 11. What are the mechanisms for independent structure of tariffs clear? verification of financial data, data on the 2. Does the contractor have the freedom condition of assets, and the achievement within specified limits to vary the tariff of performance targets? structure and levels? 12. What are the provisions for market testing 3. What are the procedures for raising tariffs? when the contractor subcontracts tasks or What is the frequency of updating? Is there purchases services from associated com- any requirement for operating efficiency panies? gains? 13. What is the goal of contract information 4. Is the operator responsible for collecting all requirements? MODULE 6 tariffs and charges? 14. What access will the regulator have to 5. Will the tariffs be remitted to the govern- assets and records? ment or retained by the operator? 15. Who will pay for independent financial audi- 6. How will depreciation and taxes be treated tors and technical auditors and who will be in the rate structure? responsible for their selection and training? 7. If the tariff adjustment method inflates indi- 16. What are the provisions for submission of vidual cost components, is a locally pub- regulatory accounts and performance data lished index available for each component? and for disaggregated accounts to aid comparative competition? 8. What are the trigger events that will allow the operator to adjust the tariff? Typical 17. What are the requirements for publication trigger events include significant of financial information and performance variations in reference volumes, a change standards? in the concession area, significant infla- 18. Will the regulator require audits by an inde- tion requiring more frequent pendent auditor? What auditing proce- adjustments, and changes in tax and dures will be used to confirm the tariff cost depreciation laws. components? 9. Are the guidelines for tariff appeals to the reg- 19. What technical information is the conces- ulatory authority clear and unambiguous? sionaire required to report? 10. Will the concessionaire provide information 20. What financial information is the conces- as may be reasonably required by the regu- sionaire required to report? lator? What is the definition of reasonable? Source: Author.

5. SUMMARY AND competitive behavior and practices within the CONCLUSIONS port sector. It is in a country’s best interest to ensure that its Decisions about reform strategy, industry ports operate efficiently and safely, that fair and structure, and regulatory frameworks are inti- competitive services are provided, and that mately intertwined. Therefore, evaluation of ports support and encourage economic develop- regulatory issues, options, and their conse- ment locally and nationally. quences should be conducted early in the reform process. As shown by the reform The purpose of economic regulation is to ensure experience in port and other sectors, delay the efficient and competitive functioning of the can add to the regulatory burden and cost, port. Regulations often intervene in the function- restrict the availability of options for the ing of markets, including the setting of control- regulator, and risk incompatibility between ling tariffs, revenues, or profits; controlling mar- regulatory requirements and institutional ket entry or exit; and maintaining fair and capacity.

302 Port Regulation: Overseeing the Economic Public Interest in Ports

Due to port sector reforms, many ports have when considering port privatization, reformers evolved into a landlord port authority, with should strive toward structural improvements facilities leased to private operators, that direct- that increase the number of competitors before ly provide their services to carriers and ship- resorting to regulatory improvements. pers. In this situation, private operators may Regulatory enhancements (particularly econom- MODULE 6 provide services previously provided by the ic regulation) are intended to improve efficiency public port authority, such as pilotage, tug by correcting various market imperfections; assist, vessel stevedoring, storage, and yard essentially, the regulations attempt to force services. Private operators are typically motivat- ports to behave as if they were competing in a ed by profit and may not necessarily provide perfect market. facilities or services that are of economical, environmental, or social value if they conflict Structural remedies include: with profit maximization. Therefore there is • Introduction of new berths or terminals. a need for regulatory oversight to ensure that the public interest is protected. The scope of • Division of the existing port into termi- regulation depends on the extent of existing nals. competition. • Entering into short-term operating agree- Factors indicative of the extent of competitive- ment, lease, or management contract. ness within the port sector include: Regulatory remedies include tariff filing and setting of tariffs and rate-of-return thresholds. • Transport options: Competitiveness of a country’s port and inland transport sys- To help design an economic regulatory policy tem in terms of total system costs and for the port sector, the following principles available options. should be considered: • Operational performance: Competitiveness • Government should clearly understand of each port in terms of capacity and level the competitive environment of the port of cargo handling services. sector. • Tariff comparisons: Competitiveness of • The regulator should clearly define what each port in terms of level of port form of economic regulation (for exam- charges. ple, rate of return or tariff setting) is to • Financial performance: Competitiveness be applied and under what circum- of each port in terms of its overall prof- stances. itability. • Responsibilities for port operational and The lack of transport options, congested competition regulation should be formal- facilities, relatively high prices, and high ly separated. Because of the risk of profits alone or together may encourage agency capture and the potential conflict terminal operators and other port service of interest between the two forms of reg- providers to breach the threshold of what ulation, they should be assigned to two may be regarded as acceptable competitive different entities. behavior. • Policy and case deliberations should Port sector reformers can choose from two gen- include the opportunity for affected par- eral strategies to increase port sector competi- ties to present their views. tion: structural remedies and regulatory remedies. Clearly, the ideal strategy is the one that • Decisions made by the regulator should results in increased competition. Therefore, be enforceable with recourse for appeal.

303 Port Regulation: Overseeing the Economic Public Interest in Ports

ANNEX A. PORT TARIFFS: Box A-1: Relative Weights of Different Port GENERAL STRUCTURE, ITEMS, Charges AND FLOW OF CHARGES Item Percent of total As mentioned earlier in this module, tariff con- charges Port tariffs on the use trol is the most commonly used method for eco- of infrastructure 5–15 nomic regulation of ports. Tariffs differ from Berthing services 2–5 port to port as they tend to be a reflection of Cargo handling 70–90 the services offered (for example, container handling, tug assist, and pilotage), the facilities Freight Forwarding 3–6 being provided (for example, gantry cranes,

MODULE 6 storage yard, or sheds), the party that incurs the storage and outside the gate; and (3) tariff charge (for example, the carrier or ship’s intermediate storage in the yard (in the agent, or the shipper), and the basis on which a case of containers) between the ship and tariff item is calculated (for example, pilotage yard transfers for a specified number of charges based on the vessel’s gross registered work days (“free time”). The related tons or vessel draught). Because of these differ- charges are for the use of labor, shore ences, tariffs may seem highly fragmented and handling equipment, yard machines complex, but there is a core set of essential serv- (“rental”), and port facilities (“use of ices required for handling ships and cargoes installations” and “wharfage”). Box A-2 that all ports typically offer. These can be shows the relationship of these charges referred to as basic services. Regulators tend to within the typical container terminal. focus on these services because they represent the bulk of the total charges and are commonly In determining if tariff regulation is necessary, offered by all ports. Box A-1 shows the ranges the regulator first has to identify the specific of the percentages of total port charges repre- service and the service provider. In the traditional sented by a core set of services. port, the public port authority was typically an operating port, meaning that the public entity Such services can be broken down into two cat- provided virtually all of the basic services noted egories: above. From a regulator’s point of view, this • Services to vessels: Basic ship services was a simple matter because of the public enti- encompass the activities and related ty’s monopoly position over all basic services. charges for ships entering and exiting the Generally, one service provider would be harbor and for berthing and deberthing. regulated. These include: pilotage, pilot boat, tug assist (berthing and deberthing), line han- Today, many ports have evolved into a landlord dling, and use of channel and navigation port authority where facilities are leased by pri- aids (harbor fee). The basic ship services vate operators, who in turn directly provide also include the use of the related port their services to carriers and shippers. In this facilities (for example, dockage and berth situation, private operators may provide services occupancy) and of the general port infra- previously under the domain of the public port structure, usually covered by the port authority, such as pilotage, tug assist, vessel dues. stevedoring, storage, and yard services. Because of this shift in service provider responsibility, • Services to cargo: The basic cargo servic- the entire tariff system as well as the transaction es include three related activities: (1) process has changed. The port authority (or transfer of cargo between ship and dock other government entity) will likely continue or storage; (2) transfer of cargo between collecting a navigation charge or port dues, and

304 Port Regulation: Overseeing the Economic Public Interest in Ports

Box A-2: Relationship between Port Charges and the Location Where the Charge is Incurred MODULE 6

Container Harbor Berth Apron Gate Ya r d

Gate Activity Pilotage Vessel Stevedoring Ya r d Proces- Charges: Towage Handling Handling sing

Activity Port Gate Berth DuesWharfage Storage Charges: Dues Dues

Source: Author.

Box A-3: Transaction Complexities Pre- and Postprivatization

Public Operating Port Line

Line

Port

Shipper

Privatized Port Line

Port Operator

Shipper

Source: Author. may also charge for dockage and gate service Thus, the regulator has gone from single-entity fees, depending on the structure of the lease regulation to potentially regulating a full range with the operator as well as the port’s facility of services provided by a number of operators.34 configuration.33 The port authority will also have a lease arrangement with the operator, Box A-3 shows the evolving complexity that who generally charges fees for the range of serv- privatization has introduced from a transaction ices provided from berth to gate (for example, point of view. Under the public operating port, vessel stevedoring, yard handling, or storage). the transaction process was quite clear, as ports

305 Port Regulation: Overseeing the Economic Public Interest in Ports

Box A-4: Port Charges in Miami, Florida

Transship Wfg. Harbor Fee ($3) Other Port Cargo Wfg ($25) Shipping Pilot/Tug ($52) Providers Authority Dockage ($27) Line Federal Gov.

Gate/yard Handling ($61) Port Ship Stevedore ($66) Operator POMTOC

MODULE 6 Cranage ($23) Stevedore Fed.harbor Fee ($63) Terminal Handling ($234) Shippers $234 + $297 Total Charges

Legend: Charges for Basic Services Terminal Handling-All port charges excluding Charges for Auxiliary Services charges directly billed to shippers Note: Amounts in parentheses represent average charges per full domestic move for and Apl ship.

Source: Author.

assessed charges to only two parties—shipping Dockage in Miami is also charged on the basis of lines and shippers. Under a privatized port GRT at a rate of $0.24 per GRT for every 24- arrangement, the port authority applies charges hour stay. Cargo charges in Miami include to operators, lines, and shippers. In potential wharfage, at $1.60 per ton, or the equivalent of antitrust settings, therefore, the regulator needs $22.40 per 14-ton box, which has declined almost to be concerned not only with the port authori- 6 percent since 1998. Cargo wharfage is billed ty’s charges, but also the many private opera- directly to the line (carrier), which in turn incorpo- tors providing basic services, dramatically rates the wharfage charge with the freight bill. increasing the potentially regulated population. There are two separate handling charges, ship Box A-4 shows an actual case of the interrela- handling (stevedoring) and terminal or gate han- tionships of port charges in the Port of Miami dling. Ship handling is performed by private for containerized cargoes. The port is estab- stevedores, collecting a range from $35–50 per lished as a landlord authority under local gov- container, excluding crane services. Terminal ernment jurisdiction (Miami/Dade County). At handling is performed by POMTOC, a private the time of writing, ship charges in Miami, like sector joint venture of local stevedores and P&O in most U.S. ports, include a special fee called Ports. POMTOC charges approximately $45–55 the Harbor Maintenance Fee, collected by the per move, for any type of container, including U.S. federal government to cover dredging and empties. The charge for gantry cranes is based aids to navigation. The charge is 0.125 percent on an hourly rate of $450 per hour (straight of the cargo value, or about $63 per average time). The cranes are owned by the port authori- box of $50,000 value. There is, however, a sec- ty, but operated by the private stevedores and ond charge called a harbor fee applied by the maintained by a private company. local port authority, which is based on the ship’s gross registered tons (GRT). The port has no direct charging relationship with shippers, only with shipping lines (carriers)

306 Port Regulation: Overseeing the Economic Public Interest in Ports

Box A-5: Port Charges in Cartagena, Colombia

Empties Storage Stuffing/Destuffing Pilot/Tug ($47) Port Transshipment Wharfage Shipping Other MODULE 6 Authority Cargo Wharfage/Empties ($5) Line Other Services ($21) Providers Dockage ($19)

Cranage ($46) Port Wharfage Operator Berth Wfg. ($16)

Yard Wharfage ($2) Ship Stevedone ($128) Cargo Wharfage/ Fulls ($83) Yard Handling ($20) Terminal Handling ($220) Shippers $83 + $20 + $220 = $323 Total Charges

Legend: –charges for Basic Services Terminal Handling-All port charges excluding charges directly billed to shippers –charges for Auxiliary Services Note: Amounts in parentheses represent average charges per full domestic move for and APLship. Source: Author. and operators. Shippers pay directly only the Miami case, the port society has a direct charg- federal Harbor Maintenance Fee. ing relationship with the shippers and also charges the port operators (stevedoring compa- Box A-5 shows how the flow of charges may dif- nies) directly for berth and yard wharfage. In fer from port to port. The figure also illustrates Columbia, shippers are also charged directly for the flow of port charges for the Port Society of yard handling by the stevedoring companies. Cartagena, whose tariff reflects the operating arrangement in that port. In Miami, the facilities The emerging complexities in privatized set- are administered by the local port authority. In tings suggest that regulators will need to be Cartagena, as elsewhere in Colombia, the facili- more cognizant of how port services are pro- ties are administered by a private sector company vided and what party is charged by whom. It is referred to in Colombian law as a port society. conceivable that one country can have a variety The port society’s primary responsibility is to of charge flow configurations depending on the operate the backup area (the area behind the operating arrangements in a particular port. As berth), while private stevedoring companies han- is shown in figures A-3 and A-4, depending on dle the loading and discharging operation.35 In the extent of competition, it is possible that addition, other private operators provide pilotage regulators will need to monitor the pricing and tug services. These operators, along with the practices of not only the port authorities, but stevedoring companies, are charged an installa- also the various private parties engaged in port tion user charge by the port society. Unlike the operations.

307 Port Regulation: Overseeing the Economic Public Interest in Ports

ENDNOTES 7 World Bank. 1996. Infrastructure Delivery: Private Initiative and the Public Good, pp 1 World Bank. 1997. Toolkits for Private xxi–xxii and pp. 54–61. Washington, DC: Participation in Water and Sanitation, World Bank Economic Development Institute. Module 1: Selecting an Option for Private Sector Participation, p. 20. Washington, 8 In many ports, load-bearing capacities may DC: World Bank. be different at each berth. For example, one berth may be designed to handle the weight 2 Return on equity (ROE) = net income/share- of gantry cranes on the berth’s apron, while holders equity; return on assets (ROA) = net other berths are designed to handle lower income/total assets. weight breakbulk cargoes. There are, of

MODULE 6 course, engineering solutions to expanding 3 Trujillo, L., and G. Nombela. 1998. an apron’s capacity, which require substan- “Privatization and Regulation of the Seaport tial investment. This investment may be jus- Industry.” December, p. 21. tified with anticipated cargo volumes. 4 Perfect competition is a noble goal, but rarely achievable. While there are cases of 9 Regulators differentiate between tariff filing markets with large numbers of sellers and and tariff monitoring. Tariff filing normally is buyers, these sellers and buyers are seldom required each time a service provider adjusts fully informed about their alternatives. The its tariff. The filing is a means of informing information available to them may be of port users about generally available prices for questionable reliability or costly to acquire, services. This allows port customers to detect while at the same time there may be artifi- any abnormalities in pricing behavior (for cial restraints (for example, government example, unjustified pricing discrimination) regulation of prices or resource mobility) and, in the event such abnormalities exist, to that affect the competitive environment. register a complaint with the regulator. In the Many might argue that the U.S. port sector event a complaint is received, usually for represents a perfectly competitive market alleged discriminatory, collusive, or predatory given excess capacity and a plethora of pricing practices, the tariff filing requirement intermodal and port options. Many of these gives the regulator a pricing history to support assets, however, either directly (for example, its investigative efforts. Where the regulator construction grants) or indirectly (for exam- perceives a relatively high risk of anticompeti- ple, tax-exempt status on the interest of tive behavior, or if there is a history of viola- bonds issued to finance construction) are tions on the part of one or more operators, subsidized, thereby distorting the market then the regulator may monitor the tariffs that supply in response to demand. are filed, assessing for itself the anticompetitive impact of the new tariff at each filing. 5 But there are a number of cases where the mere presence of a private owner changed 10 In some countries, setting the tariffs is distinct the efficiency of the port or the terminal from approving tariffs. For example, in because a very different company culture Nicaragua the operator (or cargo handling was introduced (for example, Klang company) submits a tariff for approval Container Terminal in Malaysia). through the Empresa Nacional de Puertos (EPN, the national ports authority), which 6 World Bank. 1997. Toolkits for Private Sector reviews the tariff and forwards it for final Participation in Water and Sanitation, Toolkit approval to the Ministry of Transport and 1: Selecting an Option for Private Sector Infrastructure. EPN may attach comments Participation, Annex 1. Washington, DC: regarding its assessment of the fairness and World Bank. reasonableness of the tariff, but its role is not

308 Port Regulation: Overseeing the Economic Public Interest in Ports

to assess the proposed tariff’s relationship or operators that may offer bundled services, effect on industry competitiveness (this only one of which the regulator intends to responsibility does not yet exist for any sector regulate. The complexity here is derived in Nicaragua). In Colombia, prior to its tariff from the ability to assign costs to each of

liberalization in 1995, the Superintendente these bundled services. Finally, operators MODULE 6 General de Puertos (SGP, the General Port always have a monopoly on their financial Superintendent) set the tariffs, initially both information. What they report will not nec- minimum and maximum charges and eventu- essarily be an accurate reflection of reality. ally only maximum tariffs. In practice, the Indeed, some operators may keep separate effect is the same, as the regulator sets the tar- accounting books, one for reporting purpos- iff by either dictating one or approving one. es and one for proprietary purposes. Because of the uncertainty and questions of 11 World Bank. 1996. Sustainable Transport: data reliability, regulators will often estab- Priorities for Policy Reform, p. 104. lish a mini-max or maximum tariff that Washington, DC: World Bank. reflects the range of uncertainties associated 12 World Bank. 1996. Sustainable Transport: with defining an operator’s cost structure. Priorities for Policy Reform, pp. 86–87. 15 The steps, while presented in a logical order, Washington, DC: World Bank. do not necessarily need to be implemented 13 Many port authorities, as part of their pub- in the sequence presented. lished tariffs, will impose operational regula- 16 Guislain, Pierre. 1997. The Privatization tions relevant to both carriers and terminal Challenge: A Strategic, Legal, and Institutional operators. Operational regulations can refer Analysis of International Experience, p. 258. to a variety of topics, such as vessel reporting Washington, DC: World Bank. requirements, navigation rules within the port’s jurisdiction, invoicing rules for port 17 Guislain, Pierre. 1997. The Privatization dues, information access rules (for example, Challenge: A Strategic, Legal, and Institutional anchorage, vessel lighting, speed, and so Analysis of International Experience, p. 258. forth), port working hours, reporting proce- Washington, DC: World Bank. dures for environmental incidents within the 18 Eustache, Antonio. 1999. Privatization and port area, detainment rights for vessel damage Regulation of Transport Infrastructure in to facilities, or other rules. the 1990s: Successes...and Bugs to Fix for 14 This is an important point. There are basi- the Next Millennium, p. 28. Washington, cally only two ways for determining the DC: World Bank. basis on which tariffs should be set. The first is tariff benchmarking with other ports 19 See in this respect Module C.63 of the (or their operators) that operate in similar International Labour Organization’s conditions. The second is to require the Portworker Development Program (PDP). operator to provide audited financial data 20 Guislain, Pierre. 1997. The Privatization with careful consideration of the debt serv- Challenge: A Strategic, Legal, and Institutional ice obligations from investments. In this Analysis of International Experience, sense, the regulator would have to make pp. 280–81. Washington, DC: World Bank. certain assumptions about what the rate of return is and what rate is considered 21 Smith, Warrick. 1997. “Utility Regulators— “reasonable.” What the regulator considers The Independence Debate.” In The Private reasonable may not adequately consider the Sector on Infrastructure: Strategy, initial investment risk that the operator Regulation, and Risk, September, p. 22. made. A complicating factor concerns those Washington, DC: World Bank.

309 Port Regulation: Overseeing the Economic Public Interest in Ports

22 Eustache, Antonio. 1999. Privatization and Experience, p. 280. Washington, DC: World Regulation of Transport Infrastructure in Bank. the 1990s: Successes...and Bugs to Fix for the Next Millennium, pp. 24–25. 31 World Bank. 1997. Toolkits for Private Washington, DC: World Bank. Sector Participation in Water and Sanitation, Toolkit 1: Selecting an Option 23 Burns, Phil, and Antonio Eustache. 1999. for Private Sector Participation, Annex 2, Infrastructure Concessions, Information p. 33. Washington, DC: World Bank. Flows, and Regulatory Risk. Washington, DC: The World Bank Group. 32 Eustache, Antonio. 1999. Privatization and Regulation of Transport Infrastructure in 24 Guislain, Pierre. 1997. The Privatization the 1990s: Successes...and Bugs to Fix for MODULE 6 Challenge: A Strategic, Legal, and Institutional the Next Millennium, p. 29. Washington, Analysis of International Experience, p. 268. DC: World Bank. Washington, DC: World Bank. 33 For example, the port authority may have a 25 Green, Richard, and Martin Rodriguez Pardina. general perimeter gate in which initial access 1999. Resetting Price Controls for Privatized is cleared by port authority personnel. An Utilities: Manual for Regulators, pp. 11–12. “interior” terminal gate is under the control Economic Development Institute, World Bank, of the operator that leases the facility. Washington, DC. 34 The extent to which regulation is necessary, of course, is dependent on the risk of 26 Green, Richard, and Martin Rodriguez monopolistic or oligopolistic behavior on Pardina. 1999. Resetting Price Controls for the part of both the port authority as well as Privatized Utilities: Manual for Regulators, the firms. Even in a post privatization envi- p. 64. Economic Development Institute, ronment, the port authority may still be World Bank, Washington, DC. considered a monopoly by virtue of facility 27 The operator, itself, may also be affected by ownership (for example, the landlord model factors outside its control, such as ship size, in an environment where there is no inter- number of moves for loading or discharging, port competition) and in terms of its charges type and number of hatch covers, vessel for navigation, wharfage, and dockage dimensions (width and depth determine the (assuming it charges these). In addition, path of the container’s movement), and even in nonmonopolistic settings there may stowage plan. still be a need for antitrust concerns for specific services in light of the highly 28 Berth performance is a reflection of both concentrated markets that have resulted efficiency at the berth as well as efficiency post privatization. for the operations behind it. Yard congestion itself can cause delays in vessel loading 35 This arrangement is changing, however, as and discharge. the society is now providing vessel stevedoring services for vessels calling to berths 29 Operators, on the other hand, should be where the society’s gantry cranes are located. concerned with these incremental measures because they point to underlying causes for REFERENCES overall productivity performance. Alexander, Ian, and Timothy Irwin. 1997. “Price Caps, Rate-of-Return Regulation, Risk and the Cost of 30 Guislain, Pierre. 1997. The Privatization Capital.” In The Private Sector on Infrastructure: Challenge: A Strategic, Legal, and Strategy, Regulation, and Risk, pp. 33–34. Institutional Analysis of International Washington, DC: The World Bank Group.

310 Port Regulation: Overseeing the Economic Public Interest in Ports

Burns, Phil, and Antonio Eustache. 1999. Smith, Warrick. 1997. “Utility Regulators—The Infrastructure Concessions, Information Flows, and Independence Debate” In The Private Sector on Regulatory Risk. Washington, DC: The World Infrastructure: Strategy, Regulation, and Risk, Bank Group. September, Washington, DC: World Bank.

Eustache, Antonio. 1999. Privatization and .1997. “Terminal velocity.” Containerization MODULE 6 Regulation of Transport Infrastructure in the International June, p. 95. 1990s: Successes...and Bugs to Fix for the Next Millennium, p. 28. Washington, DC: World Bank. Trujillo, Lourdes, and Gustavo Nombela. 1999. “Privatization and Regulation of the Seaport Green, Richard, and Martin Rodriguez Pardina. 1999. Industry.” Universidad de Las Palmas de Gran “Resetting Price Controls for Privatized Utilities: Canaria Dpto. AnÁlisis Econ—mico Aplicado 35017 Manual for Regulators.” Economic Development Las Palmas de Gran Canaria (Spain), December, p. 21. Institute, World Bank, Washington, DC. UNCTAD (United Nations Conference on Trade and Guislain, Pierre. 1997. The Privatization Challenge: Development). 1998. Review of Maritime Transport. A Strategic, Legal, and Institutional Analysis of UNCTAD RMT 98/1: New York and Geneva. International Experience. Washington, DC: World Bank. UNCTAD. 2005. Review of Maritime Transport. UNCTAD/RMT: New York and Geneva, 2005, Kent, P. E., and A. Hochstein. 1998. “Port Reform and Privatization in Conditions of Limited World Bank. 1996. Infrastructure Delivery: Private Competition: The Experience in Columbia, Costa Initiative and the Public Good, Washington, Rica, and Nicaragua.” Journal of Maritime Policy DC: World Bank Economic Development and Management 25 (4): 313–333. Institute.

Kerf, Michel, and Warrick Smith. 1996. “Privatizing World Bank. 1996. Sustainable Transport: Priorities Africa’s Infrastructure: Promise and Challenge.” for Policy Reform. Washington, DC: World Bank. Technical Paper No. 337, World Bank, Washington, DC. World Bank. 1997. Toolkits for Private Participation in Water and Sanitation, Module 1: Selecting an McCallum, Elizabeth. 1999. “Privatising Ports: A Option for Private Sector Participation. Legal Perspective.” Privatisation International Washington, DC: World Bank. November, pp. 53–55.

311

PORT REFORM TOOLKIT SECOND EDITION

MODULE 7 LABOR REFORM AND RELATED SOCIAL ISSUES

MODULE 7 The World Bank encourages dissemination of its work and will normally grant permission promptly.

ISBN-10: 0-8213-6607-6 ISBN-13: 978-0-8213-6607-3 eISBN: 0-8213-6608-4 eISBN-13: 978-0-8213-6608-0 DOI: 10.1596/978-0-8213-6607-3 MODULE 7 336 6.4.1. Prereform Rationalization6.4.1. Prereform Rationalization 6.4.2. Postreform 331 332 International License Organization Portworker Development Program Labour 351 5.1. Redefining the Concept of Social Equity 5.1. Redefining the Needs 5.2. Meeting Commercial 5.3. Fostering Competition Role 5.4. Government’s Port Labor Reform 5.5. Time Frame for 6.1. Alternatives to Dismissals Program Retrenchment 6.2. Elements of a Staff Severance Packages 6.3. Pitfalls in Designing and Implementing and By Whom? When 6.4. Rationalizing the Workforce: of Port Labor Rationalization?6.5. Who Should Pay for the Expenses 323 329 333 324 331 326 328 325 325 327 Annex I. World Bank Labor Adjustment Projects Bank Labor Adjustment Projects Annex I. World Have Obtained and Renewed an Annex II. List of Organizations That 337 1. Context for Labor Reform for Labor Reform 1. Context 2. Key Labor Issues in Port Reform 3. Labor Involvement Approach Force Labor Reform: A Task 4. Organizing to Address Framework for Labor Reform 5. The Institutional Rationalization Plan Workforce 6. Developing the 321 7. International Support for Labor Adjustment 323 Relations Labor Management 8. Postreform References 318 313 326 317 334 336 Box 1: Changes in Economic Policies: Impact on Port LaborBox 1: Changes in Economic Policies: 1970s and 1980s in Gang Strength, Box 2: Trends Brazil Box 3: Labor Competition in India and Port Labor ReformBox 4: Factors Prompting UnionBox 5: Port Labor Reform in the European of Reform on EmploymentBox 6: Possible Effects with Labor Unions: The Ghana CaseBox 7: Working on Employee Transfer Agreement Clauses in a Concession Box 8: Sample Reference Commission of AustraliaBox 9: The Productivity Box 10: Institutional Framework for Labor Reform Key FindingsBox 11: Job Security in Ports Box 12: Social Plans at Moulinex 323 BenchmarksBox 13: Port Staffing 314 Box 14: A Downsizing Decision Tree 316 317 318 317 325 319 322 324 326 328 330 332 BOXES MODULE SEVEN CONTENTS MODULE MODULE 7 a:1225232.Internet:[email protected] 1.202.522.3223. Fax: Please sendthemto the World Bank Transport HelpDesk. Comments are welcome. andBradle Kruk, Cornelis “Bert” Ronald Kopicki, The preparation andpublishingofthePort Reform Toolkit Juhel, underthemanagementofMarc wasperformed contributions ofthefollowing organizations. The First Edition ofthePort Reform Toolkit wasprepared andelaborated thanksto thefinancingandtechnical oftheILO Meletiou andMarios for theircontributions KeesMarges formerly to thiswork. ofITF, Group, Maritime andSimme Veldman oftheRotterdam Koppies, John We wishto give specialthanksto Christiaanvan Krimpen, for whichconsultants oftheRotterdam Group (RMG)were Maritime contracted.Toolkit’s content, and Water Public for Management) theenhancement ofthe Works, of Fund (NetherlandsMinistry Transport, Financial assistance wasalsoprovided through agrant from The Netherlands Transport andInfrastructure Trust andrural services. infrastructure inthefieldsoftransport and sharingofknowledge for learning for International Development andthe Department World Bank, between theU.K. a partnership TRISP, This SecondEdition ofthePort Reform Toolkit hasbeenproduced withthefinancialassistance ofagrant from Acknowledgments PA Consulting (USA) United NationsEconomic Commission for LatinAmericaandtheCaribbean (Chile) Nathan Associates (USA) ISTED (France) LLP(USA) Holland andKnight Netherlands) The Rotterdam Group Maritime (The Netherlands) (The Management Rotterdam MunicipalPort HoldingRotterdam (formerly as Consultancy known Mainport TEMPO), AssociatesInternational Maritime (USA) The WorldBank The ofForeign French Affairs Ministry The NetherlandsConsultant Trust Fund e ie www Web site: For more information seethe onthefacility throughof theirinfrastructure private involvement. sector PPIAF isamulti-donortechnical aimedathelpingdeveloping assistance facility countries improve thequality The Public-Private Facility Advisory Infrastructure (PPIAF) .ppiaf .or g . y Julianofthe World Bank Transport Division. MODULE

7 MODULE 7 Labor Reform and Related Social Issues SECOND EDITION

his module is the seventh of eight modules comprising the Port Reform Toolkit. The Toolkit is designed to help government officials Tand private interests alike navigate the process of port reform to achieve more modern, efficient, and financially viable seaports and related intermodal facilities and services. The labor reform module deals with some of the most critical elements of port reform: the many labor related issues associated with port ownership and operations. It is designed to help government decision makers identify the key forces affecting port labor today, understand the need for reform in a competitive environment, evaluate alternative ways of approaching labor reform, and pursue reform in a way that maximizes efficiency and minimizes labor dislocation and risks to potential port investors and operators.

1. CONTEXT FOR LABOR the benefits of a more participatory approach to REFORM port management. Port labor from crane and equipment operators Ports and port labor do not exist in isolation. to stevedores to harbor pilots is one of the keys They are an integral part of, and in turn are to success or failure in today’s competitive port affected by, national economic and trade poli- and international trade environment. Too often cies, changes in markets and services, and tech- port labor is blamed for a port’s failure to play nological advances. Box 1 illustrates how an appropriate and productive role in port changes in economic policies occurring over the operations and its nation’s economic develop- last decades have affected port labor. ment. Overstaffing, outdated and inefficient These changes in economic policies have been work rules, poor skills and training, inflated accompanied by other developments in technolo- pay scales, and unreliability are among the most gy, logistics, and transportation that have led to prominently cited problems contributing to high further reductions in the demand for dock work- costs and inefficient operations in many ports. ers. The shift from “port to port” to “door to To be fair, outdated management practices can door” cargo delivery systems, for example, and sometimes add to these problems by overlooking the use of inland container facilities have led to

313 Labor Reform and Related Social Issues

Box 1: Changes in Economic Policies: Impact on Port Labor

Economic Policies Characteristics End Result Semiautonomous economic International trade: Labor-intensive technologies: policies (until mid 1980s) • Freedom in the selection • Limited degree of of inputs, finished goods, specialization required to services, funds, and labor, operate single function lifting usually on a domestic or equipment. local basis. • Cargo handling and • National markets were warehousing monopolies. reserved for domestic • Direct and cross subsidies.

MODULE 7 producers, inefficient • Increasing wages, avoidance production methods, trade of new technologies, and low barriers, currency exchange productivity were all restriction, bias against institutionalized as measures exports. that protected national producers. • Political influence on decisions as to which and how much cargo handling equipment to acquire. Capital-intensive equipment not viewed as socially acceptable. • Expansion of the labor force simultaneously with demand, fragmentation of functions, and dock worker registration systems. More cargo, more workers. Export-oriented economic policies Global trade: Capital intensive-technologies: (from mid 1980s onward) • Economic activities • Ports can provide services restructured, customs that are competitive and duties reduced, commercially attractive. competition intensified, • Productivity increased and domestic producers meet costs reduced by exposing the demands of port labor to market international markets locally mechanisms. • Freedom in the selection of • Workforce reduction, more inputs, finished goods, cargo, less direct port services, funds, and labor, workers. Training and usually on a worldwide basis. retraining programs to • Vigorous worldwide enhance skills of workers competition for goods and safe working conditions. and services requires labor • New techniques and work to respond to the needs of organizations introduced to port customers. motivate the labor force. Participation of workers in workplace decisions. Monetary incentives granted on the basis of customers’ satisfaction, performance of cargo handling gangs, and participation in enterprise profit share linked to individual and team efforts. Source: Author.

314 Labor Reform and Related Social Issues many containers being stuffed and stripped by labor reform process is typically initiated only consignors’ or consignees’ employees on their when at least one, or more likely a combination, own premises, often distant from the port. of the following three influences are present: Handling systems have been extensively mecha- • Competition: Challenges a port or a ter- nized and are also increasingly automated. MODULE 7 minal faces from competing terminals, Box 2 shows how the size of work gangs in a either within the same port or from other number of ports has changed, or not, in response ports in local or regional markets, often to changing economic and competitive markets. lead public officials, port users, and ship- In many of the ports shown in Box 2, the num- pers to press for reforms to improve effi- ber of workers per gang was very large, and ciency and lower costs (see Box 3). remained mostly unchanged between 1970s and • Community pressure: As a result of com- 1980s despite the fact that cargoes increasingly petitive challenges, the port and trade were being transported in containers with the use community can be expected to object to of modern equipment. In developing countries, restrictive port labor work practices, where ports were operated for the most part by agreements, and regulations, all of which the public sector, a combination of factors such lead to high labor costs, low productivity, as surplus labor, strict application of union disci- and high prices for port services. pline, limited resources to acquire modern cargo handling equipment, poor training, and govern- • Political commitment: When the two fore- ment policies to maintain or create employment going factors exist, they can galvanize contributed to overmanning in ports. remedial action in the form of a plan undertaken by a public authority or pro- In the 1990s, private interests made significant posed by a candidate for public office as capital investments in ports around the world. part of a political platform. The intent is Continued imposition of large work crews and to reform port labor regimes to make the rigid work rules in many ports, however, have port more efficient and cost effective and undermined the value of these investments, and, thus improve competitiveness while reduc- hence, the commercial feasibility of ports and ing the fiscal burden of the public sector. terminals, both in developing and developed Competition is the principal motivating force countries. For example, until April 1998, in var- behind labor reform. In cases where ports serving ious Australian ports there were typically 11 or the same hinterland already face competition, the 12 workers per shift per gantry crane. With the propensity to undertake reform is usually higher new enterprise agreement, this number was (see Box 3). Regardless of whether there is direct reduced to six workers per shift per crane, and port or terminal competition, global competition substantial productivity gains were achieved (see in its broadest sense compels port stakeholders, Box 2). In the Port of Santos, Brazil, in 1997, including labor, to assess their organizational and labor and management reached an agreement operational cost structures, work methods, and reducing from 12 to 10 the number of workers procedures. From this perspective, ports may be per shift per crane. As a general matter, port ter- viewed as just one of several factors that con- minal operators would rather employ a smaller tribute to a country’s or a region’s competitive- number of workers per shift while complying ness. As such, it is in a country’s overall econom- with safety and health regulations, and pay ic interests to improve port efficiency through higher wages for a highly efficient, lean team. labor reform and other measures.

Port labor reform presents a difficult challenge The port and trade community, which includes for government decision makers and therefore it manufacturers, exporters, importers, and land is unlikely to take place unless forced by unfa- and ocean carriers, because of its close business vorable existing conditions. As a result, the port relationship with the port, can sometimes press

315 Labor Reform and Related Social Issues

Box 2: Trends in Gang Strength, 1970s and 1980s

Port Date Gang Strength Date Gang Strength Change Aruba 1979 21 1983 12 –9 Auckland 1971 14 1982 14 Nil Bahrain 1970 15 1982 10 –5 Beirut 1974 50 1983 15 –35 Bombay 1970 Ashore 13 1980 Ashore 13 Nil In hold 8 In hold 8 Nil Chittagong 1970 14 1982 14 Nil

MODULE 7 Cochin 1973/74 Ashore 8–18 1982/83 Ashore 12 (average) On board 10 On board 10 Doula 1970 14 1982 14 Nil Freetown 1976 14 1983 14 Nil Gothenburg 1976 9–13 1983 8–13 Nil Guam 1970 14 1983 9 –5 Lagos 1970 16 1982 16 Nil Madras 1970 24 1980 27 +3 Melbourne 1970 10–21 1983 10–21 Nil Montreal 1970 3–14 1982 3–14 Nil Oslo 1970 10 1982 “as required” – Panama 1971 18 1982 18 Nil Pinang 1970 9 1982 9 Nil Port-au-Prince 1977 8 1982 12 +4 Puerto Rico 1970 22 1982 22 Nil Rangoon 1972 26–30 1982 15 –(11–15) Recife 1970 4–15 1983 4–16 +1 Rotterdam1 1970 6–14 1981 6–14 Nil Tai–chung 1970 4–20 1982 4–20 Nil Shuwakh 1980 12 1982 12 Nil Singapore 1970 15 1982 10 –5 Turkey (all ports) 1970 11–13 1982 7–9 –4 A (Sweden) 1970 11 1982 9 –2 B (Norway) 1979 7–9 1982 5–7 –2 I (North Africa) 1971 17 1981 17 Nil J (Australia) 1970 11–15 1982 6–15 –3 E (Taiwan, China) 1970 22 1982 12 –10

Source: Couper, A. D. 1986. New Cargo Handling Techniques: Implications for Port Employment and Skills. ILO.

governments to modify restrictive labor regula- tute an important force to initiate the labor tions that govern work practices in ports. reform process. Transforming these requirements into effective modernization plans may depend on other fac- Finally, political commitment is essential to tors, but presenting a common voice can consti- initiate labor reform. Without strong support

316 Labor Reform and Related Social Issues

While a port labor reform process may be insti- Box 3: Labor Competition in India and Brazil gated by either competition, community pres- n 2000, Western India’s main container port, sure, or political push, the most favorable con- Jawaharlal Nehru Port (JNP), located within dition occurs when all three forces are present Mumbai Bay, used gangs of 4 workers for I simultaneously (the shaded area in Box 4). MODULE 7 container handling while the Port of Mumbai used gangs of 15 workers to perform the Box 5 describes the efforts of port labor reform same task, putting more pressure on the latter to undertake labor reform sooner than the in the European Union. Eastern Indian port of Calcutta, which used gangs of 28 workers and had no competing 2. KEY LABOR ISSUES port in the vicinity at that time. In numerous developing countries, as well as in Likewise, competition arising due to the some industrialized ones, existing port labor proximity of the Port of Sepetiba to the Port regimes, collective agreements, and management of Rio de Janeiro, Brazil, has encouraged the latter to negotiate more flexible labor arrange- and labor practices are inflexible, outdated, and ments and tariffs than the Brazilian Port of inefficient. Consequently, they hinder the develop- Santos, which at the time had no nearby ment of the commercial and operating environ- competing port (now the container terminals ments that ports require to respond to the have been privatized and multiple competing increasing demands of customers and competitive terminals exist in the same port). markets. Governments, as a result, must Source: Author. appraise, in consultation with other port stakeholders, the extent to which labor regimes, collective agreements, and labor and management and reassurance from government decision practices serve as a barrier to the achievement makers for labor reform, the chances for of the port’s commercial goals. reform to succeed are slim. Similarly, promises from aspiring political leaders could fall short In conducting this appraisal, many issues have after an election is won. Moreover, the need to to be addressed, including, but not limited to: reduce government subsidies or the desire to obtain a one off cash injection by tendering • Restrictions on which entities can offer concessions, have in the recent past been com- cargo handling and other services in the mon incentives for reform and port labor port. reform. • Reducing overstaffing by adapting gang sizes and other staffing to generally accepted levels.

Box 4: Factors Prompting Port Labor Reform • Rigid and outdated job descriptions and duties. • Limitations on working hours and days.

Community • Inefficient overtime allocation at exces- Competition Pressure sive wage rates.

• Hiring of port labor exclusively through the unions.

Political • Restrictions on output. Commitment • Unsettled and combative workplace culture.

• Insufficient training and retraining oppor- Source: Author. tunities.

317 Labor Reform and Related Social Issues

Box 5: Port Labor Reform in the European Union he European Commission attempted out their own loading operations. Services include numerous times (2001, 2003, and early cargo handling, towage, mooring, pilotage, and T 2006) to adopt a proposed directive on passenger services and represent a major part of market access to port services. The aim was to total costs of port calls for ships and of cargo establish clear rules and to set up an open and transported through ports. There are, in the transparent procedure for access to port services. opinion of the commission, no reasons why self- The proposal sought to reinforce quality service handling should not, in principle, be allowed if in ports with a strong focus on port labor and operators believe that such action provides better concession terms. Port labor, however, supported use of their resources and increases efficiency. by several industry stakeholders, fought strongly Many port stakeholders (port unions, opera- against the proposals, which included dock

MODULE 7 tors, and shipping lines) felt that this type of liber- worker strikes in Germany, the Netherlands, alization would not only undermine the position Portugal, and France. of the regular port workers, but would also open The key objective of the commission’s initia- the door for inexperienced, poorly trained, and tive, namely to increase port efficiency, would also underpaid port workers on an on call basis, giv- allow a port service provider to employ personnel ing rise to the emergence of malafide employers of its own choice. Self-handling would be allowed who would diminish the quality of port services. and self-handlers would be treated neither more The most recent proposal in January 2006 nor less favorably than other providers of a com- was rejected by the commission on a vote of parable service. Self-handling is when a port user 532 to 120. provides for itself one or more categories of port Source: Author. services, for example when ferry operators carry

• Lack of clear and meaningful productivi- adverse human and social effects that may ty objectives. result from implementation. To ensure that dock workers’ rights and interests are properly • Inadequate occupational health and safety taken into account, the International Transport procedures. Workers’ Federation (ITF) recommends that Some port reformers have opened labor markets policy makers should involve labor at all stages to competition as an approach to address these of port reform. issues. In this context, the existence of inflexible and exclusive dock labor boards or union labor The principal areas of interest for port labor pools runs counter to the desire to increase include, but are not limited to: management discretion over the recruitment, • Stable and fulfilling employment. qualification, and use of specific employees. • Reasonable incomes. Many government-owned and operated ports face not just one of these issues, but a combina- • Decent working conditions. tion of them. And solving these issues is critical • Social security and pension provision. to any successful port reform strategy. Simply shifting the burden of these issues from a public • Education and vocational training. authority to the private sector, however, will do • Health, safety, and the environment. little or nothing to resolve them. Box 6 shows how certain port reforms can affect employment • Workplace democracy. conditions and labor management relations. • Freedom from discrimination on the basis 3. LABOR INVOLVEMENT IN of race, religion, social status, or gender. PORT REFORM • Freedom from corruption and coercion. A realistic and responsible port reform initiative Historically, trade unions have worked to advo- must recognize and deal with the possible cate these interests. And trade unions can be

318 Labor Reform and Related Social Issues

Box 6: Possible Effects of Reform on Employment

Employment effects Employment conditions Management labor relations • Reclassification of posts. • Greater job mobility. • Greater emphasis on profes- MODULE 7 sionalism. • New job patterns. • Diminished guarantee of • More discretionary power in tenure and job security. making management decisions and formulating enterprise policies. • Labor retrenchment and direct • Need for retraining and • More emphasis on strict job losses. skill upgrading. implementation of these decisions and policies. • Gender-based employment • Longer working hours • Marginalization of unions’ policies. and/or increased work influence and bargaining load. power. • Discrimination against shop • Payment by results • More tedious wage bargaining stewards and other labor schemes and pay freezes. with preferences for individual representatives. rather than collective agreements. • Medium- and long-term • Loss of seniority and • Tougher stance of employment gains due to service grades. management on workers increased investment, growth, • Wider wage differentials performance and work privatized firms, and with greater incentive discipline. diversification of services. components. • Loss of pension rights. • Efficiency arguments and • Loss of social benefits profit-making gain importance (for example, housing, over social objectives. transport, child care, and health insurance schemes). • Abolition of ban on undertaking strikes and industrial actions. Source: UNCTAD. 1995. Comparative Experiences with Privatization: Policy Insights and Lessons Learned.

expected to continue to play an important role in Failure of governments to secure constructive the port community during and after the period labor involvement in port reforms can typically of reform implementation. Government authori- be traced to: ties, when undertaking reform, must recognize this legitimate and important role and should not • Mistrust stemming from historic disputes view port reform predominantly as an opportu- and the recurring conflicts over capital- nity to break trade unions or otherwise under- labor tradeoffs. mine their role in protecting workers’ interests. • Inadequate and untimely preparation of port reform proposals, making it difficult Despite the critical role that labor plays in for labor to take part in consultations ports, many countries have designed and imple- and negotiations. mented port reform adjustment programs without the involvement of workers’ representatives • Financial resources that are too limited to and unions. cover training needs created by port reform.

319 Labor Reform and Related Social Issues

Governments, however, have much to gain from and to commit significant human involving labor early and effectively in the port resources to the reform process. In addi- reform process. Port labor is one of the most tion, trade union structure must allow for valuable assets of the port community. This the internal exchange of information and pool of trained personnel is a deep source of debate. In some cases this expertise needs practical knowledge with vast experience in to be developed, as it has been within port operations. This source can be tapped to those unions more experienced in reform contribute problem-solving expertise and inno- processes. There are several ways to vation to add value to the goods and services of develop this expertise within a union, customers. including training. • Introduction of new trade union struc- MODULE 7 On the other hand, labor unions themselves must face a number of crucial challenges to tures. One obstacle to successful port adjust and optimize their own effectiveness reform could lie in outdated union struc- when dealing with reform. As listed by a former tures that divide workers into many ITF official, the main challenges include: small, different unions, that sometimes compete among themselves for member- • Union participation. The participation of ship. Efficient trade union structures, cov- trade unions in the reform process is a ering the whole industry, should be creat- big challenge because it requires a com- ed to enable union officials to exchange mitment from trade union leaders. information within the union, to organize Negotiation implies compromise and this the necessary internal debate, and to may not always be to the liking of all present a consistent approach in their affected trade union members. Union dialogue with public authorities. leaders must accept that once they have • Finding solutions to social problems negotiated the best deal possible, it is caused by reforms. The main source of their responsibility to defend it strongly port workers’ opposition to reform is to their members. uncertainty. Faced with the fear of unem- • Unification of workers’ short- and long- ployment or major cuts in income, labor’s term interests. The issues confronting first reaction is always to say no. Unless labor during the transition period to workers can be given an interest in the reform versus the period following the results of the reform, they will resist any introduction of reform are different. In change. Employment and income guaran- the transition period, the challenge for tees for port workers affected by reform trade unions is primarily to defend the are, therefore, essential in creating the cli- short-term interests of workers. At the mate required for successful and lasting same time, trade unions have to look to port reforms. The costs of severance pay, the future and to defend the workers’ unemployment benefits, pensions, cash long-term interests. This means that they payments for early retirement, or other have to understand longer term trends measures must be considered a legitimate affecting the port industry and to be able part of the overall cost of reform. The to develop appropriate policy and a strat- challenge for the trade unions, which egy for the future. comes prior to solving social problems, is to develop their own policy on those • Increase expertise within the union. issues and to reach common ground with Participating actively and effectively in a public authorities and private employers. reform process requires trade unions to become thoroughly knowledgeable about • Reform acceptance. Unions increasingly shipping, ports, and international trade, recognize the need for a differentiation of

320 Labor Reform and Related Social Issues

their policies on reforms and reform. must learn that the state, on many occa- Resolutions adopted at ITF’s Latin sions, should no longer take the lead, but American and Caribbean and African should provide an environment in which Regional Dockers’ Conferences in Lima entrepreneurs are encouraged to make

(November 1996) and Mombasa their own decisions and in which trade MODULE 7 (December 1996) indicated for the first unions and employers are encouraged to time that unions acknowledged that there develop joint approaches to addressing is no standard model for port restructur- labor issues. Box 7 describes Ghana’s ing and that increased involvement of the approach for addressing a number of private sector is an option that cannot be these challenges. discarded. The basis for this changing Box 8 presents an example of the reference to attitude toward reform was the increased the port labor clauses in a concession agree- awareness that it is not reform that ment. threatens working conditions, but the process through which it is implemented. 4. ORGANIZING TO ADDRESS

• New culture of competition. A major LABOR REFORM: A TASK consequence of reform is an increase in FORCE APPROACH competition. This usually calls for new Successful port labor reform requires govern- flexibility in working practices. There are ments, labor, and private interests to grapple many forms of flexibility, and trade with a wide range of economic, operational, unions should understand this aspect of social, safety, and cultural issues. To come to reform and competition thoroughly to grips with these myriad issues, some govern- again find a balance between what is pre- ments have established a labor reform task sented as necessary and what is recog- force, often headed by the ministry of labor, to nized as socially acceptable. consult with port stakeholders regarding any changes that might be made in government poli- • Understanding the need for new labor cies and practices to improve port productivity relations. Reform brings with it a com- and cost effectiveness. plete realignment of labor relations. In the case of state-owned ports and related The labor reform task force should include rep- companies, the relationship is between resentatives of all government agencies and pri- only two parties: government and labor. vate sector stakeholders affected by port Reform means that a third party is intro- reform, including: duced: the private entrepreneur or employer. For many trade union officials • Ministries of transport, labor, finance, this change requires a complete overhaul economics, and planning. of the way they used to think about labor • Port authorities. relations. Moreover, it also requires from managers a completely different attitude • Port labor representatives. and approach. Trade unions, employers, • Main port customers and users, including and would-be entrepreneurs can no exporters, importers, carriers and agents, longer rely on governments or other freight forwarders, and multimodal trans- authorities when decisions need to be port operators. made. In many instances, entrepreneurs • Private investors, terminal operators, and have to make their own decisions, in cargo handling and stevedoring companies. some cases in consultation with labor representatives and in some cases in con- The labor reform task force should conduct its sultation with authorities. Authorities activities in an open and transparent manner.

321 Labor Reform and Related Social Issues

Box 7: Working with Labor Unions: The Ghana Case s a strategic option to achieve its devel- Roads and Transport) and the GPHA manage- opment objectives, the government of ment, the strength of the resistance to change AGhana designed in 1998 the Ghana Trade has been minimized. The avoidance of any and Investment Gateway Project (GHATIG) with autocratic approach and the consultative, per- the support of the World Bank. The primary suasive, and participative style that has been objective of GHATIG is to create an environment adopted by the government in promoting the conducive to economic growth and develop- port reform process has resulted in a very pos- ment led by private sector initiatives. itive atmosphere among the port community Within this context, the government of for the implementation of the port component Ghana has approved a policy to further of the GHATIG Project. The public consultation through a national workshop on the accept-

MODULE 7 improve the operation of the ports, which will reduce the cost of operations and shorten the ability of the government’s policies pertinent to turnaround time of ships. The policy entails port reforms and the personal site visits of the increased private sector participation in the Minister of Road and Transport to the ports to management of ports. The Ghana Ports and speak, and more importantly listen, to the port Harbours Authority (GPHA) will be converted workforce and the port labor unions, coupled into a “landlord” port authority while the pri- with the constructive work that has been vate sector will participate in port operations, undertaken by the GPHA management, has particularly container handling operations, dock- secured the collaboration of the majority of the yards, and sites’ maintenance and services. stakeholders in the port sector. It is interesting to note that representatives of the Maritime The port reforms that are sought through and Port Workers Union (MDU) have joined the implementation of the GHATIG Project forces with the GPHA management in its effort constitute a major change in the port sector of to address the port rationalization issues in Ghana. The most critical issue in managing relation to the port reform process. MDU rep- change (that is, making change work) is over- resentatives are now members of the organiza- coming the resistance to change in many of tional restructuring and labor rationalization the stakeholders in the port industry. However, working team of the GHATIG Project in the case of the proposed port reforms in Implementation Committee and attend its Ghana, due to the proper, professional, and meetings on a regular basis. timely and proactive actions of the government (particularly the initiatives of the Minister of Source: Author.

Its main areas of activity should typically performance, and the need to address include: competitive challenges.

• Commissioning or conducting studies: • Informing the community and con- Many governments prefer to be assisted sumers: Using the media to disseminate and guided by expert professionals, retain- the results of studies and workshops ing consultancy services to work closely helps to keep the community and con- with management, workers, and other sumers at large informed, making it easi- port stakeholders in assessing the weak- er to gain their support for necessary nesses and strengths of labor regimes, col- changes. The community and consumers lective agreements, and work practices. need to be enlightened as to why port labor reform is needed, what is involved, • Organizing seminars and workshops: how the main difficulties will be mitigat- These help to build consensus by allowed, and what the expected benefits are to ing all port stakeholders to share their the entire economy or country. views and concerns on various issues. These events also permit employers to • Fostering the creation of joint commit- explain to workers what sort of competi- tees: Such joint committees between tion they face, their firms’ financial unions and private terminal operators

322 Labor Reform and Related Social Issues

Box 8: Sample Reference Clauses in a Concession Agreement on Employee Transfer 1. The Operator shall employ the employees 2. The Operator shall undertake such consul- engaged in container handling operations in tation with employees and employees’ whatever way who desire to work for the representatives as the Operator in its dis- MODULE 7 Operator on terms and conditions that are cretion deems fit. In so doing, the overall not less than those such employees Operator shall have due regard to and were drawing at the time of their termination observe: as employees of the [name] Ports Authority. (a) Any applicable law. To this purpose the Operator shall source (b) Any other agreements relating to the not less than [number] employees employed employees or employees’ representa- by the [name] Ports Authority with the tives concerned. required skills: (c) The relevant contracts of employment (a) Initially from staff working on the [name] of said employees. Container Terminal; if unable to source the total number required, then (d) All relevant consultation provisions and obligations concerning the said employ- (b) From staff working at other locations of the ees or employees’ representatives. [name] Ports Authority, employed in the port of [name]; and if there still is a shortfall 3. Subject to applicable law, the Government of the total number required and the shall transfer to the Operator such Government is satisfied that the Operator employment records relating to those is unable to obtain the required number of former employees of the Government who employees from the [name] Ports Authority, are employed by the Operator upon hand- employed in the port of [name], then over as the Operator shall reasonably require. (c) The Operator may source its employees from outside the [name] Ports Authority. Source: Author.

might address issues affecting operating For the task force to be in a position to work efficiency and safety and can help resolve effectively, sufficient budget must be allocated on-the-dock problems and disputes with- by all participants’ organizations to make it out formal government intervention. possible for the team to complete its tasks and • Defining government’s role regarding ports: work schedule. Box 9 describes Australia’s Governments should play an active and approach to creating a port reform task force focused role in regulating and monitoring (Box 10 provides the productivity research con- companies that operate in the port system ducted by Australia’s port reform task force). to ensure that safety and health laws and 5. THE INSTITUTIONAL regulations are followed. Governments can FRAMEWORK FOR LABOR assume an active and effective role in promoting the use of ports for the benefit of REFORM the entire community and economy. Port labor reform is a balancing act that must • Developing a workforce rationalization consider workers’ rights and social equity, port plan: The task force should draw up and users’ and operators’ commercial needs, the explain programs for staff restructuring and need to foster competition, and the interaction rationalization. In developing these pro- between governments and port interests. grams, the task force should evaluate a range of measures including incentive 5.1. Redefining the Concept of schemes for early retirement, voluntary sep- Social Equity aration, provision of training and retrain- The current concept of social equity (that is, job ing, and career development as well as and wage security) was developed at a time assistance in job search and outplacement. when governments believed they could insulate

323 Labor Reform and Related Social Issues

ships to conform to global market forces. Box 9: The Productivity Commission of Governments, therefore, guaranteed dock work- Australia ers’ jobs, purchasing power, and benefits. At the he Productivity Commission, an inde- same time, they were often reluctant to make pendent commonwealth agency, is the investments in new technology or to take steps government’s principal review and advi- T to reduce costs and improve productivity. The sory body on microeconomic policy and regulation. It conducts public inquiries and unfortunate truth is that this interpretation of research into a broad range of economic and social equity raised the costs and prices of social issues affecting the welfare of imported and domestic products in national Australians. markets and contributed to a downward spiral The commission’s work covers all sectors of noncompetitiveness. As such, this concept of

MODULE 7 of the economy. It extends to the public and social equity was unsustainable. private sectors and focuses on areas of commonwealth as well as state and territory The concept of social equity today has shifted responsibility. to a commercial opportunity-oriented approach. The commission performs its role through Under this approach, job security, which ulti- the following key activities: holding public inquiries and reporting on a variety of matters mately depends on expansion of trade and brought to the commission’s attention; initiat- transport activities, is not achieved through ing research on industry and productivity government guarantees of work, but through issues; reporting annually on industry and education, training, and retraining programs. productivity performance generally; assis- By this means, the enhancement of workforce tance and regulation promoting public under- skills and abilities, together with greater standing of matters related to industry and productivity; providing secretariat and participation in workplace decisions, lead to research services to government bodies, better job opportunities and improved produc- including developing performance indicators tivity. Box 11 compares past and present for government provided or sponsored servic- aspects of job security. es; reviewing and advising on regulation through the Office of Regulation Review; and For workers displaced as a result of reforms, fair investigating and reporting on complaints compensation should be granted for the relin- about the implementation of the commonwealth government’s competitive neutrality quishment of their acquired rights and privi- arrangements. leges. To facilitate their early reentry into the Source: Author. national workforce, displaced workers should be offered retraining programs and job search assistance, and above all, an institutional structure that ensures that benefits and privileges given up their economies from the rigors of fierce inter- by these workers will not be appropriated by national competition. Developing countries, in some other group within the port or trade com- particular, often pursued policies designed to munity. Labor’s possible role in this area would reserve domestic markets for national entrepre- be to ensure that training programs become an neurs while seeking to create broader export integral component of the modernization markets through the receipt of preferential process, promote occupational health and safety, treatment under multilateral trade agreements. and establish a collaborative process for the In this environment, dock workers (and other selection and introduction of new equipment. labor) were sheltered from the full force and effect of international competition, or so it may 5.2. Meeting Commercial Needs have seemed. Establishing interport, intraport, interunion, Similarly, governments were temporarily spared intraunion, and nonunion competition is key to having to make difficult decisions associated addressing shipping and port companies’ needs with adjusting labor conditions and relation- for improved productivity and cost effectiveness.

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Box 10: Institutional Framework for Labor Reform Key Findings roductivity Commission 1998, Work • The high cost of redundancies restricts the Arrangement in Container Stevedoring, ability of stevedores to adjust manning levels Research Report, AusInfo, Canberra, of permanent employees. The redundancy P MODULE 7 Australia agreements also foster skill mismatches and • Flexibility in the allocation and use of labor is reduce the ability of management to allocate critical to stevedore workplace performance the best person for the job. given the highly variable demand for steve- • There are a number of factors that impede doring services at Australian ports. change, including an adversarial workplace • The container stevedoring industry is char- culture, strong union bargaining power, limit- acterized by a system of complex, inflexible, ed competition in the labor market for oper- and prescriptive work arrangements that ational stevedoring employees, and limita- constrain workplace performance. They tions on competition in the industry. impede productivity, reduce timeliness and • The Workplace Relations Act of 1996 facili- reliability, and increase labor costs. tates change by enabling work arrange- • The most significant work arrangements are ments to be determined primarily at the the order of engagement (specifying the workplace level. Together with the second- order in which different types of employees ary boycott revisions to the Trade Practices are engaged for a shift), shift premiums and Act, it has also reduced some sources of penalty rates, and redundancy provisions. union bargaining power. • The order of engagement, in combination • Responsibility for better outcomes ultimately with relatively high shift premiums and penal- rests with managers and their employees. ty rates, add significantly to total labor costs Greater competition in container stevedoring for a given level of activity. They detract from would increase the pressures on both sides productivity by creating incentives for perma- to change work arrangements and improve nent operational employees to seek overtime performance. and lead to poor timeliness and reliability. Source: Productivity Commission. 1998. Work Arrangement They can also have deleterious effects on the in Container Stevedoring, Research Report, AusInfo, lives of operational employees. Canberra, Australia.

Creating this competition usually requires eco- of cartels. Labor’s possible role in competition nomic regulatory reform, including the elimina- should be to ensure that market mechanisms are tion of bureaucratic obstacles to the free inter- used to compete fairly and that port operators play of market mechanisms affecting the supply do not abuse their market power. and demand of dock workers and decentralization, including the assurance that labor 5.4. Government’s Role responds to local market signals without cross- To avoid pressures to modify market outcomes, subsidies among related labor organizations in governments should remove themselves from competing ports. direct involvement in port labor relations, collective negotiations, and informal dispute reso- Labor’s possible role in this area would be to lution. A proper commercial setting should be negotiate with port employers to establish job able to function without political influence, education and experience requirements and pro- although the government has a major role to vide training courses that address local market play in labor rationalization and its funding. needs. Labor’s possible role in this area would be to 5.3. Fostering Competition negotiate on a transparent basis without political Antimonopoly laws must be applied to terminal manipulation; suggest measures to improve pro- operators and dock labor alike to ensure that ductivity, facilitate work, and reduce costs; and market mechanisms do not result in the creation share decision authority at the operational level.

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Box 11: Job Security in Ports

In the past In the future

Job security was obtained through Job security obtained by responding to political alliances and the avoidance market mechanisms. This creates a of market mechanisms. The results need for formal training programs, were often not those desired and also multi-skilling, willingness to accept included a de-emphasis of the need for: new technologies, and commonality of goals among port customers, • Knowledge of and experience with employers, and dock labor. The usual

MODULE 7 international port practices. impact is:

• Labor participation in management • Collective agreements negotiated committees. to promote trade.

• Acceptance of new cargo-handling • Dock labor generates ideas that technology. lead to progressive gains in productivity and efficiency. • Training programs to increase the skills of the labor force. • Employers willing to train port workers.

Source: Author.

5.5. Time Frame for Port Labor thereby reducing the degree of uncertainty and Reform risk and, with the right labor reforms, making the offering more attractive to reputable Port labor reform is an economically and investors and operators. politically challenging process. As such, it can be expected to elicit strong political emotions Nevertheless, one can expect that labor reform both for and against. Consequently, the port will be a continuing process that will involve labor reform process should be begun and adjustments to respond to changing market completed within the term of a single public conditions. administration. The reason for this is that the changes to existing labor regimes that are 6. DEVELOPING THE considered “objective” by one administration WORKFORCE RATIONALIZATION could be judged to be “biased” by succeeding PLAN administrations. Trying to carry over this reform process from one administration to the An effective workforce rationalization plan next often results in significant delays or even must be built on accurate and relevant informa- the discontinuation of the entire reform tion and must consider the full range of ration- process. alization alternatives, not just dismissals.

Further, if port reform includes inviting poten- The design of a port labor rationalization plan tial investors to operate state-owned port and program is one the most important phases facilities, it would be advantageous to con- of the overall port reform process. To be clude the labor reform component before the designed correctly, the plan and associated pro- project is marketed and a request for bids is grams should be based on detailed, reliable tendered. This will clarify the potential information on the port enterprise, the work- investors’ future labor relations and costs, force, and local markets. In this respect, it is

326 Labor Reform and Related Social Issues useful to review the lessons learned from previ- Displaced workers will need to be reintegrated ous government labor rationalization programs. into local and regional markets. To facilitate their reentry, the labor reform task force will Before developing a rationalization plan, the have to gather information about and carefully labor reform task force should assemble the fol- consider the following factors: MODULE 7 lowing information: • The overall macroeconomic situation of • Port master plans and strategic goals for the country and, more specifically, the the short, medium, and long terms. economic and social condition of the • Estimates of required activity levels area or region in which the port is (throughput forecasts). located. • Demographic information about the cur- • Existing employment and unemployment rent port workforce, including data on patterns, job creation schemes, and the employee age, marital status, number of growth of sectors within regions. dependents, level of education, length of • The labor absorption capacity and service, and accumulated benefits (for growth potential of different sectors of example, employer’s pension fund contri- the economy. butions, life insurance benefits, and accumulated holidays). • The skills and experience of the workforce. • Current staffing levels by operational, administrative, and management cate- This information should be available to all par- gories, and descriptions of job require- ties affected by port reform because it will ments. become the basis on which many decisions will be made. • Estimates of minimum staffing levels by operational, administrative, and manage- 6.1. Alternatives to Dismissals ment categories, and descriptions of new Too often, labor rationalization has been equat- or modified job requirements. ed to wholesale dismissals. Labor forces can be • National and local laws, regulations, and rationalized in a number of ways, however, and policies relating to labor rationalization. the immediate dismissal of employees is not • All relevant collective bargaining and always necessary. In a climate of cooperation employment agreements that describe and mutual respect, labor and management work rules, compensation, benefits, train- have been able to implement agreements involving, contracting out rules, exclusive ing flexible work arrangements that preserve staffing provisions, and so forth. jobs or reduce the workforce through means other than involuntary dismissals. Some of these • Training needs and skills of workers who arrangements and measures include: will be seeking alternative employment. • Normal attrition of the workforce as a • Existing government and private sector result of retirements, deaths, or resigna- organizations capable of assisting with tions. retraining and job searches, and their capacity to provide training at the • Part-time employment, flexible working required levels. hours, reduction in working hours, variable work weeks, job sharing, and over- In developing a realistic labor rationalization time restrictions. plan, appraising the local labor market situation and conditions will be as important as assessing • General or job category-specific hiring the specific enterprise being restructured. freezes.

327 Labor Reform and Related Social Issues

• Absorbing cost reductions across the tive to new investors. In such cases, policy mak- organization by sharing reductions in ers have to adopt other measures. A staff hours of work and pay. retrenchment program is an option that permits governments to reduce large numbers of work- • Work rotation among other government ers in an operationally rational and socially departments in cases where the port is the responsible manner. To be viable, this kind of main employer of the city and jobs in the solution should be the result of negotiations surrounding areas are very scarce. with trade unions or workforce representatives. Each of these alternatives merits careful consid- Such programs typically include various meas- eration in the development of a labor rationali- ures aimed at cushioning the adverse affects zation plan. Box 12 describes one company’s workers may suffer as a result of dislocations. MODULE 7 approach to labor rationalization. The main components of a staff retrenchment 6.2. Elements of a Staff program normally include: Retrenchment Program • Compensation, with incentives for early Measures such as the flexible work arrange- retirement and voluntary separation. ments described above may prove insufficient to Retrenchment programs often permit attain workforce reductions needed to make the employees to retire with either full or port enterprise commercially feasible or attrac- reduced pension benefits at an earlier age

Box 12: Social Plans at Moulinex ocial plans can be described as agree- draw up a social plan to limit the number of ments reached between labor and man- redundancies. Moulinex announced its inten- Sagement to develop an organized set of tions in June 1996 to make 2,100 workers measures seeking alternatives to dismissal, redundant over three years, close two sites in assistance in arranging reemployment else- Normandy, and transfer the head office west where, and compensation in an effort to limit of Paris. It then signed an agreement with its the number of planned redundancies and min- five trade unions in January 1997, which imize the impact on workers and communities. reduced the number of planned job cuts from The social planning process typically begins 2,100 to 1,468 through a combination of after an organization has announced that it reductions in working time and early retire- intends to scale back the size of its workforce ment. Working time will be reduced by 15 per- or even shut down operations entirely. cent for 750 workers, from 39 hours to 33 Following such an announcement, the hours and 15 minutes per week, paid at 97.2 social partners meet to find workable alterna- percent of the base salary and organized on a tives to mass redundancies. These alterna- voluntary basis. Early retirement will be offered tives tend to involve such initiatives as early to 718 employees from age 56. To prevent the retirement schemes, incentives for voluntary loss of 600 more jobs, Moulinex will offer a redundancies, natural attrition, conversion relocation package of 12,195 to encourage from full-time to part-time status, reduction in workers to move to other locations within working hours, wage moderation or cuts in the company. The primary objectives of compensation, relocation to another work site social plans such as that concluded at within the organization, and worker retraining. Moulinex are to maintain employment levels If redundancies cannot be avoided, the social wherever possible, reduce disruption, and plans address such matters as an orderly facilitate reemployment when layoffs are process for layoffs, redundancy payments, job unavoidable. counseling, job search assistance, and train- Source: ILO. 1998. “The ILO’s Response to the Financial ing for new and expanding occupations. In Crisis in East and South-East Asia.” Technical paper for the ILO’s High Level Tripartite Meeting on Social Responses to France, for example, companies employing the Financial Crisis in East and South East Asian Countries, more than 50 workers are legally required to Bangkok, Thailand, April 22–24, 1998.

328 Labor Reform and Related Social Issues

than normal. Numerous public enterpris- at assisting displaced personnel who will es have either reduced the minimum be seeking employment. However, dis- retirement age by five years or added five placed personnel should be able to take years to length of service. Financial incen- advantage of this service regardless of

tives are normally calculated based on the whether they have been retrained. MODULE 7 number of years of service, each year of Services could include resume assistance; service entitling the separated employee providing information about employment to one month’s salary, with a ceiling of opportunities; sharing information on possibly 24 months of wages. how to start one’s own business; establishing cooperatives; and other measures. • Compensation for involuntary separation. When the targeted workforce reduction is 6.3. Pitfalls in Designing and not reached through voluntary programs, Implementing Severance Packages and workers have to be dismissed or laid Retrenchment efforts involving significant staff off, they normally receive a lower sever- reductions often face considerable political ance payment, for example, 80 percent of opposition. As noted above, to overcome oppo- the amount received by workers who left sition and to fairly treat public employees who voluntarily. Dismissed workers are also lose their jobs, governments often offer sever- entitled to training and outplacement ance pay to those workers forced to leave pub- assistance. Criteria to decide who should lic employment. But problems in the design and be dismissed could be based on: workers’ implementation of these compensation schemes records of attendance; frequency of often reduce their efficiency and may not penalties or suspensions; overall perform- achieve their objectives. ance evaluations by immediate supervi- sors; and family situation (for example, Potential problems include: marital status or number of dependents). In some countries, the standard is still • Paying too much. Workers are paid more “first in last out” when making redun- than would have been necessary to dancy decisions. induce them to leave. These increased costs may bring a retrenchment program • Provision of training and retraining. The to a halt because funds run out. training and retraining component of the retrenchment program is aimed at facili- • Adverse selection. Severance pay pack- tating the return of displaced workers to ages do a poor job at targeting redundant gainful employment. Experiences in vari- workers; often the best workers tend to ous countries, however, have revealed accept the buyout because they have that in many cases only 20 percent of the readily available alternatives, while the displaced workers take advantage of the worst tend to remain. retraining programs being offered. The • The revolving door. Workers accept sev- main reasons for this low level of partici- erance pay but are later rehired when it is pation include timing delays, weak insti- determined that their skills are needed. tutional capacity of the local public sec- As a result, the severance package is tor, and low educational level. To have a wasted and downsizing is not achieved. greater chance of success, retraining pro- How do ports accurately measure the portion of grams should be demand driven, not sup- the labor force that is excessive? Typically, a ply driven. government- or state-owned enterprise, allowed • Guidance and assistance in job searching to restructure on its own, may cut more workers and outplacement. This component is than is socially optimal, particularly if the cost closely linked to retraining and is aimed of downsizing is borne by another agency. When

329 Labor Reform and Related Social Issues

wages are higher in the public sector than in the of thumb can help ports and governments iden- private sector, governments tend to overestimate tify where they may be overstaffed or where redundancies. Cuts are also exaggerated when their productivity significantly trails other ports. employment in a given government agency Box 13 identifies a number of these benchmarks. affects the earnings of those it does not employ; for instance, in communities where the govern- From a financial point of view, shrinking bloated ment agency being reformed is the primary governments appears to be a very profitable source of direct and indirect employment. undertaking, even when employees get substan- However, agencies tend to underestimate the tial severance pay. Practice shows that if number of necessary redundancies when heavily employees are given two to three years of salary subsidized by the general budget. Although each to leave, for example, then in a mere two years

MODULE 7 port’s situation is unique, applying certain rules the money spent is recovered through cost

Box 13: Port Staffing Benchmarks

Size of the port authority Recommended staffing level Small authority: a few million tons About 50 Average port authority: 10–20 million tons From 150 to 250 Large ports: example: 100–300 million tons 1,000 More generally, and indicative ration would be: 100,000 tons per staff per year, with large variations: small ports require more than this proportion, large ports gain from scale economies and require relatively less staff; general cargo requires more staffing than bulk traffic. Type of cargo Performance Containers 1,000 TEUs of staff per year (including operational, administrative, and (for a large array of yearly throughput, from management staff) 150,000 up to 600,000 TEUs). Comment: also Source: Drewry Shipping Consultants, here there are economies of scale 150,000 TEU = World Container Terminals 1997. 150 people / 600,000 TEU = 500 people Breakbulk Cargo 40 tons per hour 2.5 tons/hour/docker Boxes on 2 ton pallets built in the hold (fruits, frozen goods, and so forth): Gang: 15 to 17 dockers (excluding transfer and storage crew, crane driver, maintenance staff) Prepalletized boxes, handled with cages: 160 tons per hour 14 tons/hour/docker Gang: about 13, including transfer (excluding storage crew, crane driver, maintenance staff) Exotic wood in logs, handled with slings: 80 tons per hour 6 tons/hour/docker Gang: 12 to 15 dockers (excluding transfer and storage crew, crane driver, maintenance staff) Exotic wood in logs, handled with hydraulic 140 tons per hour 14 tons/hour/docker clamps: Gang: 10 dockers (excluding transfer and storage crew, crane driver, and maintenance staff) Source: Author.

330 Labor Reform and Related Social Issues savings and productivity improvements. To keep the best employees, the research find- However, research has found that governments ings suggest developing a menu of alternatives must take care to avoid losing the best employees, to the standard severance package. For instance, so as not to have to rehire them later. public employees could be given the following

choices: (a) keep their jobs; (b) leave and get MODULE 7 Ironically, severance packages often have the severance pay; or (c) keep their jobs, but with a adverse effect of inducing the most productive higher salary and on a fixed term contract. This people to leave. Quite often, the best public last option would help retain the more produc- employees have to be rehired, an expensive way tive public employees who have good outside of getting back to “square one.” World Bank alternatives and are not afraid of losing their research has found substantial rehiring in about jobs. Without the third option, those employees a quarter of the surveyed retrenchment pro- would tend to take the severance pay and leave. grams. What, then, are the best mechanisms for shedding redundant public sector workers? If Box 14 depicts a decision tree that can help severance packages are offered to induce volun- port reformers carefully think through the tary departures, how should they be designed to process of workforce rationalization. minimize the total cost? And are there ways to structure such packages to induce to least pro- 6.4. Rationalizing the Workforce: ductive employees to depart while encouraging When and By Whom? to most valuable employees to stay? Workforce rationalization can take place at a number of points along the path to port reform Too often, severance pay is offered indiscrimi- and, depending on when it takes place, can be nately, without an overall plan for continued implemented by either the government or by the operations. Some public sector employees take private sector. There are pros and cons to each the package, others stay, and only later do gov- of the various approaches. ernments know which personnel and skills remain. The sequence should be reversed, first 6.4.1. Prereform Rationalization identifying the services to be cut or transferred to the private sector; second, identifying the Having the government initiate workforce specific overstaffed jobs; and meanwhile enforc- rationalization prior to reforming other ele- ing work hours and attendance recordkeeping ments of port ownership and operation in most to chase away “ghost” workers. Only then cases has several advantages: should those specifically targeted to leave be offered a severance package. • Presents potential concessionaires and investors with a “cleaner” business deci- Tailoring severance packages to observable sion. characteristics, such as age, education, number • Reduces uncertainty and certain risks of dependents and the like, may substantially associated with the project, permitting reduce the costs of downsizing. Care must be the government to get the best price for taken, however, not to discriminate against par- the concession. ticular categories of personnel in a manner contrary to human rights and labor law. • Places the expense of rationalization on the government, which in most cases is Usually, the packages involve a multiple of the the entity that contributed most heavily separated worker’s current salary in the public to the overstaffing, rigid work rules, and sector, the multiple being related to seniority. other conditions that reduced efficiency. But these packages tend to overcompensate the people who accept them. World Bank research • May result in less disruption to port estimates overcompensation in selected coun- operations as a result of work stoppages, tries at about 20 percent. sick outs, slow downs, and other actions.

331 Labor Reform and Related Social Issues

Box 14: A Downsizing Decision Tree

Is Is privatization Is adverse no advisable? yes overstaffing selection a an obstacle serious to concern? privatization? yes

no yes no MODULE 7 Using targeting Assess Privatize and menus to percentage of without identify redundant prior redundancies workers downsizing

Predict loss Is of predicted loss redundant higher than workers legal Set No compensation? compensation based on predicted loss Yes Yes

Set up training Is full and other Settle compensation redeployment old-age of workers services pension needed? liabilities

Assess Let workers economic Pay choose their mix returns to legal of cash and downsizing compensation services

Source: Rama, Martin. 1999. “Public Sector Downsizing: An Introduction.” World Bank Economic Review, Vol. 13.

At the same time, having the government initi- • Governments may not structure cutbacks, ate workforce rationalization prior to reforming severance packages, and incentives to other elements of port ownership and operation retain the best personnel and critical can have drawbacks, including: skills.

• Governments may cut too few from the 6.4.2. Postreform Rationalization workforce in response to political pressure, leaving potential concessionaires Delaying workforce rationalization until after and investors with an oversupply of other port reforms have been implemented also labor. has strengths and drawbacks.

332 Labor Reform and Related Social Issues

On the positive side, delaying workforce ration- possible number of workers. In many instances alization until after other port reforms have a compromise is reached between the two, but been implemented means that decisions in this the new terminal operator should be given the area will be made by private sector concession- option to further adjust the workforce size and aires and investors who are efficiency minded composition, which may lead to further disloca- MODULE 7 and profit oriented. This, in turn, suggests that tions postreform. their decisions about workforce restructuring will be more attuned to operating needs and For example, in Argentina in 1991, concession- customer demands. aires of the five terminals at Puerto Nuevo, Buenos Aires, were required to employ 1,350 On the negative side, forcing the new concession- workers from the public agencies previously aires and investors to implement workforce operating at the port, or to negotiate an equiva- reform can significantly increase the uncertainty lent number of redundancy agreements. The and risk associated with the reform initiative. number of workers assigned to each concession- This, in turn, can scare away potential bidders aire was based on the business plan submitted and result in a lower concession or selling price in the bid. For example, 130 workers were for the government. In addition, port labor might assigned to Terminal Five, but most of them be inclined to pursue work actions against a pri- were offered and accepted severance packages vate employer more readily than against a gov- only a few months after the new firm started ernment employer. Indeed, in some countries it is operating. Out of the 218 workers assigned to illegal for public employees to engage in work Terminal Three, 119 of them were offered and stoppages and other disruptive work actions. accepted severance packages. Of the 900 workers assigned to Terminals One and Two, in May In cases where overstaffing is not an issue and 1999, only 419 remained with the firm. significant downsizing is not required, it is gen- Severance payments ranged from erally preferable for the new operator and $15,000–$20,000 per worker. investor to assume the task of rationalizing the workforce. This situation would be unlikely to The terminal operators at the Port of Buenos occur in seaports, however, especially those in Aires preferred the compensated dismissal developing countries. Indeed, seaports have option to retaining an oversupply of workers. served for many years as natural shelters to This was due in part to the distorting gaps in avert unemployment and as a source of political wages and length of vacation among workers patronage for various public administrations. performing the same tasks. Because of their Thus, the question for policy makers is: What is longer length of service, former public sector the maximum number of workers the prospec- workers were entitled to higher salaries and tive concessionaire can be asked to employ extended periods of vacation compared to without undermining the entire port reform ini- new private sector hires. In addition, at an tiative? If too many workers are imposed on the average age of 50 years, most of the trans- new concessionaire, the business proposition ferred public sector workers were “worn out” will be less attractive. As a result, few compet- as a result of having worked in the old port ing bids may be submitted and the sales price or under difficult and, in some cases, hazardous the concession fee most probably will be signifi- working conditions. cantly discounted. 6.5. Who Should Pay for the A new terminal operator typically prefers to have the freedom to determine the firm’s Expenses of Port Labor required number of staff and skill mix. The Rationalization? government will normally have an interest in The expenses associated with downsizing the new terminal operator absorbing the highest could amount to millions of dollars depending

333 Labor Reform and Related Social Issues

on the number of workers, levels of set com- 7. INTERNATIONAL SUPPORT pensation, and safety net components such as FOR LABOR ADJUSTMENT training and outplacement assistance. Many countries have recognized the convenience of A number of programs and funding sources can reducing the workforce prior to private sector be used to support port labor reform, several of participation in state-owned enterprises, but which are described below. offsetting the expenses related to labor reduc- Since 1990, the World Bank (Bank) has sup- tion has been a difficult task for many govern- ported labor adjustment in reform and enter- ments, especially in view of pressing budgetary prise restructuring in about 50 operations constraints. around the world. The main elements of Bank support have included: MODULE 7 For the government of Mozambique, for example, the staff rationalization component, which • Technical assistance for governments to included staff reductions of approximately help: 14,000, pension fund payments, staff redeployment, and social mitigation as part of the ~ Develop staff inventories and profiles. Mozambique Rail and Port Restructuring ~ Identify staffing needs. Project in 1999 was estimated to cost the gov- ~ Develop severance and retirement pack- ernment $50 million. Compensation paid to ages. workers laid off in Chilean ports as a result of the deregulation of dock labor in 1981 amount- ~ Analyze labor market characteristics ed to a total of $30 million. Payments per and needs. worker averaged $14,300 and ranged between ~ Redeploy workers through active labor $10,000 and $200,000. In 1991, the govern- market programs. ment of Colombia provided $50 million to compensate 8,000 Colombian dock workers for ~ Design employee share ownership the loss of acquired rights. The restructuring of schemes. Venezuelan ports in 1991 led to the layoff of ~ Establish consultative mechanisms. 10,279 dock workers and 2,000 officials in the National Ports Institute. All received double ~ Prepare communications programs. compensation from the government of • Direct financing for severance payments, Venezuela, amounting to $182 million overall, provided that such financing results in or $14,822 per person. improved productivity of the sector and When considering whether and how to pay related enterprises and that social mitiga- such sums, governments have to contrast these tion measures are put in place. The first expenditures with the broader long-term goals example of this type of support was the of port reform, which are to make ports more reform of Brazil Railways, where a Bank efficient and cost effective in support of the project financed half the costs of the sev- overall economy. Therefore governments, as erance program. For a list of other exam- former employers, and the private sector, as ples, see Annex 1. new employers, both have an important role to • Poverty alleviation programs such as play in the financing of the expenses associated social funds to provide compensatory with port labor reductions. Actually, it could assistance, advice and training, placement also be possible, in view of the benefits to be services, and credit for self-employment. expected from a quick resolution of the issue, to Such funds are typically targeted to the ask port customers (shipping lines, for instance) poor, but they have been used for state to contribute to the modernization costs enterprise workers in cases of extreme through a temporary levy on tariffs. economic distress or where large-scale

334 Labor Reform and Related Social Issues

redundancies occur in concentrated areas The translation into Spanish of the PDP and (as in the case of mining in Bolivia and the training of PDP instructors and coordina- Peru). tors was undertaken under a German Technical Cooperation Agency (GTZ) project

Education and vocational training are vital to in Latin America. Since 2000, the program is MODULE 7 the change process. Training should include not regularly implemented in several Latin American only general education and broad industry- countries. PDP is also being translated into focused vocational training, but also specific job Chinese. instruction, communication and social skills courses, and health, safety and environmental Outreach for training programs has also training. Sufficient and continuing funds are been improved through the establishment and necessary to finance the education and training strengthening of training centers, management infrastructure. The need for lifelong training to training institutes, universities, and coopera- enable workers to cope with the permanent tion networks associated with the internation- changes taking place in the industry is recog- al TRAINMAR Program of UNCTAD (United nized in the 1989 EU charter of Fundamental Nations Conference on Trade and Social Rights of Workers, which states that: Development) in Central and South America “...every worker of the European Community and the Caribbean. This was achieved through must be able to have access to vocational train- the upgrading of local and regional training ing and benefit there from throughout his or capabilities and the application of the system- her working life.” atic TRAINMAR methodology for the development and exchange of standard training Moreover, good education and vocational materials as part of cooperation projects training are increasingly recognized and used as financed by UNDP (United Nations an instrument to improve the quality of the Development Programme), the European products and services of businesses and thus Commission, Germany, and France. Since enhance their competitiveness. Therefore, edu- 1988, the three TRAINMAR networks in cation and vocational training are in the best Latin America and the Caribbean are regular- interest of the port community as a whole. ly and successfully developing and delivering Furthermore, a lack of education and training courses and management training programs means a lack of opportunities to teach the directed at all categories of personnel from workers the essence of transport economics and the port and transport industry. policies, the position of ports in the intermodal transport system and its dependency on the Further information on the PDP may be other modes of transport, and about the forces obtained from: Chief, Maritime Industries shaping the competitive environment. Branch, Sectoral Activities Department, International Labor Office, 4 route des The objective of the International Labor Office Morillons, CH-1211 Geneva 22, Switzerland, (ILO) Port Worker Development Program telephone (41.22) 799-7466, fax (41.22) 799- (PDP) is to enable governments and port 7050, e-mail: [email protected]. authorities of developing countries to establish effective and systematic port worker training Further information on the TRAINMAR schemes. This training is designed to improve networks in South and Central America container handling performance, working con- and on the implementation of the PDP in ditions and practices, safety, and the status Latin America may be obtained from: and welfare of port workers. See Annex II for ATAS (Asociación TRAINMAR de América a list of training centers or organizations that del Sur—South American TRAINMAR have acquired the PDP training materials Association) Montevideo, Uruguay. and licenses. Web site: www.atas-trainmar.org.

335 Labor Reform and Related Social Issues

8. POSTREFORM LABOR employers are balanced with the social goals MANAGEMENT RELATIONS (equity and fairness) of their employees. Once port reform is implemented, port labor and REFERENCES management must continue to cooperate if AusInfo. 1998. “Work Arrangement in Container reform is to achieve its objectives. The proposed Stevedoring, Research Report.” Productivity changes in labor regimes, collective agreements, Commission, AusInfo, Canberra, Australia. and work practices to improve productivity and Couper, A. D. 1986. “New Cargo Handling curtail cost will stand a better chance of success if Techniques: Implications for Port Employment and they are reached with the agreement of all stake- Skills.” ILO. holders. For mutual gains, labor and management ILO (International Labour Organization). 1998. MODULE 7 have to concentrate on building stronger relation- “The ILO’s Response to the Financial Crisis in ships through better communication and more East and South-East Asia.” Technical paper for cooperation. In that respect, it appears appropri- the ILO’s High Level Tripartite Meeting on Social ate to foster the establishment of joint committees Responses to the Financial Crisis in East and between port workers and terminal operators to South East Asia Countries, Bangkok, Thailand, resolve operational problems and disputes with- April 22–24, 1998. Web site: http://www.ilo.org/ public/english/region/asro/ bangkok/download/ out having to resort to official intervention. crisis/gb274.pdf.

Participation of port workers in workplace deci- Rama, Martin. 1999. “Public Sector Downsizing: An sions has an enormous potential to motivate Introduction.” World Bank. workers and to enhance customers’ satisfaction. Economic Review, Vol. 13. The combination of better communication and working toward agreed objectives can set the UNCTAD (United Nations Conference on Trade and stage for improved labor management relations Development). 1995. “Comparative Experiences in ports that are undertaking reform. Successful with Privatization: Policy Insights and Lessons Learned.” UNCTAD: New York and Geneva. Web labor reform can only be achieved when the site: http://www.unescap.org/drpad/publication/ commercial goals (efficiency and growth) of the dp22_2122 /chap5.PDF.

336 Labor Reform and Related Social Issues MODULE 7 Financing (total, Evaluation and social plan finances implementation of the and process restructuring through avoids social unrest $65.2 million); social mitigation program $0.6 million Total (severance payment and (WB $0.6 million) Component D: compensation incentives; and redeployment; retraining and support services); D/ Staff training and retraining supports the implementation in of the training program review railway procedures and design; operational performance monitoring; communication improved and negotiation skills within the TCDD; and labor on safety regulation and health. services in selected areas. services in selected areas. Components: 1/ Design of $0.95). Borrower Component 1: and monitoring and employment programs, million; Project NameProject Approval by component and (Yes— Restructuring (APL)Project No. 28049-TU workers; for retrenched and effectiveness productivity, training for retrenched workers (WB $184.7 million); of railways operations. Component B: Total adjustment Components: B/Staff $81.5 million (WB Promotion (LIL) Project No. 25657–YU Montenegro workers; for retrenched by piloting and of labor programs million (WB public works; labor market information innovative labor deployment DFID $1.75 testing new approaches, $2.75 million; No. and Number Country Date Intervention Type Description and Components by institutions) Report #/No) ECA 1. Railways Turkey 06/09/2005 Adjustment schemes the financial viability, Improve $221 million Total: No 2. Employment Serbia and 04/30/2003 Adjustment schemes the efficiency Seeks to improve $5.45 Total: No ANNEX I. WORLD BANK LABOR ADJUSTMENT PROJECTS

337 Labor Reform and Related Social Issues Financing (total, Evaluation MODULE 7 Labor Redeployment Activities: assistance through provide total: $2.41 services, labor redeployment displaced workers reintegrate million (WB: $1.2 million); into the labor market & Component 2: mitigate the social costs of 2/ enterprise restructuring; Piloting Reforms in Public million (WB: total: $ 2.03 Employment Services: Design, $1.02 million); pilot, and evaluate cost- total: $0.4 million Component 3: public employment effective services, to assist the the unemployed reenter million) (WB: $0.21 labor market, through employment improved assistance services, search and small programs, business advisory services; 3/ Labor market information, and evaluation: Building local capacity to generate, analyze, and use the information for policy formulation, and program design; state-owned enterprises (MSOEs), as well as, the economic emergency disruption due to the $1.60). conflict in Kosovo. The Component 1: total: $4.56 million (WB: $4.56 million); labor administration of the majority restructuring Government Project (SSP) Project MacedoniaNo. 19432-MK workers; for retrenched social and economic impact million (WB $10. 27574, employment services; of bankruptcy and labor million; 01/15/2003) Project NameProject Approval by component and (Yes— 3. Social Support FYR 06/16/1999 Adjustment schemes Aims to mitigate the negative $11.6 Total: (ICR—No. Yes No. and Number Country Date Intervention Type Description and Components by institutions) Report #/No)

338 Labor Reform and Related Social Issues MODULE 7 project supports completion project of enterprises privatization and focuses on poverty Component 2: alleviation and human $6.18 Total: capital development by social assistance targeting million (WB: and upgrading programs social services. Components: $4.84 million); $0.4 Total: Component 3: 1/ Labor restructuring: $0.39 million); Finances severance payments million (WB: for workers of MSOEs and $0.46 Total: limited assistance to develop employment services; 2/ Component 4: million (WB $0.21 million) Facilitate Labor redeployment: beneficiaries into the targeted 3/ Social benefits: labor force; social programs Improve and develop effectiveness institutional capacity to and evaluate social protection labor market programs. state-owned enterprises, and monitors the social impact of Component 1: the Economic Reform Program $322.4 Total: (ERP). Components: 1/ Job million (WB: Loss Compensation: Provides severance and related $225.7 million); Component 2: payments to displaced workers; 2/ Labor (LRP): Redeployment Program labor redeployment Provides $28.3 Total: million (WB: services (job counseling, temporary retraining, community employment, small $20.2 million) workers impact of the privatization $105.3 million). Social Support (PSSP)Project No. 20709-TU workers; for retrenched privatization government’s employment services; training for retrenched mitigates the program, negative social and economic million (WB Government $250.0 million; 4. Privatization Turkey 11/27/2000 Adjustment schemes Supports achievements of the $355.3 Total: No

339 Labor Reform and Related Social Issues 420.1 27.2 0.9 million € € € 360 million). € million; Financing (total, Evaluation MODULE 7 Management, : assists Component 2: ) 3/ Components: 1/ Job Loss Compensation (JLC million; payments, (severance and related 2/ Labor early retirement); Redeployment Services (LRS): workers find helps affected Total: Component 3: alternative employment (finances a variety of LRS, including job counseling, placement services, labor business advisory retraining, services, and temporary community employment through Employment Agency the Turkish [ISKUR], and small business the Small and incubators through Medium Industry Development Agency [KOSGEB]); Monitoring and Evaluation (MME): implementation effective ensure and assess the social impact of privatization. workers made redundant workers made redundant Total: business incubators, small business technical assistance) to displaced workers, and including secondary layoffs, to assist them in rapidly the labor market. reentering labor administration enterprises (SOEs). Total: No: 31738-TU workers; privatization of state-owned Component 1: Privatization Social Support (PSSP2)Project workers; for retrenched employment services; by privatization program training for retrenched mitigating the negative social and economic impact of the $465.4 million ( million (WB Project NameProject Approval by component and (Yes— 5. Second Turkey 05/10/2005 Adjustment schemes Support the government’s $581.7 Total: No No. and Number Country Date Intervention Type Description and Components by institutions) Report #/No)

340 Labor Reform and Related Social Issues MODULE 7 lion $100 million). Component 2: WB: $35 WB: $95 million (WB edeploy surplus labor using socially implementation and the proposed new employment restructuring. Components: 1/ Severance Component 1: workersPayments for underground million; 2/ under the 2003–2006 Program; WB: $70 Severance Payments, Reskilling and Reemployment for surface workers million; under the 2003–2006 Program, including: severance payments to Component 3: surface workers and reemployment mil incentives payments to employers exsurface hiring eligible redundant workers; 3/ Severance payment previously commitments from implemented Miners’ Social Packages under the 1998–2002 Program. benefits; railwaypreretirement leave; unemployment benefit); million, except 2/ Labor Redeployment for the (requalification Programs training as well professional and social advice other Component 2: unemployment forms of professional benefit); guidance). These include $23.68 million general labor redeployment and special labor programs, programs. redeployment financing) (no WB assistance/insurance; training for retrenched Components finance and workers support: 1/ Income support Component 1: $296.2 million (severance lump sums; (WB $98.57 Mitigation ProjectNo: 28061-POL employment subsidies to mitigate acceptable measures $200 million; Restructuring ProjectNo: 21797-POL the consequences of program Government workers; for retrenched Railways’ (PKP) to increase unemployment employment services; $335.26 million finances, improve efficiency, and privatize selected activities. million); (WB $101.03 Social workers; for retrenched r 7. Railway Poland 04/30/2001 Adjustment schemes Polish State Aims to restructure financing Total No 6. Coal Hard Poland 03/10/2004 Adjustment schemes Downsize employment and $300 Total: No

341 Labor Reform and Related Social Issues Financing (total, Evaluation MODULE 7 to a competitive transport market. The major social issue faced by the project (WB $35.4 to the staff is related and services retrenchment million) components. reduction the foresees The project separation of about 7,000 of the (30 percent staff Component 6: 1998 staff). will be Redundant staff or eligible for a redundancy package. an early retirement to SME-focused banks help scale up their small enterprise portfolio; $77.5 million); Component 5: $10 million Department for International Development [DFID]); training for retrenched development of the small the Small Enterprise Fundworkers (DFID) facility (SEF), as a refinancing enterprise sector through (WB $180 $372 million (WB $10 million); funds will be on-loan where Component 4: million; DFID Modernization and Restructuring ProjectNo: 18553-HR workers for retrenched Hrvatske restructure (severance payment) $183.0 million Zeljeznice (HZ) to diminish No: 33204 (WB $101 its deficit and financial a company adapted creating 12/19/2005 on the budget while burden $82.4 million million); Component 6: Growth and Growth Bank Modernization ProjectNo: 27979 workers; for retrenched private generation through (microcredit); microenterprises $480 million (United Kingdom employment services within the SOEs. and reforms sector enterprise growth Components: 1/ Enterprise million); supports the growth Component 1: (WB $250.0 $20 million Project NameProject Approval by component and (Yes— 8. Railway Croatia 12/08/1998 Adjustment schemes Seeks to modernize and financing Total IC Report Asia 1. Enterprise Bangladesh 05/11/2004 Adjustment schemes employment Trigger financing Total No. and Number Country Date Intervention Type Description and Components by institutions) Report #/No)

342 Labor Reform and Related Social Issues MODULE 7 illion P2291 4/ Support for voluntary schemes retirement (VRS) in SOEs, which being closed down are by (entirely and/or privatized—covering (continue the retirements assistance initiated under DFID) Bank’s the World Development Support [DSC], which Credit supported much of the first tranche of 28 SOE in 2001–2). Designed closures to cover the VRS costs to the government of a second tranche of about 95 enterprises slated for over the closure/privatization period 2002–3 to 2007–8; 5/ Retraining and counseling services for retrenched/ of SOE, staff retired financed completely by DFID. Activities include and safety net program social assistance and program. protection adequate It provides counseling and retraining workers. support to retired and institutional framework; new power create for corporations; prepare privatization of the 5: $5 m distribution business; (all WB) PPFB-P2290) Report No: 32423 05/24/2005 Power Sector Restructuring ProjectNo: 20250-IN workers retrenched the power sector reform $236 million (SCL- by establishing process a new legal, regulatory, (WB $150 million); 45450 Component PPFB- 2. Uttar Pradesh India 03/24/2000 Adjustment schemes for Supports the initiation of financing Total ICR Yes.

343 Labor Reform and Related Social Issues Financing (total, Evaluation MODULE 7 reduce the most critical reduce bottlenecks in the power the system to improve supply and establish the benefits; and to build develop support among key stakeholders in the state. Component 5 helps develop a VRS. Finances the Nationalized Bank (NCB) Commercial rationalization through staff a voluntary separation a scheme, whereby severance package (consisting of cash compensation calculated on the basis of one month pay per year of service, plus commutation of all annual leave, pensions, and medical benefits) will The voluntary be provided. scheme will be complemented by the of noncore outsourcing Project NameProject Approval by component and (Yes— Sector Restructuring and Privatization ProjectNo: 22509-PAK workers for retrenched program banking reform $540 million a competitive to create (IDA-35710) regulatory strong (WB IDA $300 private banking system, banking court effective framework, and an Report No: million); system. Component 1: Component 1: (WB $300.0) $437 million 06/15/2005 32588 No. and Number Country Date Intervention Type Description and Components by institutions) Report #/No) 3. Banking Pakistan 10/01/2001 Adjustment schemes Support implementation of financing Total ICR Yes.

344 Labor Reform and Related Social Issues MODULE 7 staff and leave without staff but without benefits pay, for those in executive levels. at job growth is targeted opportunities, especially in the service sectors. One of these ways will Cofinanciers and be retraining $2.22 million million; counseling to laid-off and state enterprise employees Government to start their own businesses million (WB $0.90) (reemployment) $0.92 $1.24 Total (Component 3). Each component will be implemented in the following areas: Component 3: Changsha, Shenyang, and Wuhu. Wuhan, declared operator on staff Financed redundant. activities: severance $32.8 Total: payments; technical advisory services and operating costs of the million to provide unit created Component 1: $13.47 million Severance payments: Reform ProjectNo: 19300-CHA (counseling) workers; employment services of laid-off retraining workers in a manner that and test ways to fosterCorridors million); (WB IDA $5 Improvement ProjectNo. 27668 $8.14 million 27454 11/30/2003 Report No. employment services; workers; for retrenched and compensation plan to mitigate the impact of workers training for retrenched concessioning of rail services to a private 4. Enterprise China 06/28/1999 for retrenched Training will help revisit The project financing Total IC Note Africa 1. Transport Mali 03/11/2004 Adjustment schemes Component A1: Social No

345 Labor Reform and Related Social Issues Financing (total, Evaluation MODULE 7 support to redundant staff staff support to redundant in evaluating training needs, finding a new job, and $13.2 million; personal business preparing Advisory facilitating projects; of redundant reinsertion the unit that and technical staff; services to advisory services to monitor the social impact support to during of redundancies will provide and after the period of implementation of the million redundant $0.16 social and staff: compensation plan. assessment environmental of and preparation social a comprehensive and mitigation protection for the workers program of displaced as a result sector restructuring. will generally Training cover individual, group, Project NameProject ApprovalSector Reform and Rehabilitation Project(APL-Phase 1)No: 20395-MAG by component andInvestment (Yes— Promotion training for retrenched workers workers; retrenched Project management by sector policy and implementation of a including capacity-building and training for social mitigation strategy workers; adjustment schemes of the preparation workers for retrenched compensation packages. financed by IDA): Finance No. and Number Country Date Intervention Type Description and Components2. by institutions) Report #/No) Transport Madagascar 05/02/2000 Adjustment schemes for transport Strengthen 3. Private Senegal for retrenched Training ($6.5 million Postal reforms

346 Labor Reform and Related Social Issues MODULE 7 and on-the-job training of technical staff. for Public Service Bureau Reforms (BPSR). Assistance includes: termination benefits and facilitating training through reinsertion activities to aid new toward redeployment activities, adaptation to new jobs, acquisition of skills necessary to develop and personal projects, customized counseling; 3/ Pensions reforms. operational costs, reduce its freight and configure services, and tariffs. Components 2/ Staff $16.90 million rationalization finances (WB $15.2 compensation retrenchment 32520 severance through million); payments, and an (all WB) Component 7: additional 15 percent $1 million 12/20/2005 contingency will be to cope with provided any variations; and pension obligations and liabilities Reform and Governance Project (federal government)No: 30383-NG workers; adjustment schemes support reforms workers for retrenched employment services restructuring public sector); (from and capacity buildingRestructuring service administrative in four pilot ministriesProjectNo: 21073-ZM (WB-IDA: $140); Severance $179.22 million Million $48.23 Training for the newly established $48.23 million workers; for retrenched of Zambia restructuring workers training for retrenched its Railways, to increase $31.0 million (IDA-34330 operating efficiency, (WB IDA $27); TF-23134), Component 2: Report No: 4. Economic Nigeria 11/15/2004 for retrenched Training Components: 2/ Pilot civil financing Total No 5. Railways Zambia 10/18/2000 Adjustment schemes aims a substantial Project financing Total ICR Yes.

347 Labor Reform and Related Social Issues Financing (total, Evaluation MODULE 7 Social mitigation, based funded by the pension fund; 7/ of the on recommendations social assessments. participation in infrastructure, regulatory and an improved (WB $25.5 million) framework. Component 1: technical assistance Provides and on-the-job training to help the government design and implement the privatization and severance program, payments and redeployment support. international traffic freight with neighboring countries. Component 2: The adverse impact of involuntary number separations of a large Component 2: is minimized of surplus staff million, of which, rationalization a staff through specially that offers program redundancy staff total $93.5 $84 million and designed retirement (WB $67 million) and $7 million workers in their increases share Project NameProject Approvaland Utility Sector Reform ProjectNo: 20016-UG workers; for retrenched coverage, and quality, and Ports employment servicesRestructuring Project of economic efficiency $92.1 million (WB IDA by component and (Yes— privatization, private and utility commercial services through employment services; workers; for retrenched $45.3 million); $71.7 million major of three efficiency port-rail systems in training for retrenched Component 1: Mozambique, and enable $120 million (WB IDA $100.0 million); No. and Number Country6. Date Privatization Uganda Intervention Type 05/22/2000 Description and Components Adjustment schemes by institutions) the aims to improve Project Report #/No) financing Total No 7. Railways Mozambique 09/14/1999 Adjustment schemes the operating Increase financing Total No

348 Labor Reform and Related Social Issues MODULE 7 retrenchment packages; retrenchment support to redeployment help workers find alternative jobs or become self-employed; redeployment) (staff social mitigation measures; of a pension fund creation CFM for the remaining employees; a comprehensive pension study for all public enterprises including CFM. gains, achieve major efficiency responsive and, become more (WB $14.85); to client needs. Component: separation assistance, Voluntary component labor aimed at improving VSEP is government’s- efficiency, Separation financed Voluntary Employment Package (VSEP), only $2.7 financed by the government consistent with the country’s million labor laws, and granted after consultation with the union. public bus service, to improve finances severance project payments to about 900 employees of redundant public bus companies. Reform Project Tobago workers for retrenched and quality of postal services, $23.04 million Sector Investment ProjectAPL (Phase II) No: 21151 TUN workers for retrenched finances investments in $56.6 million urban transport as well as additional investments building in transport sector (WB $37.6); management. As a part in railways and capacity of the investment program Severance $36.2 million Latin America and the Caribbean Region 1. Postal Services and Trinidad 02/25/1999 Adjustment schemes Seeks to expand the coverage financing Total Middle East and North Africa Region 1. Transport Tunisia 02/21/2001 Adjustment schemes that Phase 2 of project financing Total No

349 Labor Reform and Related Social Issues Financing (total, Evaluation MODULE 7 individual ministries. Components: 1/ Among other activities, includes extensive training through specific modular courses by the be financed systems and on new core government skills; 2/ Technical assistance will be provided a civil service fund to create and establish its policy framework regarding and redundancy, retirement, severance options. Modernization of YemenProjectNo: 20209-YEM workers; the mechanism to reduce workers for retrenched adjustment schemes servants and initiate a number of unqualified civil $33 million (WB $30); Buy-out * in process restructuring packages will Project NameProject Approval by component and (Yes— 2. Civil Service Republic 03/23/2000 for retrenched Training will establish a Project financing Total No No. and Number Country Date Intervention Type Description and Components by institutions) Report #/No)

350 Labor Reform and Related Social Issues

ANNEX II. LIST OF ORGANIZATIONS THAT HAVE OBTAINED AND RENEWED AN INTERNATIONAL LABOUR ORGANIZATION PORTWORKER DEVELOPMENT PROGRAM LICENSE

List of organizations which have obtained and renewed a ILO PDP License MODULE 7 Nonrenewed Organization/Institution Acquired License Valid License License

Hong Kong International Container Terminals Ltd. (Hong Kong, China) TEMPO, Municipal Port Management (the Netherlands) YES YES NO Shipping and Transport College/International Maritime Transport Academy (the Netherlands YES NO Mauritius Port Authority (Mauritius) YES YES PORTNET Academy (South Africa) YES NO Sri Lanka Ports Authority (Sri Lanka) YES YES PNG Harbours Board (Guinea) JP Training & Development SDN BHD (Malaysia) YES YES NO MOMAF - Ministry of Maritime Affairs and Fisheries / Shipping and Logistics Bureau (Republic of Korea) YES NO Carriers Container Council, Inc. (United States) YES YES Colombo Nautical & Engineering College (Sri Lanka) Jakarta International Container Terminal (Indonesia) YES NO Wubeling and Partners, port safety Consultants, Rotterdam (the Netherlands) YES NO The Hong Kong Polytechnic University (Hong Kong, China) YES NO U.S. Merchant Marine Academy (United States) YES YES World Maritime University (Sweden) YES YES Pelabuhan Tanjung Pelepas Sdn Bhd (Malaysia) YES YES Pacific Maritime Association (United States) YES YES AMC Search Ltd. (Australia) YES YES Global Maritime & Transportation School (United States) YES YES UNCTAD (Switzerland) YES YES Klang Container Terminal Bhd (Malaysia) Chung-Ang University (Republic of Korea) YES YES Express Maritime Services Ltd. (Ghana) YES YES Sea Ports Corporation Training Centre (Sudan) Instituto de Educacion Nautica y Portuaria A.C. (IENPAC) (Mexico) YES YES Regional Maritime Academy (Ghana) YES YES IFIRA Wharf & Stevedoring (1994) Ltd. /(Port Vila, Vanuatu ) YES YES Kelang Multi Terminal (WESTPORT) (Malyasia) YES YES Hong Kong Logistics Association (Hong Kong, China) YES YES Thessaloniki Port Authority S.A. (Greece) YES YES Port and Coast Directory (Maritime Authority) (Brazil) YES YES Philippine Ports Authority (Philippines) YES YES Altamira Terminal Portuaria (ATP) (Mexico) Internacional de Contenedores Asociados de Veracruz (Mexico) Oriental Port and Allied Services Corporation (Philippines) YES YES Joint Dock Labour Industrial Council (Nigeria) YES YES Container and RO-RO Terminal (Slovenia) YES YES Thai Laemchabang Terminal Co., Ltd. (Thailand) YES YES

351 Labor Reform and Related Social Issues

ANNEX II. CONTINUED Nonrenewed Organization/Institution Acquired License Valid License License

Kerria Ltd. (Russian Federation) YES YES Shipping & Logistics (Australia) YES YES P&O Ports Pvt. Ltd. (India) YES YES Nigerian Ports Authority (Nigeria) YES YES Malaysian Association of Productivity (Malaysia) YES YES Indian Institute of Port Management (India) YES YES Shanghai Maritime University (China) YES YES Department of Maritime Transport, Ministry of Transport and

MODULE 7 Communication (Eritrea) YES YES Arab Academy for Science and Technology, Port Training Institute (Egypt) YES YES Modern Terminals Limited (Hong Kong, China) YES YES Consilium Services Inc. (Canada) YES YES Manzanillo International Terminal-Panama S.A. (Panama) YES YES Comision Centroamericana de Transporte Maritimo (Nicaragua) YES YES HZSAFETY B.V. (the Netherlands) YES YES PSA Corporation Limited (Singapore) YES YES PLIPDECO (Trinidad and Tobago) YES YES Fundacion Puertos de las Palmas (Spain) YES YES Chittagong Port Authority (Bangladesh) Cia. Minera Antamina S.A. (Peru) YES YES Ministry for Competitiveness and Communications (Malta) YES YES Arser S.A. (Turkey) YES YES Sri Lanka Port Authorities (Sri Lanka) YES YES Bandari College, Tanzania Harbours Authority (Tanzania) YES YES Panama Ports Corporation (Balboa and Cristobal Terminals) (Panama) YES YES Kenya Port Authority (Kenya) YES YES Dubai Port Authority (United Arab Emirates) YES YES Association TRAINMAR in South America (ATAS) (Argentina) YES YES Source: International Labor Organisation.

352 PORT REFORM TOOLKIT SECOND EDITION

MODULE 8 IMPLEMENTING PORT REFORM

MODULE 8 The World Bank encourages dissemination of its work and will normally grant permission promptly.

ISBN-10: 0-8213-6607-6 ISBN-13: 978-0-8213-6607-3 eISBN: 0-8213-6608-4 eISBN-13: 978-0-8213-6608-0 DOI: 10.1596/978-0-8213-6607-3 MODULE 8 355 363 1.1. IWG Mandate and Composition1.1. IWG Mandate 1.2. Hiring Advisers 1.3. Time Frame 1.4. IWG Workplan 2.1. Regulatory Principles and Consultations 2.2. Port Authorities Pricing 2.3. Public Infrastructure 2.4. Labor Redeployment Principles and Procedures2.5. Contract Management 4.1. Financial Model 4.2. Due Diligence 4.3. Contractual Document Preparation 4.4. Bidding Documents’ Preparation 354 359 356 354 356 356 356 359 360 360 360 360 1. Strategic Preparation: The Interministerial Working Group Group Working The Interministerial Preparation: 1. Strategic and Powers 2. Redefinition of Authorities 353 3. Legal Adaptation Preparation 4. Transaction References 356 359 359 Box 1: Hiring and Managing Advisers Box 2: Port Reform ProcessBox 2a: Port Reform Process 355 361 362 BOXES MODULE EIGHT CONTENTS MODULE MODULE 8 a:1225232.Internet:[email protected] 1.202.522.3223. Fax: Please sendthemto the World Bank Transport HelpDesk. Comments are welcome. andBradle Kruk, Cornelis “Bert” Ronald Kopicki, The preparation andpublishingofthePort Reform Toolkit Juhel, underthemanagementofMarc wasperformed contributions ofthefollowing organizations. The First Edition ofthePort Reform Toolkit wasprepared andelaborated thanksto thefinancingandtechnical oftheILO Meletiou andMarios for theircontributions KeesMarges formerly to thiswork. ofITF, Group, Maritime andSimme Veldman oftheRotterdam Koppies, John We wishto give specialthanksto Christiaanvan Krimpen, for whichconsultants oftheRotterdam Group (RMG)were Maritime contracted.Toolkit’s content, and Water Public for Management) theenhancement ofthe Works, of Fund (NetherlandsMinistry Transport, Financial assistance wasalsoprovided through agrant from The Netherlands Transport andInfrastructure Trust andrural services. infrastructure inthefieldsof transport and sharingofknowledge for learning for International Development andthe Department World Bank, between theU.K. a partnership TRISP, This SecondEdition ofthePort Reform Toolkit hasbeenproduced withthefinancialassistance ofagrant from Acknowledgments PA Consulting (USA) United NationsEconomic Commission for LatinAmericaandtheCaribbean (Chile) Nathan Associates (USA) ISTED (France) LLP(USA) Holland andKnight Netherlands) The Rotterdam Group Maritime (The Netherlands) (The Management Rotterdam MunicipalPort HoldingRotterdam (formerly as Consultancy known Mainport TEMPO), AssociatesInternational Maritime (USA) The WorldBank The ofForeign French Affairs Ministry The NetherlandsConsultant Trust Fund e ie www Web site: For more information seethe onthefacility throughof theirinfrastructure private involvement. sector PPIAF isamulti-donortechnical aimedathelpingdeveloping assistance facility countries improve thequality The Public-Private Facility Advisory Infrastructure (PPIAF) .ppiaf .or g . y Julianofthe World Bank Transport Division. MODULE

8 MODULE 8 Implementing Port Reform SECOND EDITION

hifting the boundary between the public and private sectors entails four kinds of preparations: (1) Strategic preparation, including the Sconsideration of a particular institutional model and service ensemble that best matches a port’s competitive environment and its growth prospects. (2) Redefinition of authorities and their powers and mandates, resulting in regulations, rules, tariffs, and procedures that will ensure that the provision of all port services are fully coordinated and that the proper incentives to spur efficiency are in place. (3) Legal adaptation, which establishes the sectoral legal framework based on the principles agreed upon as a result of the strategic analysis and the redefinition of institutional rules. (4) Transaction preparation, which results in the development of tendering processes that are transparent, open, and competitive. This module describes how to undertake this series of tasks in a practical and effective way.

1. STRATEGIC PREPARATION: government. Once the principle is agreed upon THE INTERMINISTERIAL by the council of ministers or cabinet, an effec- WORKING GROUP tive way to overcome the traditional difficulties inherent with working across several ministerial Because of the wide-ranging implications of departments is to set up an interministerial work- port reform for the national economy, deciding ing group (IWG) under the chairmanship of a to embark on the path to reform must be an high level public official, and give it an explicit initiative fully supported at the highest levels of mandate. Drafting and getting this mandate

353 Implementing Port Reform

approved will be the first step to set the reform 1.2. Hiring Advisers process in motion. Designing and implementing a port sector Due to its interministerial nature, and to the fact reform program involving increased private sec- that most of its proposed decisions will have a tor participation in port services requires sub- far-reaching impact across a number of ministeri- stantial economic, financial, technical, and legal al departments, a logical proposition would be expertise, and the coordination of this expertise. for the IWG to report directly to the head of gov- The process requires detailed work, first refining ernment, prime minister, or council of ministers. the institutional option to be implemented, then preparing the legal and regulatory measures 1.1. IWG Mandate and Composition required to support it, and finally drafting complex documents, such as the necessary enabling MODULE 8 The IWG will have to define the objectives of laws (port law, competition law, and more), port reform and draft a new or revised institu- reform policies and procedures, and model con- tional framework for the sector based on these cession agreements. Preparing these documents objectives. Its proposals should be included in a often involves several iterations, as preliminary port sector policy paper that should be endorsed versions are distributed to the national profes- by the council of ministers. This policy paper sional community and to prospective private then should be distributed for comments from partners for comment, and then amended in all of the stakeholders within the port and mari- accordance with those comments and with the time sectors, such as port cities, port authorities, government’s policy concerns. chambers of commerce, port labor unions, shipping and liner agents, and the like. Based on Governments often lack the full range of expert- the sector comments, the policy paper should be ise within the civil service to carry out these adapted and submitted to parliament or the con- tasks. Some countries may have few of the nec- cerned parliamentary commission for approval. essary skills available locally and will need In particular, this policy paper will propose a international advisers. All governments will preferred choice for the new port management need to contract out at least some of these tasks model to be implemented. to external advisers. Managing these advisers then becomes a primary task of the IWG. The skills of the people appointed to the IWG will be critical. First, IWG members must repre- Various kinds of advisers may be helpful. sent the various ministerial departments directly Economic and regulatory consultants can advise interested in port sector activities, including on how the market for port services can be struc- transport, external trade, finance, labor, envi- tured and how competition can be promoted, ronment, and possibly agriculture, industry, and depending on domestic and regional contexts; more. Second, they must collectively hold the they can also help devise adequate regulatory required competence in terms of economic, and monitoring mechanisms when needed. financial, technical, and social aspects of the Legal consultants can help prepare draft legisla- port industry both domestically and regionally. tion and regulations as well as model conces- Third, they must be seen as independent from sion agreements if required. In the event that any interest group, and the key staff must have the government develops a national ports mas- a recognized reputation in their field of compe- ter plan, technical consultants can assess port tence. While the IWG may, and should, consult facilities and help prepare technical specifica- with all interested stakeholders and representations and requirements for both general regula- tives of the professional port and maritime com- tory purposes and specific concession contracts. munity, it must be able to view the reform Environmental consultants can prepare environ- process from a broader economic perspective, mental studies, baseline surveys of existing con- focusing on the overall public interest of the ditions at the outset of the reform process, and country. environmental impact assessments of specific

354 Implementing Port Reform

Box 1: Hiring and Managing Advisers he Public Private Infrastructure Advisory defining terms of reference, budget, and Facility (PPIAF http://www.ppiaf.org/) has timetable. funded the Toolkit: A Guide for Hiring T ~ Module 5: Provides concrete recommen- MODULE 8 and Managing Advisors for Private dations for tailoring advisory packages to Participation in Infrastructure. This Toolkit will small projects. assist governments in hiring and managing • Volume 2 is made up of a single module, economic consultants, financial advisors, and Module 6, which provides a practical guide legal experts as well as other specialists to sources of funding for transaction support required to increase the role of the private sec- from multilateral and bilateral agencies, tor in all infrastructure services. The main com- either through technical assistance or lend- ponents of the Toolkit are an overview, an ing. It discusses their eligibility criteria and executive summary, and three volumes of pub- funding interests. Some information is out of lications that contain nine modules as follows: date, but most contact details and Web links • Volume 1 introduces PPI reforms and the remain current. role of advisors in those reforms: • Volume 3 goes into more details about the ~ Module 1: Highlights how advisors can help mechanics of hiring advisors: improve the chances of success of public- ~ Module 7: Discusses methods of selecting private infrastructure reforms, but warns that advisors. they are costly and must be well managed. ~ Module 8: Recommends alternative ways ~ Module 2: Describes the types of infra- of paying advisors for their advice. structure reforms and breaks down the infrastructure reform process in four key ~ Module 9: Provides guidance on how gov- stages: formulating policy, establishing the ernments should be organized internally legal and regulatory framework, tendering to manage the reforms and supervise the contract, and managing the contract. advisors. ~ Module 3: Outlines the types of advisors The Annexes (PDF, 117B) contain sample eval- that may be required (economic, financial, uation forms, sample proposal formats, and legal, technical, human resources, and com- sample terms of reference. Information for munication) and their roles at each stage. ordering the PPI Advisory Toolkit as well as a self-guided tour of the Toolkit’s main themes is ~ Module 4: Discusses ways of available on PPIAF’s homepage: packaging advisory services and www.ppiaf.org. development options. Finally, investment obviously will vary country by country, bankers and financial consultants can help pre- depending on the local economic context and pare financial projections and cost benefit on the physical magnitude of the sector; how- analyses for the sector as a whole. In the event ever, a six-month period is likely to be the min- of specific port development projects, they imum time required to establish a sector reform might also assist in determining the bankability strategy and secure agreement on it from vari- from a private investor’s perspective. For more ous stakeholders. This phase may extend up to information on how best to select and hire 12 months in more complex institutional and advisers, see Box 1 on the separate World Bank operational environments. Implementing the toolkit for hiring and managing advisors for reform itself—including transforming public private participation in infrastructure (PPI). port authorities, setting up regulatory bodies as needed, preparing transactions with private 1.3. Time Frame partners, and closing contracts—may require For the sake of efficiency, it is advisable to give between one to two years, assuming no politi- explicit deadlines to the IWG. The time frame cal disruptions occur. Altogether, a two- to for conceptualizing and implementing reform, three-year time frame from the inception of however, must be realistic. Time requirements the reform process to when the new sector

355 Implementing Port Reform

organization is up and running would seem a arrangements, and usually has a bearing on the reasonable estimate. legal provisions to be developed as part of the new sectoral legislative framework. On the 1.4. IWG Workplan basis on the institutional and management The first element of the IWG workplan should framework decided upon as part of the strategic be to consider the strategic situation of the port preparation phase, the IWG can then turn its sector, and to review the operational and eco- attention to the establishment of the public enti- nomic strengths and weaknesses of the domestic ties that will be in charge of regulating and port and maritime industry. Organizing effective monitoring the sector, and the definition of their communications with the national port and mar- mandates. itime community, as well as with important stake- MODULE 8 holders (for example, the importers/exporters 2.1. Regulatory Principles association, chambers of commerce, and inland Following the assessment of the competitive sit- transport carriers), and maintaining this uation in the sector (from both a national and interaction throughout the reform design and regional perspective), the IWG should assess the implementation process, will be a major respon- need for an economic regulatory mechanism. If sibility of the IWG. The IWG review should such a mechanism is determined to be neces- include: sary, the mandate, operating rules, and composition of the regulatory body should be estab- • Market conditions, competition condi- lished (see Module 6 for guidance in this tions (both domestic and regional), and regard). In all cases, regulatory principles will demand forecasts. have to be drafted or updated to take into • Domestic legal and regulatory conditions. account the consequences of the new opera- • Domestic institutional arrangements. tional framework and of technological changes. • National strategic objectives for the port 2.2. Port Authorities and sector in support of overall national eco- Consultations nomic development goals. As part of the reform process, the status and The IWG must then decide on the port sector mandates of the public port authorities will be institutional and management model that would redefined, along with their missions and respon- best suit the national conditions and strategic sibilities. Reporting and monitoring relationships economic objectives. Information included in with line ministries and private operators, Modules 2 and 3 on evaluating and selecting respectively, should be defined precisely, together the appropriate model may be helpful in this with the appropriate implementation guidelines. process. Once the main organizational princi- In doing so, particular attention should be paid ples of the sector are agreed upon within the to the establishment of official consultation pro- IWG, the government must firmly endorse and cedures between the private port and maritime adopt them so that all parties can be assured community and the local public monitoring bod- that the reform program will be seen through to ies (for example, the public port authorities). completion. These consultation procedures will be important 2. REDEFINITION OF in ensuring that customers’ concerns and sugges- tions regarding the functioning of the ports can AUTHORITIES AND POWERS be efficiently channeled to the ports’ manage- For the next step in the strategic preparation ment boards or to the sector regulatory body. process, the IWG should define the regulatory principles applicable to the sector and the meth- 2.3. Public Infrastructure Pricing ods to be employed in implementing reform. This The principles for port public infrastructure work is complementary to the organizational pricing will also have to be agreed upon at this

356 Implementing Port Reform stage. Recently, a great deal of attention has authority includes in the concession fee the been devoted to this very issue within the amount required to cover the full depreciation European Union (EU), resulting in the publica- of its previous investment, a cost that the con- tion of two papers of significant interest: a cessionaire will again transfer to its own cus-

Green Paper on “Sea Ports and Maritime tomers through its charges for services. The key MODULE 8 Infrastructure,” and a White Paper on “Fair to getting a fair tariff for the customer hinges Payment for Infrastructure Use: A Phased on the competitive conditions prevailing for Approach to a Common Transport awarding the contact, and, sometimes, on the Infrastructure Charging Framework in the EU.” award criteria themselves. Generally, award cri- Those papers, following the conclusions of an teria should rely predominantly on maximizing earlier study, European Sea Port Policy, 1993, total discounted revenues to the port authority basically endorse the view that there is no fun- in cases where strong competition exists for the damental difference between investments in port services to be concessioned, as well as on mini- infrastructure and other capital-intensive invest- mizing the cost for the customer in cases where ments in industrial complexes. Therefore, there competition is deemed weak or nonexistent. should be no reason for adopting a completely different approach to port investments, and Pricing of basic port infrastructure (mostly consequently no reason why direct users should access and protection assets such as channels, not bear the costs of such investments. The breakwaters, and navigation aids) presents a study went on to suggest that the introduction different challenge. Most of these assets have of market principles in infrastructure pricing unusually lengthy depreciation periods. It is would be the most effective remedy to avoid the common in official depreciation schedules for risk of creating wasteful overcapacity and possi- financially autonomous port authorities to find ble distortions of trade flows (except in the case breakwaters being depreciated on a 80-year, of pricing maritime access and protection infra- sometimes even a 100-year, basis. This feature structure). of basic port infrastructure raises two issues. First, these depreciation periods are, in the best This distinction made between port access and of cases, about five to six times longer than any protection infrastructure (which can take the available commercial financing in the market form of basic infrastructure and operational (when there is a market for financing long-term infrastructure) and other forms of port-related infrastructure). And second, technical obsoles- investments relates well to the new sharing of cence (for example, insufficient access draft) responsibilities between public authorities (as may occur well before the end of these depreci- owners and developers of basic infrastructure) ation periods, effectively rendering worthless and private service providers (as operators or the original investment. concessionaires and licensees or investors in operational infrastructure). The EU papers referenced above list three well- known pricing options for basic infrastructure: The result is that operational infrastructure (for example, berths) increasingly is being priced on • Average cost pricing, which would guar- commercial terms. The commercial transaction antee full recovery, including past infra- may be structured as a build-operate-transfer structure investments. (BOT) or a build-own-operate-transfer (BOOT) • Charging for operating costs only, which concession agreement, where the operator or would leave capital costs out, particularly investor will include its capital cost in the cargo for new investments. handling charges to be levied on its customers. Or, the transaction may be structured as an • Marginal cost pricing, which is deemed operating concession (where the operational to best meet economic efficiency infrastructure already exists), where the port requirements.

357 Implementing Port Reform

The research recommends an infrastructure infrastructure, when available, offers much shorter charging policy based on long-term marginal maturities than the economic life of the port costs, which would cover the cost of new assets to be financed, therefore this would tend capital and operating and external costs of to drive up port charges significantly. To mitigate infrastructure use. In other words, port basic this phenomenon, governments sometimes agree infrastructure charges should be set in line with to finance part of the access and protection costs marginal costs, which would also take into of ports as part of the national budget, which account the continuing need for new invest- effectively splits basic infrastructure costs ments and the existence of externalities relating between the user and the taxpayer. An example to environment, congestion, and accidents. of one approach is in the United States, where dredging of access to ports from the high seas is

MODULE 8 Public landlord port authorities increasingly are carried out by the U.S. Corps of Engineers and is organized as autonomous financial entities funded through the federal budget (while dredg- required to recover their full costs to the largest ing of port basins is left to the port authorities). possible extent. As a consequence, these authori- Another example is an approach taken in France, ties have been confronted with the question of where the 1965 Law on Autonomous Port whether full cost recovery of basic infrastructure Authorities split port infrastructure costs between investments through user charges would weaken the port authority and the state budget, the latter their competitiveness in the market to the point of bearing 100 percent of access dredging costs and seriously undermining their attainment of public 80 percent of protection costs (breakwaters). policy objectives. Government authorities, from From an accounting standpoint, French port their perspective, while eager to curtail budget authorities register the government’s contribution contributions to port infrastructure investments, in their balance sheets as a subsidy, which is sometimes worry that increased port user charges renewable, and, consequently, not depreciated. may divert traffic flows to other routes, which However, scarcity of budget resources in many might prove economically disadvantageous for countries is making these arrangements increas- the country as a whole. Competitiveness issues in ingly difficult to sustain, and while infrastructure relation to port infrastructure charges are certainly subsidies of this kind may still exist, more often worthy of attention, but must also be seen in than not there is no guarantee that such subsidies perspective—on average, they amount to only 10 will continue. Consequently, port authorities percent of the costs incurred during a port transit. must fully depreciate the investment, subsidies This may be critical for ports facing strong com- included. These port authorities still benefit from petition (particularly when competing for trans- the subsidy scheme, though, since their tariffs can shipment traffic), but relatively minor in other cir- reflect the depreciation of assets over their full cumstances. Of course, because of specific geo- economic lives. graphic settings, some ports may face higher than average access and protection infrastructure costs Finally, there is the question of allocating these (for example, periodic maintenance of a long infrastructure charges between the ship and the entrance channel). cargo. In the past 50 years, a number of port authorities and governments have attempted to The level of cost recovery required for basic infra- rationalize this allocation through analytical structure is contingent not only on the amount methods (for example, the Freas Formula in the invested, but also on the terms under which it is United States), and later through cost account- financed. Because balanced budgets are now a ing techniques. Historically, when infrastructure must for port authorities, financing schemes will charges were actually split between ship dues heavily drive the depreciation schedule built into and cargo dues, cargo ended up paying a much infrastructure charges (that is, amortization sched- higher proportion of the total cost than the ules will supersede technical or economic life ship. Notwithstanding any formula-embedded depreciation formulas). Commercial financing of rationale, this situation may also have had to

358 Implementing Port Reform do with the respective bargaining power of the sary legal work should get underway very early shipowners on one side (usually well organized) in the reform process. Often, port-related enti- compared to the shippers on the other (typically ties enter into commercial arrangements ahead not well organized and often much less able to of the legislative changes that are necessary to negotiate effectively with port authorities). fully reform and liberalize the sector. Subsequent MODULE 8 legal changes may complicate the contractual This debate tends to become somewhat academic relationships for these initial deals. Or, these today, since in well-functioning shipping markets early investors may try to slow down the broad- infrastructure charges assessed against vessels ulti- er reform process so that they can enjoy as long mately transfer back to shippers through the as possible a competitive edge stemming in part freight rates. Indeed, there is some rationale for from an advantageous legal situation. the port to assess charges only against vessels, the physical characteristics of which largely determine Once the strategic choices for the reform the size and cost of the basic infrastructure process have been made, the main priority of required to accommodate them. There is, there- the IWG will be to translate them into national fore, some logic in establishing a schedule of infra- legislation. This will generally include, without structure dues based on those physical characteris- being limited to, the following elements: tics rather than on the characteristics of the cargo. • Conduct legal due diligence, identifying the pieces of legislation to be updated, 2.4. Labor Redeployment changed, or scrapped altogether, and the Usually, port sector reform will entail a significant missing pieces to be added. adjustment in the number and qualifications of • Conduct legal review of all aspects associ- port workers, both dockworkers and clerical staff. ated with port labor reform that can have Module 7 provides a detailed overview of how to significant consequences when it comes to address this issue effectively. Authorities should funding the required transition measures. organize interactions with the unions early on in the reform process to give reform the best chance • Draft new port sector legislative frame- for success. Areas that need to be discussed with work. unions include staff redeployment, retraining, and • Draft bylaws of reorganized or restruc- procedures and compensation principles in case tured public entities, port authorities, and redundancies prove unavoidable. regulatory authorities. 2.5. Contract Management • Draft legislation governing contractual Principles and Procedures arrangements between public authorities and private commercial partners (for Once the mandates of all public entities are example, licenses, leases, and concessions). clearly defined, explicit procedures and regulations governing the award, management, and • Draft standard bidding documents and monitoring of contracts with private sector standard contractual documents. partners will have to be drafted. These proce- • Prepare all necessary briefing documenta- dures should be widely publicized through tion to present the new legislative pack- workshops organized with all domestic stake- age for government and parliamentary holders and be open to interested foreign approval. investors and operators so that the rules of the game are clear to all potential players. 4. TRANSACTION PREPARATION 3. LEGAL ADAPTATION There are myriad details that must be attended to as port reform initiatives move into their If the organizational changes contemplated final stages. Dozens of documents and analyses should require changes in legislation, any neces- must be prepared and made available to the

359 Implementing Port Reform

public, prospective investors, and port opera- be borne by public authorities as well, before tors. The key documents are described below. the formal launch of the reform process. However, if all or part of these staff restructur- 4.1. Financial Model ing costs are left to the private sector, they Establishing the viability of any given reform should be factored into the financial model used package will involve testing its overall financial to assess the feasibility of the reforms. sustainability, as well as its sensitivity to a few critical variables. Financial modeling should 4.2. Due Diligence help the public authorities identify the transac- Public authorities, possibly with help from spe- tions that will prove attractive to private sector cialized financial advisors, will have to prepare partners, while providing them with the revenue the required due diligence reports to certify the MODULE 8 streams they need to meet their own financial financial status of the assets and activities to be obligations. The project financial model includ- tendered. ed in Module 5, with a number of adjustable parameters, should help those responsible for 4.3. Contractual Document port reform develop a financial picture reflect- Preparation ing the particular conditions of the transactions Public authorities should draft the contractual under consideration, thereby further helping documents defining the operational and financial decision makers select feasible packages to offer relationships between and among the contracting for bidding by private investors and developers. authority, the regulatory authority, and the pri- The project financial model will be fed with vate operators. These should especially include data resulting from the following tasks: all required operational and financial covenants that may be deemed necessary. The details of • Preparation of project cost estimates concession contracts are provided in Module 4. (capital, operations, and maintenance). • Establishment of tariff principles, struc- 4.4. Bidding Documents’ ture and levels. Preparation • Estimation of market demand and of cor- In addition to the proposed draft contract, the responding revenues. tendering documentation should include all documents pertaining to the organization and rules • Determination of the prospective capital governing the bidding process, with enough infor- structure (debt-equity ratio). mation provided to guarantee its transparency • Identification of the level of government and fairness, thereby ensuring the widest partici- support (guarantees, investment pation by potential interested investors or opera- contribution). tors possible. All documents and information relevant to the proposed transaction will then have to • Assessment of tax, dividend, and foreign be displayed for review by potential bidders in a exchange requirements and their cash dedicated data room. For more detailed advice on flow implications. how to structure and manage the bidding process Assessment of staff restructuring costs from the (for more information, see Kerf et al. 1998). review of labor practices and requirements must be built into the overall cost estimate of the Boxes 2 and 2a depict in detail a typical sequence reform program at this stage. Any redeployment of actions associated with port reform, with rough of labor necessitated by port reform should time frames associated with each action. This preferably be carried out under the auspices of information should be useful in guiding reform public authorities. Similarly, the attendant cost decision makers through the entire process—from associated with any such redeployment should conceptualization through implementation.

360 Implementing Port Reform

Box 2: Port Reform Process

The Critical Path Preparation Phase Implementation Phase MODULE 8 Strategic Preparation Set up the interministerial working group (IWG) and define its mandate Organize interaction with the port and maritime community Port and maritime industry analysis (Module 2) Review market conditions, competition conditions, and demand forecasts Legal and regulatory review of current status Institutional review of current arrangements Draft port sector policy paper with principal reform objectives Choice of port sector institutional and management model Validation by government Redefinition of Authorities and Powers Determine technical and economic regulatory needs Establish regulatory authority Establish consultation principles with port and maritime community Draft technical regulations Adopt economic regulation principles as needed Establish principles for public infrastructure pricing Draft port authority statutes and mandates Organize interactions with unions on port staff redeployment Agree on procedures and compensation principles to handle staff redundancies Draft procedures for managing and monitoring new public-private partnerships for commercial operations

Source: Author.

361 Implementing Port Reform

Box 2a: Port Reform Process

The Critical Path Preparation Phase Implementation Phase

Legal Adaptation Prepare legal due diligence report Review legal aspects of labor issues Draft new sector legislation Draft port authorities by laws Draft legislation on contractual arrangements with the private sector (licenses, leases, concessions) as MODULE 8 needed Draft standard bidding documents Draft standard contractual documents Prepare briefing papers on new legislative package

Enact necessary enabling laws

Transactions Preparation Develop financial modeling Estimate costs (capital, operations, maintenance) Establish tariff principles Estimate market demand and revenues Propose capital structure (debt/-equity ratio) Determine government support (guarantees, investment contribution) Assess tax, dividend, and foreign exchange requirements, implications Review staff restructuring costs (as needed) Prepare preliminary financial statements Prepare financial due diligence report Define contractual operational and financial covenants Prepare bidding documents Prepare data room

Transaction Implementation Launch prequalification process Prequalify bidders Launch bidding process Assess technical offers Evaluate bids Negotiate final terms with preferred bidder Issue award letter Reach financial closing Source: Author.

362 Implementing Port Reform

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---.1996g. “Major issues in transport and communication: Concepts and Guidelines for the Implementation of the Commercialization and Privatization of Ports.” Ports and Harbors (April).

---.1997a. “Terminal velocity.” Containerization International June, p. 95.

---. 1997b. "Towards a New Role for the State in Uruguay's Utilities." Report 16154-UY. Washington, D.C.

---. 1997c. World Development Report. Washington, D.C.

---.1998. “Major issues in transport, communication, tourism and infrastructure development: Commercialization and Private sector Involvement in Ports.” Ports and Harbors (November)

---.1998. “Les financements internationaux d’infrastructure: la fiscalité des BOT.” Les ECHOS 12 May.

---. 2000. Port Reform Toolkit–Module 7: Port Labor Reform. Washington, D.C.

---. 2001. "Enhancing Public-Private Ownership in the Context 0f the African Vision for Water(2025)." In Political Economy of Water Sector Reform. Volume 1, Summary of the Regional Conference on the Reform of the Water Supply and Sanitation Sector in Africa, Kampala, Uganda,February 26-28, 2001.

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Water and Sanitation Programme, World Bank. Washington, D.C.

---. 2002. Public Communications Programs for Privatization: A Toolkit for Task Team Leaders and Clients. Washington, D.C.

file:///Users/Lehi/Desktop/reference.html Page 9 of 9 Glossary of Port and

Shipping Terms Glossary

Backhaul Bill of lading

To haul a shipment back over part of a route A document that establishes the terms of con- that it has already traveled; return movement of tract between a shipper and a transportation cargo, usually opposite from the direction of its company. It serves as a document of title, a con- primary cargo destination. tract of carriage, and a receipt for goods. Ballast keel Bond port A heavy keel fitted to vessels to lower the center Port of a vessel’s initial customs entry to any of gravity and improve stability. country; also known as first port of call. Ballast tanks Bonded warehouse Compartments at the bottom of a ship that are filled with liquids for stability and to make the A warehouse authorized by customs authorities ship seaworthy. for storage of goods on which payment of duties is deferred until the goods are removed. Beam Breakbulk The width of a ship. Loose, noncontainerized cargo stowed directly Berth into a ship’s hold. A place in which a vessel is moored or secured; Broker place alongside a quay where a ship loads or discharges cargo. A person who arranges for transportation of loads for a percentage of the revenue from the Berth term load. Shipped under a rate that does not include the Build-operate-transfer (BOT) cost of loading or unloading. Berth dues (or quay dues or dockage) A form of concession where a private party or consortium agrees to finance, construct, operate Charges for the use of a berth. Typically and maintain a facility for a specific period and assessed based on the duration of a vessel’s stay transfer the facility to the concerned govern- and length overall (LOA). ment or port authority after the term of the

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concession. The ownership of the concession Carrier area (port land) remains with the government or port authority during the entire concession Any person or entity who, in a contract of period. The concessionaire bears the commer- carriage, undertakes to perform or to procure cial risk of operating the facility. the performance of carriage by sea, inland waterway, rail, road, air, or by a combination of Build-own-operate-transfer (BOOT) such modes.

A form of concession where a private party or Cartage consortium agrees to finance, construct, own, operate and maintain a facility for a specific Intraport or local hauling of cargo by drays or Glossary period and transfer the facility to the concerned trucks (also referred to as drayage). government or port authority after the term of Chassis the concession. The ownership of the concession area (port land) vests in the private party A frame with wheels and container locking or consortium during the entire concession devices to secure the container for movement. period and is transferred to the government or port authority at the end of the concession Classification yard (also commonly period. As with the BOT, the concessionaire known as a shunting yard) bears the commercial risk of operating the A railroad yard with many tracks used for facility. assembling freight trains. Bulkhead Cleaning in transit

A structure to resist water; a partition separating The stopping of articles (such as farm products) one part of a ship from another part. for cleaning at a point between the point of ori- Bulk vessel gin and destination. Clearance All vessels designed to carry bulk cargo such as grain, fertilizers, ore, and oil. The size beyond which vessels, cars, or loads cannot pass through, under, or over bridges, Bunkers tunnels, highways, and so forth. Fuel used aboard ships. Cleat

Cabotage A device secured on the floor of a container to Shipments between ports of a single nation, fre- provide additional support or strength to a quently reserved to national flag vessels of that cargo-restraining device, or a device attached to nation. a wharf to secure mooring lines. Cargo tonnage Common carrier

Ocean freight is frequently billed on the basis of A transportation company that provides service weight or measurement tons. Weight tons can to the general public at published rates. be expressed in terms of short tons of 2,000 Concession pounds, long tons of 2,240 pounds, or metric tons of 1,000 kilograms (2,204.62 pounds). An arrangement whereby a private party Measurement tons are usually expressed as (concessionaire) leases assets from a authorized cargo measurements of 40 cubic feet (1.12 cubic public entity for an extended period and has meters) or cubic meters (35.3 cubic feet). responsibility for financing specified new fixed

366 Glossary of Port and Shipping Terms investments during the period and for providing Container vessel specified services associated with the assets; in return, the concessionaire receives specified rev- Ship equipped with cells into which containers enues from the operation of the assets; the assets can be stacked; containerships may be full or revert to the public sector at expiration of the partial, depending on whether all or only contract. some of its holds are fitted with container Glossary cells. Conservancy Container terminal In some countries, this fee is levied to retain upkeep of the approaches to waterways and An area designated for the handling, storage, canals. and possibly loading or unloading of cargo into or out of containers, and where containers can Consolidation be picked up, dropped off, maintained, stored, or loaded or unloaded from one mode of trans- Cargo consisting of shipments of two or more port to another (that is, vessel, truck, barge, or shippers or suppliers. Container load shipments rail). may be consolidated for one or more consignees. Container yard

Container A container handling and storage facility either within a port or inland. Steel or aluminum frame forming a box in which cargo can be stowed meeting International Contraband Standard Organization (ISO)-specified measurements, fitted with special castings on the corners Cargo that is prohibited. for securing to lifting equipment, vessels, chassis, Contract carrier rail cars, or stacking on other containers. Containers come in many forms and types, Any person not a common carrier who, under including: ventilated, insulated, refrigerated, flat special and individual contracts or agreements, rack, vehicle rack, open top, bulk liquid, dry transports passengers or cargo for compensa- bulk, or other special configurations. Typical con- tion. tainers may be 10 feet, 20 feet, 30 feet, 40 feet, 45 feet, 48 feet, or 53 feet in length, 8 feet or 8.5 Controlled atmosphere feet in width, and 8.5 feet or 9.5 feet in height. Sophisticated, computer controlled systems that manage the mixture of gases within a container Container freight station throughout an intermodal journey, thereby A dedicated port or container terminal area, reducing decay. usually consisting of one or more sheds or Customhouse warehouses and uncovered storage areas where cargo is loaded (“stuffed”) into or unloaded A government office where duties are paid, doc- (“stripped”) from containers and may be tem- uments filed, and so forth, on foreign ship- porarily stored in the sheds or warehouses. ments. Container pool Customs broker

An agreement between parties that allows the A person or firm, licensed by the customs efficient use and supply of containers; a com- authority of their country when required, mon supply of containers available to the ship- engaged in entering and clearing goods through per as required. customs for a client (importer).

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Cut-off time (closing time) EDIFACT

The latest time a container may be delivered to Electronic Data Interchange for Administration, a terminal for loading to a scheduled barge, Commerce, and Trade. International data inter- vessel, train, or truck. change standards sponsored by the United Nations. Daily running cost Eminent domain Cost per day of operating a ship. The sovereign power to take property for a nec- Deconsolidation point essary public use, with reasonable compensa-

Glossary tion. Place where cargo is ungrouped for delivery. Demurrage Feeder service Transport service whereby loaded or empty A penalty charge against shippers or consignees containers in a regional area are transferred to a for delaying the carrier’s equipment beyond the “mother ship” for a long-haul ocean voyage. allowed free time. The free time and demurrage charges are set forth in the charter party or Fixed costs freight tariff. Costs that do not vary with the level of activity. Dock or quay Some fixed costs continue even if no cargo is carried; for example, terminal leases, rent, and A structure attached to land to which a vessel is property taxes. moored. Force majeure Draft (or draught) The title of a common clause in contracts, The depth of a ship while in the water. exempting the parties from nonfulfillment of their Measured as the vertical distance between the obligations as a result of conditions beyond their waterline and the lowest edge of the keel. control, such as earthquakes, floods, or war. Dredging Foreign trade zone Removal of sediment to deepen access channels, A free port in a country divorced from customs provide turning basins for ships, and maintain authority, but under government control. adequate water depth along waterside facilities. Merchandise, except contraband, may be stored Dry bulk in the zone without being subject to import duty regulations. Loose, mostly uniform cargo, such as agribulk products, coal, fertilizer, and ores, that are Forty-foot equivalent unit (FEU) transported in bulk carriers. Unit of measurement equivalent to one forty- Dunnage foot container. Two twenty-foot containers (TEUs) equal one FEU. Material used in stowing cargo either for separation or the prevention of damage. Free trade zone Electronic data interchange (EDI) A zone, often within a port (but not always), designated by the government of a country for Transmission of transactional data between duty-free entry of any nonprohibited goods. computer systems. Merchandise may be stored, displayed, or used

368 Glossary of Port and Shipping Terms for manufacturing within the zone and reex- Grounding ported without duties being applied. Also referred to as free port. Contact by a ship with the ground while the ship is moored or anchored as a result of the Freight, demurrage, and defense water level dropping, or when approaching the

coast as a result of a navigational error. Glossary Class of insurance provided by a protection and indemnity (P&I) club that covers legal costs Groupage incurred by a shipowner in connection with claims arising from the operation of the ship. The grouping together of several compatible consignments into a full container load. Also Freight forwarder referred to as consolidation. Person or company who arranges for the car- Harbor dues (or port dues) riage of goods and associated formalities on behalf of a shipper. The duties of a forwarder Charges by a port authority to a vessel for include booking space on a ship, providing all each harbor entry, usually on a per gross ton- the necessary documentation, and arranging nage basis, to cover the costs of basic port customs clearance. infrastructure and marine facilities such as buoys, beacons, and vessel traffic management Freight payable at destination system. Method of paying the freight often used for Hand-over shipment of bulk cargo, the weight of which is established on discharge from the ship. Term used in contracts, meaning the process of providing exclusive, unencumbered, peaceful, Gantry crane and vacant possession of and access to a concession area and the existing operational port A crane fixed on a frame or structure spanning infrastructure and also all rights, title (free of an intervening space typically designed to tra- all encumbrances and security), and interest in verse fixed structures such as cargo (container) all the movable assets and all the facilities by storage areas or quays and which is used to the government or the port authority on the hoist containers or other cargo in and out of hand-over date for the conduct of terminal vessels and place or lift from a vessel, barge, operations. trucks, chassis, or train. Gateway Harbormaster An officer who is in charge of vessel move- A point at which freight moving from one terri- ments, safety, security, and environmental issues tory to another is interchanged between trans- within a port. portation lines. Good international practice Heavy lift charge A charge typically imposed when special lifting Term used in contracts, meaning the exercise of gear is required to handle a given piece of that degree of skill, diligence, and prudence that cargo, which may be of either heavy weight or would, in order to satisfy internationally accept- of large dimensions (often referred to as “out of ed standards of performance, reasonably be gauge” when dealing with container vessels). practiced by an experienced person holding all applicable qualifications who is engaged in the Hold same type or similar types of activity under the same or similar circumstances. A ship’s interior storage compartment.

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In bond Loaded draught (or draft)

Cargo moving under customs control where Depth of water to which a ship is immersed duty has not yet been paid. when fully loaded. Inducement Landlord port

Placing a port on a vessel’s itinerary because the An institutional structure where the port volume of cargo offered by that port justifies authority or other relevant public agency retains the cost of routing the vessel. ownership of the port land and responsibility for port planning and development, as well as

Glossary Inland carrier the maintenance of basic port infrastructure and aids to navigation. A transportation company that hauls export or import traffic between ports and inland Lender’s direct agreement points. Agreement between parties to a concession or Intermodal BOT agreement (government or port authority and special purpose vehicle [SPV] or terminal Movement of cargo containers interchange- operator) and the lenders (usually banks or a con- ably between transport modes where the sortium of banks) setting out the rights and obli- equipment is compatible within the multiple gations of the lenders in relation to the govern- systems. ment or port authority regarding the facilitation Jetty (or pier) of the financing of a port project. The lender’s direct agreement is used in the event of a pro- A structure that is perpendicular or at an angle posed termination of the concession agreement to to the shoreline to which a vessel is secured for induce the lenders to provide the debt to the SPV the purpose of loading and unloading cargo. or operator under the financing documents. These rights and obligations usually comprise assign- Jumboising ment rights with respect to the concession and the Conversion of a ship to increase cargo-carrying site lease agreement, priority rights with respect capacity by dividing and adding a new section. to of repayment of the debt, and step-in rights in case of termination as a result of breach of con- Keel tract by the SPV or operator.

A flat steel plate running along the center line Lighter of a vessel. An open or covered barge towed or pushed by Knot a tugboat or a pusher tug and used primarily in harbors and on inland waterways to carry Measure of ship speed, equal to one nautical cargo to or from the port. mile (1,852 meters) per hour. Limited recourse financing LASH Project financing in which sponsors or govern- Abbreviation for “lighter aboard ship.” A spe- ments agree to provide contingent financial cially constructed vessel equipped with an over- support to give lenders extra comfort; typically head traveling gantry crane for lifting specially provided during the construction and start-up designed barges out of the water and stowing period of a project, which is generally the them into the cellular holds of the vessel (load- riskiest time in the life of an infrastructure ing) and unstowing (unloading) as well. project.

370 Glossary of Port and Shipping Terms

Line haul ownership of the facility and the commercial risk associated with its operation. The movement of freight over the tracks of a transportation line from one location (port or Mezzanine financing city) to another.

A mix of financing instruments, including equi- Glossary Liner ty, subordinated debt, completion guarantees, and bridge financing, the balance of which A vessel sailing between specified ports on a changes as the risk profile of a project changes regular basis. (that is, as a project moves beyond construction into operation). Lloyds’ Registry Mixed cargo An organization engaged in the surveying and classing of ships so that insurance underwriters Two or more products carried on board one and others may know the quality and condition ship. of the vessels involved. Mobile crane Longshoreman (or docker, port worker, or dock worker) General purpose crane capable of moving on its own wheels from one part of a port to another. Individual employed locally in a port to load and unload ships. Moor Lo-lo (lift-on lift-off) To attach a ship to the shore by ropes.

Cargo handling method by which vessels are Neobulk cargo loaded or unloaded by either ship or shore Non-, or economically not feasible, containeriz- cranes. able cargo such as timber, steel, and vehicles. Malacca-max Nonrecourse financing

Maximum size of container and bulk vessels (in Project financing for which no loan guarantees terms of draught) that can cross the Malacca or financial support is provided by the sponsors Straits. The Malacca-max reference is believed or governments to lenders for the project. to be today the absolute maximum possible size for future container vessels (approximately Nonvessel operating common carrier 18,000 TEU). (NVOCC) Main port A cargo consolidator in ocean trades who buys space from a carrier and resells it to smaller A large multipurpose port serving a number of shippers. The NVOCC issues bills of lading, countries and regions. publishes tariffs, and otherwise conducts itself as an ocean common carrier, except that it does not Management contract provide the actual ocean or intermodal service. An arrangement whereby the operation and On-carrier management of a facility is contracted by the public authority to a specialized operator for a Person or company who contracts to transport specified period and under specified conditions cargo from the port or place of discharge of a relating to performance criteria, economic sea-going or ocean-going ship to another desti- incentives, and maintenance and infrastructure nation by a different means of transport, such commitments. The public authority retains as a feeder vessel, truck, train, or barge.

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Optional cargo Plimsoll mark/load lines

Cargo that is destined for one of the ship’s dis- A series of horizontal lines and a circle with a charge ports, the exact one not being known horizontal line painted amidships of both sides when the goods are loaded. of the hull of a ship marking the level that must remain above the surface of the water for the Overcarriage vessel’s stability. The carriage of cargo beyond the port for which it was intended. Pontoon Pallet Flat-bottomed floating structure with a shallow Glossary draught. A flat tray, generally made of wood, but occasionally steel or other materials, on Pooling which goods can be stacked. There are two Sharing of cargo or the profit or loss principal sizes: the ISO pallet, which meas- from freight by member lines of a liner ures 1 x 1.2 meters, and the europallet at 0.8 conference. x 1.2 meters. Panamax Port dues (or harbor dues)

Maximum beam that allows vessels to pass Charges levied against a shipowner or ship through the locks of the Panama Canal (specifi- operator by a port authority for the use of a cally used for dry bulk and container vessels). port (see also harbor dues). Permanent dunnage Port of refuge

Strips of timber fixed to the frames of a ship to Port, not on a ship’s itinerary, which the ship keep cargo away from the sides of the ship to calls at due to some unforeseen hazard at sea avoid damage and condensation. and where the ship may undergo repairs, refuel, or rescue cargo. Pilferage Port of registry Stealing of cargo. Place where a ship is registered with the Pilotage authorities, thereby establishing its nationality. The act of assisting the master of a ship in navi- Preentry gation when entering or leaving a port or in confined water. Presentation to the customs authorities of export or import declarations prior to the clear- Pilotage dues ance of goods. Fee payable by the owner or operator of a ship for the services of a pilot; the fee is normally Project financing based on the ship’s tonnage, draft, or length. Financing wherein the lender looks to a Platform (or flat) project’s cash flows to repay the principal and interest on debt, and to a project’s assets for A shipping container without sides, ends, or a security; also known as “structured financing” roof. Normally 20 or 40 feet long, it is used for because it requires structuring the debt awkwardly shaped cargo that cannot fit on or and equity such that a project’s cash flows in any other type of container. are adequate to service the debt.

372 Glossary of Port and Shipping Terms

Rail-mounted gantry (RMG) or rail- Spotting mounted container gantry crane Placing a container where required to be loaded Rail-mounted gantry crane used for container or unloaded. acceptance, delivery, and stacking operations in a container yard. Spreader Glossary A piece of equipment designed to lift containers Reefer by their corner castings. Refrigerated container or vessel designed to Stackcar transport refrigerated or frozen cargo. An articulated multiple platform rail car that Relay allows containers to be double stacked. To transfer containers from one ship to Stacktrain another. A rail service whereby rail cars carry containers Ro/ro stacked two high on specially operated unit trains. A shortening of the term “roll-on roll-off.” Ro/ro is a cargo handling method whereby ves- Stevedore sels are loaded via one or more ramps that are lowered on the quay. Individual or firm that employs longshoremen (or dockers, dock workers, or port workers) to Rubber-tired gantry (RTG) or rubber- load and unload vessels. tired container gantry crane Stevedoring charges Gantry crane on rubber tires typically used for acceptance, delivery, and container stacking at a Fees for loading and stowing or unloading a ship. container yard. Sto-ro

Shed (also see warehouse) A vessel with capacity for breakbulk cargo as Covered area for the reception, delivery, consol- well as vehicles or trailer borne cargo. idation, distribution, and storage of cargo. Stowage factor Note: A warehouse usually points at longer term storage, whereas a shed usually is used for The average cubic space occupied by one ton shorter term storage. weight of cargo as stowed aboard a ship. Ship chandler Straddle carrier

An individual or company selling equipment Type of equipment that picks up and transports and supplies for ships. containers between its legs for movement within a container terminal. Ship’s tackle Stripping (unstuffing) All rigging and so forth used on a ship to load or unload cargo. Unloading of a container. Side loader Supply chain

A lift truck fitted with lifting attachments oper- A logistics management system that integrates ating to one side for handling containers. the sequence of activities from delivery of raw

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materials to the manufacturer through to the to reach their final destination, compared to a delivery of the finished product to the customer direct service from the load port of origin to the in measurable components. discharge port of destination. This method is often used to gain better vessel utilization and Tare weight thereby economies of scale by consolidating The weight of wrapping or packing; added to the cargo onto larger vessels while transiting in the net weight of cargo to determine its gross weight. direction of main trade routes. Terminal charge Transshipment port

A charge made for a service performed in a ter- A port where cargo is transferred from one car- Glossary minal area typically referring to handling asso- rier to another or from one vessel of a carrier to ciated with receipt, delivery, or inspection of another vessel of the same carrier without the cargo via land-based operations. cargo leaving the port. Throughput charge Turnaround time

The charge for moving a container through a The time it takes between the arrival of a vessel container yard off of or onto a ship. and its departure from port; frequently used as Top off a measure of port efficiency.

To fill a ship that is already partly loaded with Twenty-foot equivalent unit (TEU) cargo. Typically occurs where there is a draught Container size standard of twenty feet. Two restriction at the first load port—the ship loads twenty-foot containers (TEUs) equal one FEU. a quantity of cargo corresponding to the per- Container vessel capacity and port throughput missive draught, then fills up at the second port capacity are frequently referred to in TEUs. where there is no restriction. Unitization Top stow cargo The consolidation of a quantity of individual Goods that are stowed on top of all others in a items into one large shipping unit for easier and ship’s hold because of their relatively low densi- faster handling through methods such as pal- ty and the probability that they would be dam- letizing, stripping, slinging and containerization. aged if overstowed. Toplifter Unloader

Forklift truck capable of lifting a container by Port equipment employed to unload ships carry- means of its spreader. ing dry bulk cargo. (Note: Small movable and hoistable unloaders are sometimes referred to as Towage “vacuvators.”) Charges for the services of tugs assisting a ship Unmoor or other vessels in ports. To remove the ropes that attach a ship to the shore. Tramp line Unstuffing (or stripping) An ocean carrier company operating vessels on other than regular routes and schedules. Unloading of a container. Transshipment Variable cost

A distribution method whereby containers or Costs that vary directly with the level of activity cargo are transferred from one vessel to another within a short time. Examples include costs of

374 Glossary of Port and Shipping Terms moving cargo inland on trains or trucks, stevedor- Note: A warehouse usually points at longer ing in some ports, and short-term equipment leases. term storage, whereas a shed usually is used for shorter term storage. Vessel manifest Waybill Declarations made by international ocean carri- Glossary ers relating to the ship’s crew and contents at Document, issued by a shipping line to a ship- both the port of departure and arrival. All bills per, which serves as a receipt for the goods and of lading are registered on the manifest. evidence of the contract of carriage. Vessel traffic management system Wharf

Vessel control and management system (VTMS) Structure built alongside the water or perpendi- usually under the authority of the harbormas- cular to the shore where ships berth for loading ter, comprising equipment (such as radars, or discharging goods. tracking software, and radio communications), personnel (traffic operators), and regulations. Wharfage Most larger maritime ports have relatively The charge that an owner of a facility (terminal advanced vessel traffic management systems for or port) charges for the movement of cargo maritime safety, protection of the environment, through that facility. and coordination of marine services. Warehouse (see also shed) Sources: Brodie, Peter. Dictionary of Shipping Terms, Third Edition, 1997, and Sullivan, Eric, Covered area for the reception, delivery, consol- The Main Encyclopedic Dictionary, Fifth idation, distribution, and storage of cargo. Edition, 1996.

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