Port Reform Toolkit

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PORT REFORM TOOLKIT

MODULE 1 FRAMEWORK FOR PORT REFORM

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MODULE 1 FRAMEWORK FOR PORT REFORM

INTRODUCTION AND OBJECTIVES The complex reform process through which the Toolkit navigates policy makers The process of institutional reform is com- is a worthwhile journey. While the rea- plex. Most countries undertake the kinds sons for engaging in port reform are of fundamental institutional reforms that many and varied (as discussed in Module shift boundaries between the public and 3), the benefits are real and can be quanti- private sectors less than once in each gen- fied as they accrue to exporters, con- eration. Hence, the knowledge necessary sumers, shippers and entrepreneurs. A to carry the reform process forward needs successful reform program may free gov- to be built up in most countries from a ernments of unnecessary expenditures, near zero base. The Port Reform Toolkit releasing funds for high priority social (Toolkit) is designed to shorten the learn- programs, ease bottlenecks to trade and economic development, and motivate the ing curve for institutional review and adoption of new regulations that protect renewal by providing background infor- the environment and improve workman mation, concrete examples of successful and navigational safety. More broadly, and unsuccessful reforms, and specific the benefits the main stakeholders can tools and methods that policy makers and expect from port reform include: reformers require to proceed with the confidence that genuine knowledge • Governments: at the macroeconomic affords. level, improvement of external trade

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competitiveness by reducing trans- • Consumers: lower prices for con- port costs, and in particular the cost sumer goods and better access to a of port services, and improving port wider range of products through efficiency at the sea/land interface; improved access and increased com- at the microeconomic level, easing petition between suppliers. the financial burden on national In Colombia, for instance, the liberaliza- budgets by transferring part of port tion of port labor practices along with investments and operating costs to the transfer of most port services to the the private sector, and incidentally, private sector has resulted in large and raising revenues from asset divesti- rapid improvements in productivity, tures; lowers fees for port users, and very • Transport and Terminal Operators: attractive returns for the concessionaires more cost-effective port operations (see Box 1). Similarly, in Argentina, the improvements following the concession- and services, allowing for more effi- ing of terminal operations in Buenos cient use of transport assets and bet- Aires have been dramatic: port charges ter competitive positions in transport and shipping tariffs have declined markets, and more business opportu- sharply, labor productivity has nearly nities in growing sectors (e.g., con- quadrupled, and cargo volumes have tainer operations); jumped by more than 50% (see Box 2).

• Shippers, Exporters/Importers: The objective of the Port Reform Toolkit reduced port costs and, potentially, is to provide support for policy makers lower maritime freight rates, allow- in undertaking sustainable and well- ing lower costs of imported goods considered reforms to public institutions and intermediate products and that provide, direct and regulate port enhanced competitiveness for services in developing countries. In par- exports; and Box 1

COLOMBIA: OPERATING PERFORMANCE BEFORE AND AFTER REFORM

Indicator Before 1993 1996

Average vessel waiting time (days) 10 No wait or in hours, depending on the port Working days per year 280 365 Working hours per day 16 24 Tons per vessel per day Bulk cargo 500 2,500 minimum General cargo 750 1,700 Containers per vessel per hour (gross) 16 25

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

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Box 2

ARGENTINA: SELECTED PERFORMANCE INDICATORS FOR THE PORT OF BUENOS AIRES

Indicator Before 1993 1996 Cargo (thousands of tons) 4,000 6,000 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 (US$ per ton) 450 120 Port tariff for exports (US$ per ton) 6.7 3.0 Port tariff for imports (US$ per ton) 2.1 1.5

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

ticular, the Toolkit offers public officials available. The Toolkit is designed to fill with support in: this knowledge gap and to provide port reformers with decision support tools, • Understanding the need for and tested and proven institutional reform challenges associated with sector tactics, and guidelines that represent reform and institutional redesign in "best international practice." light of the changing business environment affecting port operations; The Toolkit draws together practical institutional designs and alternative • Choosing among options for private approaches for increasing private sector sector participation and analyzing involvement without compromising the their implications for redefining public interest. It presents "best interna- interdependent operational, regula- tional practices" in a manner that is rele- tory and legal relationships between vant to decision makers, and is designed public and private parties; to be easily understood by non-specialists. It supplements general points with •Preparing legislation, contracts and specific examples drawn from recent institutional charters to govern pri- port reform activities around the world. vate sector participation; and While the main audience for the Toolkit • Managing the transition to increased is public officials in developing coun- private sector involvement. tries who are responsible for port sector Resources that address port institutional reform, the Toolkit should also be of reform in a comprehensive and system- interest to other government officials, to atic way or that clearly explain the executives with port service companies, processes involved in re-engineering shipping companies, port consultants, public port institutions are not readily and companies that use port services.

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In addition to this introduction, the consequences associated with each Framework Module includes the follow- option based on recent international ing sections: experience. The framework is presented in the form of a "decision tree" that pro- • Context for the Framework vides a context for understanding the Module subsequent modules, which are:

• The Port Business Environment • Module 2: The Evolution of Ports in a Competitive World: The roles and •ARoad Map for the Port Reform Process functions of ports; forces shaping port dynamics in the 21st Century. •Implementing Port Reform: Pulling Readers of this module should be It All Together able to place their ports in the context of current and historic port CONTEXT FOR THE FRAMEWORK developments and to understand the MODULE major trends shaping the ports of the future. The Toolkit is made up of eight modules. The first of these, the Framework • Module 3: Alternative Port Module, sets the stage for all of the Management Structures and other modules that follow. It provides a Ownership Models: Description of unifying "decision framework" that poli- different port structures and owner- cy makers can use to guide them step- ship models and identification of the by-step through the processes of reform- strengths and weaknesses of each. ing and re-inventing port institutions. It Readers of this module should be also provides a common language and a able reach a decision about the most set of concepts that are used throughout effective, efficient, and feasible struc- the Toolkit and that represent the com- ture for their ports, given each coun- mon language port reformers use in try’s/community’s unique economic, communicating with their various con- political, and social environment. stituencies. Importantly, the Framework Module also includes a road map for the • Module 4: Legal Tools for Port other modules that follow. It explains Reform: Description of legal and the interrelationship of these modules contractual options and the identifi- with one another and their relevance to cation of the strengths and weak- the framework presented here. nesses of each. Readers of this module should be able to understand and The Framework Module lays out an take steps to develop specific port ordered set of decisions that are linked reform measures and legal frame- together functionally as well as tempo- works based on the port’s/govern- rally. For each decision, the Toolkit ment’s economic, financial, political, attempts to articulate the principle and social goals and objectives. options and alternatives available to policy makers and to assess the expected

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• Module 5: Financial Implications advice on how to take the many ele- of Port Reform: Risk allocation ments of port reform and put them among port stakeholders; potential into a procedurally logical and politi- sources of funding for the reform cally feasible sequence of steps that process; pricing port services to maximize the chances for success. achieve revenue and public policy objectives. Readers of this module Awider range of reform models and of should gain an appreciation for port public-private partnership formats exists finance and its relationship to reform for the delivery of port services than for as well as how the financial risks and any other infrastructure intensive serv- rewards vary from one reform option ice sector. This is because the ensemble to another. of services provided by seaports is vast and requires more diverse and special- • Module 6: Overseeing the Economic ized skills and involves more categories Public Interest in Ports: Defining the of service than other public/ private public interest; description of over- institutions. Although the Toolkit does sight mechanisms and techniques; not elaborate on all models available to elements of the public interest. sector reformers, it does define the Readers of this module should gain a options on either end of the public-pri- solid understanding of oversight vate spectrum as well as the most com- mechanisms and methods; the role of mon risk-sharing arrangements such as regulatory bodies, inspections and concessions and terminal operating leas- audits; reporting requirements; and es. Importantly, it also provides tools the interplay between competition for assessing hybrid options and for and regulation. understanding their merits and risks.

• Module 7: Labor Reform and Related In dealing with reform in the port sector, Social Issues: Institutional, legal, and the World Bank has tried to pool knowl- industrial frameworks for port edge from around the world. This reform; establishing a productive knowledge is abundant. Over the past dialogue among port stakeholders; 10 years more than 100 transactions rationalizing the workforce; over- have been completed that involve coming roadblocks. Readers of this increased private sector participation in module should be able to plan for the sector (see Boxes 3 and 4). The prob- and implement rationalization of lem confronting public policy makers port labor in a manner that treats when they take up the challenge of port affected parties fairly while achiev- reform is not a lack of information, but ing essential efficiency and economic rather a lack of useful knowledge they improvements. can use to support their own process of reform. • Module 8: Implementing Port Reform: How to get from concept to The Toolkit uses a diversity of commu- effective implementation. Readers of nication media to convey knowledge this module will receive practical and insight to its users, including narra-

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tive text, mini case studies, graphics and Box 4 stylized representations of decision Investments in Port Projects with processes. The objective of the World Bank in developing this Toolkit is to Private Participation in Developing provide not only a comprehensive but Countries by Project Type also an easy to use and apply Toolkit for 1990-1999 port reform. (US$ Nominal Million) Class Year Total Box 3 DIVESTITURE 1990 0.00 1991 0.00 1992 0.00 Port Projects with Private 1993 0.00 Participation in Developing 1994 0.00 Countries that Reached Financial 1995 0.00 1996 30.00 Closure, 1990-99 1997 83.00 1998 0.00 Year Projects 1999 0.00 1990 2 1991 1 GREENFIELD PROJECT 1990 0.00 1992 7 1991 10.00 1993 12 1992 88.00 1994 17 1993 141.00 1995 24 1994 139.00 1996 14 1995 1321.00 1997 20 1996 1225.00 1998 16 1997 1700.00 1999 14 1998 248.00 1999 275.00 Port Projects with Private OPERATIONS AND MAINTENANCE WITH Participation in Developing MAJOR PRIVATE CAPITAL EXPENDITURE Countries by Type of Project, 1990-99 1990 1.00 1991 0.00 Number 1992 160.00 Type of Project of Projects 1993 196.00 Divestiture 8 1994 850.00 Greenfield Project 41 1995 506.00 Operations and Maintenance Project 22 1996 179.00 Operations and Maintenance with 1997 2482.00 Major Private Capital Expenditure 56 1998 540.00 1999 2251.00

THE PORT BUSINESS ENVIRONMENT • The acknowledged financial and operational benefits of private partic- Three broad forces are generating ipation in infrastructure develop- momentum for port reform in development and service delivery; and ing and industrialized countries alike: • The diversification and globalization • External forces of competition and of investors and operators in the port technology from the shipping indus- industry. try;

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These three forces are described below. are realizing that they cannot compete effectively without the efficiencies First is the need to restructure port oper- offered by private operators and, equal- ations to deal with the external factors ly importantly, without access to capital that affect port viability including provided by private investors. In national competition for global markets, response, there has been a steady changes in port and transport technolo- increase in recent years of private partic- gy and increased competition among ipation in port operations around the ports. Port institutional models devel- world. Countries with recent experience oped in the 19th and early 20th century of port privatization include Poland, today significantly constrain ports from Germany, Lithuania, Estonia, Latvia, competing effectively on a service quali- Russia, Japan, Malaysia, China, ty basis, limit their agility and market Thailand, the Philippines, Indonesia, responsiveness in mobilizing resources Argentina, Chile, Brazil, Mexico, and constrain their ability to share risks Colombia, Panama, Mozambique, with private sector partners. In plan- Tanzania, United Kingdom and Canada. ning how responsibility for future port The World Bank is currently involved in development and operations will be port reform projects in about twenty divided between the private and public countries in various regions worldwide. sectors and in deciding on desired levels Moreover, the pace of private invest- of investment to be funded or guaran- ment in the sector is accelerating. As teed from public sources, policy makers Box 5 below demonstrates, private must increasingly regard the competi- investment in the sector has increased tiveness of their port(s) vis a vis other progressively since 1990. Over this peri- ports in their region and vis a vis the od private sector investment in the ports supply chain alternatives available to increased from $10 million in 1991 to their users. In general, these alternatives are more abundant today than they Box 5 were ten years ago. Consequently, the Investments in Port Projects with Private port business is more competitive today Participation by Year than it was when most port authorities (US$ nominal millions) were originally chartered. New institutional models are needed for this new Year Investment era of increased competition. 1990 $1 1991 10 1992 248 The second force generating momentum 1993 337 for reform is private participation in 1994 989 infrastructure. In recent years, world 1995 1,827 1996 1,435 governments and lending agencies have 1997 4,264 come to acknowledge that private sector 1998 788 participation can be a powerful force for 1999 2,526 enhancing the performance of port Total $12,425

assets, as with other infrastructure Source: PPI Database,World Bank assets. National and regional seaports

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$4.3 billion in 1997, and to a cumulative the shipping line investors in terminals; amount of more than $12 billion over and 4) niche investors looking more the period at the end of 1999. specifically at small to medium scale facilities. The five first-wave operators The private sector, which has driven today operate about 70 terminals world- recent port development, has rapidly wide, mostly container operations, and matured and has organized itself into accounted in 1998 for more than 30% of distinct specialized sub-sectors. Today, the total container handling market. The the port services industry is a US$45-60 second wave includes ten or so stevedor- billion global business that includes sev- ing groups from the United States, eral distinct specialized segments, as Europe and Asia, and is now challenging Box 6 below demonstrates. the first "global stevedores" on new development opportunities. The major Box 6 shipping lines, with three main actors so far, are reorganizing their terminal oper- Estimated Available Market ations as separate corporate entities to in the Port Sector better operate in the market. The niche (US $billions) investors, a dozen identified so far, can be expected to continue to carve out spe- Estimated Annual cific market segments in the future. Revenues

Container Terminal Operations $30 to 40 But in this market, as well as in the ship- Tug Assist Services 4 to 5 ping industry, consolidation may well Maintenance Dredging 4 to 5 change the competitive landscape, at Information Technology 2 to 3 Environmental and least between the different groups above Ship Safety Services 1 to 2 as a starting point, and maybe later Other Port Services 4 to 5 within the groups themselves. The con- Total Available Market $45 to 60 sequences of consolidation for regional competitive conditions could be significant, and will require due attention from The third force affecting reform is the public authorities. The structure of this development of a global market for port global industry should, therefore, be development services, with specialized considered by policy makers when niches each containing a number of adopting specific reform models. international companies that offer spe- Module 2 provides a detailed overview cialized service capabilities. The market of prevailing trends in the global port today broadly includes four groups of and maritime industry. operators: 1) the first wave of "global stevedores," the first to have expanded The range of services ports offer differs their operations internationally from a widely. So, too, do the service reputa- strong home base; 2) the second wave, tion and established commercial rela- comprising regional operators now tionships with carriers that global serv- entering the international market follow- ice operators can bring when they are ing the success of their predecessors; 3) selected as investor/operators.

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In general, modern ports offer two kinds instance in vessel traffic manage- of services: core and value added serv- ment, means that, regardless of the ices. The core services provided by most arrangement adopted to deliver the ports include but may not be limited to: service, the ultimate operational and legal responsibility for the service • Marine Services remains with the public sector, usual- - Access and Protection ly the Port Authority. This is critical - Pilotage when considering how to optimize - Towage service delivery while keeping up - Vessel Traffic Management with the public characteristics of the - Fire Protection Service service. Commercial activities in - Chandlering ports also entail some level of public responsibility, but to various degrees. •Terminal Services The minimum is usually the duty for - Vessel Tie-up Services the Port Authority to ascertain the - Container Handling and Transfers qualifications of service providers - Traditional Breakbulk and Neo- operating on the public domain bulk Cargo Handling through a licensing process. Equally - Dry and Liquid Bulk Cargo significant is the requirement for a Handling Port Authority to ensure the avail- - Container Stuffing and Stripping ability of basic port services, includ- - Bagging and Packaging ing commercial ones, to all users on - Cargo Storage a non-discriminatory basis.

• Repair Services • The nature of the assets required to - Dredging and Maintaining deliver each category of service. The Channels and Basins assets required to deliver many - Lift Equipment Repair marine services, for example, are - Dry Dock Ship Repairs mobile and can be moved at relative- - Container and Chassis Repairs ly low cost from one port to another. • Estate Management Services Most of the assets required to provide access and protection or to •Information Management Services deliver terminal services, however, are immobile and have long econom- A number of these services can be out- ic lives. Moreover, the use of these sourced to specialized private sector long-lived assets is indivisible among service providers via a number of differ- discrete service units. In other ent methods. In general, the appropri- words, a large portion of their costs ateness of specific methods is deter- are fixed regardless of the volume of mined by two main factors: service units over which it is amor- tized. • The nature of the service itself (e.g., public responsibility or commercial For the purposes of defining asset activity). Public responsibility, for "rights" of ownership, lease, rental, casu-

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al use, etc., it is helpful to differentiate non-traditional services to their cus- port assets into three categories: 1) long- tomers as well. These non-traditional lived, high cost infrastructure (e.g., services typically expand the role of port breakwaters, channels and turning service providers in the supply chains of basins) in which incremental benefit can shippers. These services create value for only arbitrarily be assigned to individ- shippers by expanding the scope of mar- ual port users; 2) long-lived, high cost kets they can economically access, by infrastructure (e.g., quays and terminals) reducing the delivered cost of products whose incremental use and benefit can they sell, or by reducing the cost to com- be apportioned in various ways and plete buy/sell transactions. These serv- assigned to discrete service delivery sys- ices allow ports to participate in special- tems; and 3) superstructure and equip- ized port service niches and to differen- ment whose use is clearly associated tiate themselves from competing ports with specific users and specific service by means other than price and turn- delivery systems. around times.

Much of the preparation for port institu- Improving logistics is now a widely tional reform therefore involves: accepted means for companies to improve their competitiveness. •Identifying the critical basic public Logistics, in short, is a procedure to functions and public responsibilities coordinate all aspects of the manufactur- that will define the role of the nation- ing and distribution process to ensure al and local public authorities in the delivery of the right products to the charge of the port sector; and right markets at the right time. The key elements to develop an advanced logis- •Identifying the assets needed to sup- tics strategy will usually include: port each function and category of service, assessing the adequacy of • Understanding the cost and operat- these assets, and determining which ing behavior of the entire supply services and related assets to pack- chain and using this understanding age together and which among these to inform decisions about where to to tender to private investors/opera- locate manufacturing, assembly, and tors. distribution centers;

Box 7 presents the most common •Promoting strong relationships with options for transferring specific cate- carriers and vendors that include gories of "rights" to reposition specific quality certification procedures; categories of core port services from the public to the private sector. The differ- • Designing a flexible transportation ent port models indicated in the table system that allows for quick routing are defined and discussed in Module 3. and mode selection changes; and

In addition to providing core port serv- • Developing a logistics information ices, increasingly ports are delivering system that is effectively integrated

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Box 7

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 Service Port

Private Service Port

Tool Port

Landlord Port

Public Responsibility Private Responsibility

with manufacturing and purchasing mation and communication services of processes. various kinds.

There is a significant number of activi- VAL activities, in particular, are growing ties that can be classified as value added in importance as producers concentrate services in the field of logistics. on meeting the demands of customers Generally, they fall into two categories: for high quality specialized products. New players in this field–third-party •General Logistics Services including logistic services providers–have storage, loading/unloading, strip- emerged to take over parts of the pro- ping/stuffing, groupage, consolidation, and distribution; and duction chain (assembly, quality control, customizing, packaging, etc.) and of the •Value Added Logistics (VAL) includ- after-sales (repair, re-use) service. ingrepackaging, customizing, assembly, quality control, testing, repair, Ports are in a natural position to partici- on-terminal auto-accesorizing, grain pate in this logistics revolution, bring- storage and fumigating, news print ing together all modes of transport, storage and transfer, and in-container information systems, and land for the garment assembly. construction of facilities. Undoubtedly, containerized and general cargo have General value added services may the highest VAL potential. include such services as equipment maintenance, equipment renting and leasing, cleaning facilities, tanking, safety, security services, offices, and infor-

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A ROAD MAP FOR THE PORT REFORM social capital should figure prominently PROCESS in deliberations of public policy makers concerning public interest objectives Setting Reform Objectives and Planning underlying port reform. for the Creation of Value All of the reform design issues touched Port reform should only be undertaken on above need to be assessed in the con- after a full and complete assessment of text of the operating scale of a particular the objectives that public officials are port and the interest and willingness of trying to achieve. Institutional reform private companies to invest in the par- or, indeed, private sector involvement ticular set of services offered to them. should not be an end in itself, but only a For example, intra-port competition for means to achieve specific and well services such as stevedoring or terminal defined public interest objectives. The operations may be feasible in a large objectives underlying port reform may volume port but not feasible in a small volume port. be as varied as the need to expand or to modernize container handling capacity, Modules 3 and 6 describe circumstances the desire to stimulate the growth of a under which competition for licenses, distribution-based economy centered on rights or franchises may be an effective a regional hub port, or the need to way to sustain competition and main- reduce government expenditures on the tain incentives for continuous service sector so that limited public funds can enhancement. They also identify cir- be applied to other more pressing social cumstances under which competition in needs. In any case, the private provision the market may not be feasible. of port services and infrastructure is Furthermore, Module 3 in particular dis- only one tool among others that are cusses advantages of designing competi- available to officials to solve specific tion between or among private opera- problems and to achieve specific public tors into the tendering process for the interest objectives. Thus, the decision delivery of specific categories of service. process should begin with the consideration of the objectives that port reform is Where competition "in the market" for designed to achieve. Module 3 reviews specific categories of port services is not those objectives in greater detail. workable, competition "for the market" may still be an option for protecting the The delivery of port services has become public interest. While continuing and an increasingly risky undertaking. robust competition among multiple Increased competition between or service providers is the best way to among ports, large capital outlays, more ensure low prices for services rendered, specialized investments, and the expan- such competition may not be feasible in sion of port activities beyond traditional all port environments due to physical services all increase the possibility of constraints or small cargo flows. In such economic losses from port operations. an environment, it is still essential to Considerations of risk and return on maximize the economic benefits of com-

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petition and to minimize the risks asso- particular, all of the possible outcomes ciated with monopoly service through resulting from the selection of any spe- competitive bidding. For the provision cific option need to be explicitly evaluat- of still other categories of service (e.g., ed with respect to the stated objectives those that have significant consequences of reform. for the efficient use of assets for both shipping lines and for terminal opera- A useful tool for laying out the port tors), retention of these services in the reform process and feasible options is a public domain may be the best option. decision tree. The key "branches" com- Module 3 addresses this issue of packag- prising this port reform decision tree ing core and non-core services into bun- include: dles for private participation. • Methods of private sector involve- Port reformers should explicitly assess ment; the objectives they seek to achieve before settling on any specific reform •Modes of public interest oversight; model, since different objectives have • Funding of the port sector; important implications for the types of reforms being pursued. Options for pri- • Legal framework adaptation; vate sector involvement, investment and risk-sharing range from open entry to • Service packaging and asset restruc- service contracts, management contracts, turing; leases, joint ventures, control of corporate entities and concessions all the way • Labor adjustment and settlement; to full divestiture. Differing forms of •Implementation responsibility; private sector involvement result in different allocations of risk, different • Sequencing transactions; and responsibilities for government, and different types of government oversight. •Transaction preparation. Module 5 delves into the issue of risk sharing at greater length. For each of these key decision points several options exist. Box 8 shows a Reform Policy Decision Context notional decision tree leading port reformers through the many steps The port reform decision process must involved in the process. begin with the clear definition of the objectives that the reforms are intended Methods of Private Sector Involvement to achieve. The next step is to delineate all of the key institutional design and The nature of private sector involvement reform decisions needed to move the in the port sector will be prescribed by process to a successful result. Next, for the adoption of a specific institutional each decision point along an ordered set model. To assist port reformers in deter- of decisions, options and alternatives mining which approach might best should be developed and assessed. In apply in their circumstances, Module 3

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Box 8

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 "Packaging" One agency responsible terminals and for implementing sector other assets reform; One transaction manager assigned to each transaction

describes four port management models nerships used in other transport that cover the spectrum of private sector infrastructure projects as well as involvement in ports. These include: 1) other sectors of the economy; and the public service port; 2) the tool port; 3) the landlord port; and 4) the private • The fit with the investment capacity service port. and interests of potential strategic investors. Within these models, a broad array of options exists with respect to the specific Once the main institutional options for form public/ private partnerships may sector reform are decided upon, the take. These can significantly affect the issue of asset restructuring must then be agility and responsiveness of service addressed. The two key issues involv- providers, their market orientation and ing asset restructuring are: efficiency, and their decision making autonomy. • What degree of competition should be designed into port service mar- The appropriateness of specific models kets; and for particular ports needs to be judged, ultimately, by how well they help • What assets (and related services) achieve the objectives of the reform pro- should be tendered as packages for gram. However, a number of other fac- single source responses? tors should also be considered includ- Port assets can be divided among sets of ing: services and tendered as separate pack- • The strategic fit with the identified ages in a number of different ways. The needs of the existing and potential consequences of either bundling assets market; (and corresponding services) or unbundling them has a direct effect both • The competitive consequences for on competition among private service other ports in the same range; providers and on the efficiency with which a port can operate. • The compatibility with other approaches to public/private part- In larger ports, competition among ter-

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minal operators is both desirable and nical regulation, and economic regula- practical. In smaller ports, competition tion. Planning the future development is less feasible because the economies of of ports, and sharing those plans with scale required to attract specialized serv- private developers who can help imple- ice providers are not sufficient to assure ment them, is a continuing responsibili- them of a reasonable profit while main- ty of governments. As discussed above, taining charges at reasonable levels. every port’s vision of its future needs to Moreover, effective coordination of be realistically set in the context of its cargo handling and marine services can commercial environment and its com- be better assured in smaller ports by petitive position versus other ports. It integrating them in a single source serv- must also take into account the likely ice. Module 6 reviews the consequences effects of proposed increases in capacity of such options from an economic regu- on regional markets, since one country’s latory perspective. efforts to increase its share of regional trade typically evoke competitive Public Interest Oversight responses.

The two key issues involving public Thus, regardless of which port reform interest oversight are: model is selected, strategic transport planning will remain a critical responsi- • What powers and authorities should bility of governments. Enhancing inter- be retained by a public oversight national competitiveness requires, body after reform; and among other things, implementing and maintaining a cost-effective transport • How should that body be constituted system, with the port interface being a and at what level of government critical link to international markets. A should it operate? national ministerial body, therefore, As noted above, increased private sector should be in charge of developing the participation in the delivery of port long-term strategic vision for national services should be viewed as an instru- waterfront development plans. The port ment to achieve well-defined public reform vision should also encompass interest objectives. Thus, a key element other land transport reforms to ensure in port reform must be the creation of a the complementary development of mechanism to protect the public interest interconnected links in the transport and make certain that the objectives of infrastructure. Many examples exist reform are met. In creating such a around the world of the inefficiencies mechanism, it is important to keep pub- and bottlenecks created when road and lic statutory and regulatory oversight rail links are not developed at a pace responsibilities separate from commer- adequate to handle increased port activi- cial activities. ty. Further, this planning effort will have to take into account various stake- Government oversight typically takes holders’ interests in the long-term devel- several forms: strategic planning, tech- opment of coastal areas within the

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framework of a national Integrated Port Rules and Regulations. Module 4 Coastal Zone Management (ICZM) will discuss the content of a model set of policy. rules and corresponding enforcement mechanisms that have been used effec- Regulatory oversight typically involves tively in various port reform efforts. both economic and technical issues. Finally, this module describes the legal sources such as decrees, laws, contracts, Technical regulation of operations is licensing agreements, and sectoral poli- required to ensure compliance with safe- cies used to define and enforce obliga- ty, labor, and environmental protection tions on private operators and port standards, as well as to set and monitor users. appropriate minimum performance requirements (especially when competi- Economic regulation, which usually tion is weak). Safety is a major concern aims at monitoring market entry and with ship movements in and around pricing, is necessary when competition port mooring and berthing areas and is weak or non-existent. Conversely, with cargo handling operations ashore. when significant competition develops, Requirements for handling and storage either internally or externally, the need of hazardous cargoes must be clearly for strong economic regulation decreas- spelled out in port regulations, and es. Indeed, when competitive pressure should be based on international con- is well-established, there may be little ventions with due allowance for specific reason to maintain any price regulation local conditions. The need for and other than a requirement to publish tar- forms of technical regulation does not iffs, a continuing prohibition against change significantly with port reform; undue discrimination against similarly consequently, technical regulation is not situated port users, and retention of a dealt with in detail in the Toolkit. mechanism by which the government can monitor the competitiveness of the A complex set of mutual obligations typ- market and investigate alleged anti- ically bind private operators and users competitive activity. to act in concert and in compliance with rules in the provision and use of port The level of competition faced by an services. The development and enforce- individual port, therefore, has important ment of operating rules and regulations implications for the nature and degree represents another oversight responsibil- of regulatory oversight of port opera- ity that most public authorities assume tors. Ports with abundant intra- and or retain as part of their essential func- inter-terminal competition require mini- tions. Module 4 elaborates on the kinds mal economic regulation. of mutual obligations among private service providers and between them and In general, the difference in public sector public service integrators that are need- responsibilities before and after institu- ed to ensure the safe and efficient deliv- tional reform is the difference between ery of services. These technical regula- "rowing" the boat and "steering" the tions are typically articulated in a set of boat, respectively. Post-reform oversight

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powers are typically indirect and management or contradictory policies designed to induce socially beneficial that interfere with planning and invest- actions on the part of the private sector. ment decisions. Oversight may involve the creation of incentives for private sector investment, The degree of decentralization in policy the tendering of investment opportuni- making and regulation should: ties, compatibility of all private invest- • Reflect the objectives of the port ments with a master plan and co-invest- reform program; ment under certain circumstances. Module 6 discusses various aspects of • Consider the institutional capacity economic public interest oversight in and authority of the relevant levels depth. of government; and

Once the areas for continuing govern- •Provide a balance between national ment oversight have been defined, it is economic goals (such as seamless necessary to determine an institutional transport flows and export promo- framework for administering the over- tion) and local concerns (such as sight. labor activity, environmental degradation and industrial development). Port administration may be centralized or decentralized. Each approach has its In addition, whether port regulatory strengths and weaknesses. Centralized responsibilities should be concentrated administration permits a broader nation- at the central level or decentralized to al economic and multi-modal perspec- the local level should be looked at with tive for directing port development poli- two concerns in mind: 1) consistency of cy. Decentralized administration per- the approach with that generally fol- mits a more narrow local perspective lowed throughout the country; and 2) that aligns port development with the the need for a transparent and efficient, economic interests and priorities of user-friendly regulatory system. The municipal or regional economies. former would call for some sort of nationwide unit, likely at the ministerial In addition to discrete national and local level, although at arm’s length from the approaches to port oversight responsi- Ministry of Transport to guarantee inde- bility, a two-tiered option also exists. pendence; the latter could lead govern- For example, a national port council can ments to consider local (state/province) be formed, to which local port authori- regulatory units closer to the field and, ties report. Under the best of circum- therefore, better able to tailor decisions stances, this two-tiered arrangement to meet local conditions. allows for the balancing of national and local interests and the reconciliation of To provide for a clear separation of poli- both though deliberative processes. In cy and regulatory responsibilities at the worst of circumstances, the two- both the national and local levels, a tiered bureaucracy may lead to exces- three-tier institutional framework has sive interference in port operations and also been employed effectively. For

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example, under the assumption that their infrastructure pricing policies; and reforms will result in a landlord port 3) it provides an appeal level for dispute arrangement with commercial activities resolution in case private commercial fully carried out by private operators, operators believe they are unfairly treat- the new public oversight framework ed by their local Port Authority and reg- could be devised along the following ulator. lines: Financial Implications of Port Reform: •Acentral body comprising senior Risk Allocation and Funding representatives from relevant ministries, municipalities of port cities, The two key issues involving financial and from Port Authorities would risk are: work out national port policy and strategic planning objectives, and • Which categories of port assets would establish the main sector reg- should private investors be at risk for ulations to be enforced by the Port providing, maintaining and repairing Authorities; versus those for which the public sector should be responsible; and • The Port Authorities, autonomous public institutions or public joint- • On what basis should user fees or stock companies, would be granted subsidies be used to cover the cost of the right to use state-owned land, long-lived port assets? administer, maintain and develop port infrastructure assets, manage Module 5 describes the many types of and enforce navigation safety meas- risks involved in port projects and ures, enforce environmental protec- assesses the risks associated with the tion regulations, monitor the conces- reform models developed in Module 3. sions and leases governing private Module 5 also identifies the financial sector activities in the port area, and tools that decision makers can use to market the port to attract new assess systematically the financial risks investors; and and potential rewards associated with specific investment programs. (A finan- • The private operating companies cial simulation model to assess the via- would carry out commercial activi- bility of specific investment operations ties related to cargo traffic manage- will also be added to the module at a ment and handling and market their later stage.) services to attract new port users. Port reformers should explicitly consider In such a setting, the national body what risks the public sector can afford to serves three key roles: 1) it establishes bear and on what basis specific risks the basic rules of participation to be should be transferred to the private sec- applied by all entities, public and pri- tor. Port planners have available to them vate; 2) it regulates the public Port a number of risk mediation tactics, Authorities, in particular with respect to which are described in Module 5.

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Port operations require several cate- However, from the perspective of private gories of long-lived assets, some of investors, the first category involves the which are inherently more amenable to greatest risk, has the longest payback and private investment and user fee recap- involves the highest risk tradeoff between ture than others. their ability to set prices independently without regulatory constraint and the As noted above, port assets include level of investment they are prepared to long-lived, high cost infrastructure like make. In general, private investors are breakwaters, channels and turning prepared to make larger investments basins for which charges for incremental when they are unconstrained by regula- use can only be assigned arbitrarily to tors or when price schedules (including individual users, since the marginal ben- escalation mechanisms) they propose in efit derived from using this common advance of awards are accepted and infrastructure significantly outweighs locked in for a long term. In other situa- the marginal cost of replacing it. tions, the funding of long-lived, high cost Consequently, a charge schedule devel- infrastructure remains in the public sector oped by a private developer and based and is charged back to users though a on user benefits could result in monop- number of different regimes. Modules 3 oly profits and less use than was eco- and 6, respectively, deal with the opera- nomically desirable. tional and institutional aspects and the regulatory aspects of charging for port Port assets also include long-lived, high infrastructure. cost infrastructure like quays and terminals, whose incremental use can be Most port charges involve some combi- meaningfully assigned to users and nation of public components for support whose marginal cost and marginal bene- of publicly financed common use infra- fit can be balanced through a number of structure and private components for price regulation regimes or intra-port the provision of terminal infrastructure. competition. The combination of these two pricing factors determine the competitiveness of Finally, port assets include long-lived ports compared to other competing superstructure and equipment whose ports. In general, the greater the degree use is closely associated with specific of competition the less the need for reg- users and specific service delivery sys- ulatory intervention. Module 6 discuss- tems. Equipment is a mobile asset and es the limited set of circumstances under can be competitively provided or easily which regulatory intervention into pric- redeployed. On-dock storage and trans- ing decisions made by private service shipment facilities can be awarded providers may be appropriate. through competition and assigned to their most productive use through open Box 9 illustrates how the four port man- tender. agement and operation models array themselves on scales measuring private All three categories of assets can be pro- sector risk and the need for independent vided or maintained by the private sector. government oversight.

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Box 9 in port activities, the national legal framework for private/public partner- The Public-Private Balance of Risk ships must also incorporate these ele- and Regulation ments, or at least establish which entity High will be responsible for monitoring them. Private Service The basis of any licensing process, for Port example, must be made clear in the law, Landlord Port which can specify that Port Authority regulations will articulate more precisely e Sector Risk Tool Port the implementation criteria. Privat

Public The following legal documentation Service Port Low should be reviewed to assess the poten-

Low High tial need for modification or the devel- Importance of Regulation opment of complementary statutes:

Adapting the Legal Framework • Sector Laws: legislation establishing the national institutional framework To effect wide-ranging reform, the legal governing ports and describing framework that underpins the institu- clearly the mandate of all public enti- tional arrangements of the sector may ties involved; require significant amendment. • Concession Law/Concessions To ensure credibility, openness and Contracts: since a widely used transparency in the reform process and option for private sector participa- to attract international participation and tion in port activities is the use of long-term financial commitments from concessions, the basic legal frame- potential investors, a sound and precise work enabling public authorities to legal framework for defining enter into such contractual arrange- private/public partnerships is essential. ments must be in place, including a In particular, prior to any reforms clear and transparent process for involving Build-Operate-Transfer (BOT) awarding contracts and standard arrangements, governments should contractual language providing for enact a concession law spelling out the appropriate monitoring arrange- principles of the process and establishments; ing rules and responsibilities for each party. Further, governments should • Port Regulations: the set of provi- consider putting in place a complemen- sions governing the daily operations tary set of regulations describing how in the port; some may apply univer- the concession law will be applied in sally within the country (e.g., envi- practice. ronmental protection and labor rules) and some may apply only to specific Since there are ways other than conces- localities (e.g., ship movements, sions for securing private participation access, traffic safety, tariff structure).

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Since amending a law most often the lead responsibility in helping ration- requires going through a legislative alize the system. Often, this means cre- process, the earlier in the reform process ating programs to ease the transition of this can be initiated the better. Sector port labor into other sectors. Doing this, laws and laws governing contract award in turn, requires the application of sig- and management between public and nificant financial and management private entities are the most critical ele- resources early in the reform process. ments to be enacted. Port regulations can usually be put in place by a ministe- If port services and infrastructure are rial decree. Module 4 offers guidance tendered to the private sector before this and examples in the drafting of sector issue is resolved, for the process to stand laws reflecting the sector model to be a fair chance to succeed, care should be implemented as well as guidance on the taken that: 1) the private operators are contents of concession contracts and allowed to adjust their workforce over port regulations. time to actual operational requirements; and 2) existing social protection pro- Labor Adjustment grams ensure the labor adjustment process will be smooth and not provoke The process of port labor reform often undue labor unrest. This may some- requires governments to eliminate pro- times require the establishment of spe- visions from existing labor regimes that cial government-funded programs to unduly constrain flexibility and produc- accompany staff retrenchment, possibly tivity. Overstaffing, in particular, has by complementing general social pro- been a pervasive feature of most port grams with sector-specific assistance organizations in both the developing made available over a defined and limit- and developed world. As a result, to ed period of time. achieve more cost-efficient operations will generally require significant reduc- In all cases, this means that organizations in the workforce. To achieve this tional and budgetary resources must be result in a socially acceptable way must mobilized early in the reform process to be a prominent concern of public ensure appropriate and socially accept- authorities and an integral part of the able treatment of potential labor disloca- reform process. tions. In particular, worldwide experience strongly suggests that port labor Addressing the overstaffing issue as one should be involved in the port reform of the first steps in the reform process, process from its earliest conceptual before involving the private sector in phase. Again, experience indicates that operations, will usually facilitate the the best way to build confidence in the overall reform process. Since over- reform process by all affected parties is staffing in ports is often the result of to broaden the sphere of participation government policies that view port and responsibility to include port users, organizations as instruments of social port labor and port and maritime policy and natural shelters for the employers. Such broad participation unemployed, governments should take will allow all stakeholders to share com-

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mon concerns about competitiveness of Opening labor markets to competition is port services and gain a better under- one of the objectives sometimes sought standing of how any weakening of this by port reformers. In this context, one of competitiveness would be detrimental the key issues to be addressed is the role to all. This would be particularly true of these dock labor boards or union labor for the workforce, which would be the pools and how they affect management first to bear the consequences of reduced discretion over the recruitment, qualifi- economic activity, both inside and out- cation and use of specific employees. side the port. Significantly, the International Transport Workers Theoretically, labor contract issues can Federations (ITF), while cautious about be resolved either before or after port the social consequences of port reforms, services and infrastructure have been appreciates the need to improve port transferred from the public to the pri- efficiency, possibly through increased vate sector. Either the public sector or private sector participation. It insists, the new private sector operator can however, on the critical need to involve manage negotiations and can absorb the labor unions from the start so that liability associated with separating sur- mutually acceptable labor rationaliza- plus employees. tion strategies can be worked out to make the whole process both economi- Typically, however, resolving labor sepa- cally and socially sustainable. ration issues before transactions are Two key issues arise when considering completed relieves investors of uncer- reductions in the workforce as part of tainty and enhances the perceived value port reform: of the investment. In general, it is a good idea to make a clean break in labor • Who will be responsible for "buying contract coverage and the basis for out" surplus labor and when in the employee selection and work assign- process will labor separation negotia- ments at the same time that the rights to tions be completed; and control port assets are conveyed. This may involve not only "buying out" indi- • On what basis will post reform labor- management relationships be con- vidual laborers under the terms of exist- ducted? ing contracts, but also "buying out" the contract itself, thereby giving private Institutions for allocating available work operators a clean slate to negotiate new among members of a qualified labor agreements. Module 7 reviews in depth pool based on seniority or some other the issues relating to labor adjustment rank ordering principle have grown up policies in port reform and proposes within most traditional ports. Unions ways to handle them in a manner that typically control entry into these pools meets the joint objectives of institutional of qualified labor, the result being to reform and social sustainability. close the port labor market to competition and to new entrants.

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Responsibility for Implementing ministry responsible for ports has only Port Reform indirect control? Should the process be managed at a national, regional or local The key issues arising in connection with level? Should different reform units be the responsibility for implementing organized for "greenfield" port develop- reform are: ments and for the privatization of existing facilities? What powers should the • Where within government should reform unit have? How should the unit responsibility reside for port sector be funded? To whom will it answer? reform; and How will it obtain information from other organizations? Can part of its • What skills and competencies are responsibilities be subcontracted? And required to implement a port sector importantly, what access will the unit reform program successfully? have to key political decision-makers?

The delegation of responsibility for man- Often, for the reform process to be aging port sector reform typically comes implemented successfully, the mandate in the form of a special decree, law or given to the "Reform Unit" must come other explicit delegation of authority. To from the highest levels of government, what organization of government should and the reporting must follow the same this authority be delegated? It is rarely route. This avoids frequent inter-minis- possible for a Port Authority to reform terial conflicts over competence and itself, since the inherent conflicts are too jurisdiction. The agencies and individu- great for even a well meaning Port als comprising membership of the Authority to adopt and implement sig- "Reform Unit" also must be defined nificant change. Moreover, the work of unequivocally by the political leader- implementing port reform is diverse and ship. requires special skills. Some of it, for example, involves developing regulatory Several organizational options are avail- frameworks; some of it involves labor able for implementing port sector negotiations; and some of it involves reforms. One agency can manage the preparing individual transactions. entire process with individual transaction managers within that agency In deciding which agency of government assigned responsibility for completing should manage port reform, many ques- discrete transactions. Or, multiple agen- tions arise. Should reform be carried out cies can be assigned responsibility for by a temporary agency of government sector reform and task forces created whose sole purpose is port reform or from these several agencies to accom- should it be delegated to a standing plish component tasks and to complete agency of government? Should the min- individual transactions. istry responsible for ports also be responsible for the process of reform or should In managing the politics of reform, it is this fall to an agency dealing with priva- important that there be a means to take tization generally, and over which the account of stakeholder interests and

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concerns. Stakeholders in ports include In general, three approaches to transac- labor, existing public agencies, environ- tion preparation are possible: mental groups, shippers, shipping companies and other users of port services • Engage a separate financial advisor (e.g., fishermen or the navy). Module 8 for each transaction; will examine workable processes for • Engage one advisor for the entire set actively including stakeholder interests of transactions; or in policy decisions or for otherwise fac- toring their interests into key decisions. • Engage no outside advisor; instead, learn about transaction preparation The “Reform Unit” will typically require by preparing them "in-house." consultant services to assist in the privatization process. Issues relating to the Financial advisors add credibility to the use of consultants include determining claims and representations made in mar- what skills are needed, the criteria by keting a transaction. They are also help- which consultants will be chosen, the ful in assessing the market for port degree to which consultant services assets without compromising transac- should be bundled together, and how tion integrity and in "packaging" trans- consultants should be compensated actions to be marketable. However, some financial advisors are better than (e.g., flat fee, success fee). others. Engaging one is itself a signifi- Module 8 will provide some insights on cant transaction involving risks. these various aspects of implementing Consequently, financial advisors should the reform process. be selected with care, using a competitive process as with other transactions. Transaction Preparation Sequencing of Transactions At implementation, port reform requires In addition to preparing the variety of the completion of a number of complex transactions associated with port reform transactions in connection with the ten- for tendering or other actions, those dering of service franchises and asset charged with reform also have to con- ownership or use rights. Transactions sider the order in which the transactions can be completed only after an elaborate will be undertaken. preparation and due diligence process. When port operations are privatized, the Two key issues associated with transac- public sector retains only an indirect tion preparation are whether transaction relationship with the service provision preparation should be "outsourced" or of service. The new relationship entails completed by "in-house" government new tasks to be performed in the public staff, and what kind of technical assis- sector. New skills are required to per- tance the group responsible for transac- form these tasks, requiring a period of tion preparation within government will training and possible assistance from require. consultants or advisers from other ports.

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A range of measures can be adopted to es that are the specific target for help to build the public sector’s capacity reform. to perform its new role as contract monitor and regulator. Preparing for this • Preparation of Redefined Authorities new role should be one of the first steps and Powers. Redefinition of authori- in the reform transaction process. ties and powers results in regula- From the commercial perspective, sever- tions, rules, tariffs and procedures to al possible strategies should be consid- ensure that all port activities are ade- ered when scheduling and program- quately coordinated and operate in a ming port reform programs that include manner consistent with the public several components and multiple trans- interest. actions. For example, the most valuable assets might be tendered first to attract • Preparation of a Legal Framework. investors and to increase their confi- The legal framework for the port sec- dence in and familiarity with procedures tor must reflect the principles set out in which they would be involved in any in the strategic analysis and the subsequent transactions. Another strategy is to offer all components at the same redefinition of institutional rules. time – a "big bang" approach. This has • Preparation of Transactions. the merit of allowing some transaction preparation costs to be shared among Transaction preparation results in the several transactions and allowing a new development of tendering processes set of competitive conditions to become that are transparent, open and com- effective more or less simultaneously. petitive.

IMPLEMENTING PORT REFORM: Module 8 will elaborate on these four PULLING IT ALL TOGETHER stages.

Port reform that shifts the boundary Box 10 illustrates these four sets of between the roles of the public and pri- preparations and how they interrelate. vate sectors entails four broad categories of preparations:

• Preparation of a Port Reform Strategy. Strategic preparation involves careful analysis of the port’s competitive position, strengths, weaknesses, role in the national economy, prospects for growth, etc. It results in the selection of a particular institutional model and the identification of a set of assets and servic-

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Box 10

Shifting the Boundary of a Public-Private Partnership

Transaction Strategic Preparation Preparation Service Designs Service Designs Institutional Model Institutional Model

Legal Adaptation Redefinition of Authorities and Powers Sector Laws Contracting Laws Rules, Regulations, Tariffs, Procedures

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

The Public-Private Infrastructure Advisory Facility (PPIAF) PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of 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

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

Port reform toolkit / Public-Private Infrastructure Advisory Facility. p. cm. Includes bibliographical references. ISBN 0-8213-5046-3 1. Harbors—Management. 2. Harbors—Government policy. 1. Public-Private Infrastructure Advisory Facility

HE551.P757 2003 387.1'068—dc21

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PORT REFORM TOOLKIT

MODULE 2 THE EVOLUTION OF PORTS IN A COMPETITIVE WORLD

THE WORLD BANK 42705_MOD2_TEXT_AGS 5/27/03 7:49 AM Page 1

MODULE 2 THE EVOLUTION OF PORTS IN A COMPETITIVE WORLD

COMPETITIVE SCAN MODULE achieved over the past several decades, ports are now perceived to be the remain- The port sector has radically changed ing controllable component in improving over the past two centuries. During the the efficiency of ocean transport logistics. 19th century and first half of the 20th cen- This has generated the drive today to tury ports tended to be instruments of improve port efficiency, lower cargo han- state or colonial powers and port access dling costs and integrate port services and egress was regarded as a means to with other components of the global dis- control markets. Competition between tribution network. Because of the capital ports was minimal and port-related costs intensity of such efficiency improvements, were relatively insignificant in compari- these have also generated the drive to unbind ports from bureaucratic control of son to the high cost of ocean transport public entities and encourage private sec- and inland transport. As a result, there tor operation of a wide range of port- was little incentive to improve port effi- related activities. ciency. OVERVIEW OF THE COMPETITIVE How times have changed! Most ports LANDSCAPE today are competing with one another on a global scale and, with the tremendous In the 21st century, five forces will inter- gains in productivity in ocean transport act to shape the competitive landscape

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F O

R E S W R O E S P

G T N I R N O I PORT USERS PORT P A G R • Carriers • Shippers • Tenants A s clearance s clearance

BARGAINING POWER OF BARGAINING POWER B ports able to the access economically markets same hinterland efficiency of port particularly services, Custom procedures number of competitors for and/or criteria within the portoperating • Number of competing • Ability control to • Rules and policies on PORT RIVALRY DETERMINANTS OF THE INTENSITY OF OF DETERMINANTS port user to the port supply for portsupply for services and facilities in the region in the portoperations to competition create among service providers preserving existing business and/or operations cross-subsidize cross-subsidize Size and importance of the • of demand and Balance • Ability segment to • Stakes at risk in • Ability absorb losses to

G N I E T

S I U R S W T X O I R E E S F

O N T

S G L T F I N B A N T I A O U

O E T R S T

P T N M A L E M N E A A

T ENTRANTS E R OMPETITORS O tial of new ports or B Y O between portsbetween C H R service providers O POTENTIAL FOR POTENTIAL P THREAT OF NEW THREAT T L L A other sources of supply other sources GLOBAL SUBSTITUTE GLOBAL G Poten V I Ability to utilize other ports or RIVALRY AMONG EXISTING RIVALRY R • Other of supply sources • products Substitute • Other assembly sites Intensity of rivalry within and • New port facilities in the region • Start load centers up of regional • New service in the port providers THE COMPETITIVE LANDSCAPE THE COMPETITIVE NEW PORT ENTRANTS nals that creates barriers by barriers by nals that creates ts that the port wants to ng cost of entryng cost lt in more powerfullt in more players POWER OF PORT USERS termi raisi and ability patterns of carriers to of direct in place load centers utilize service protecting serviceagreements in the new entrants from providers port other portsutilize or service within the portproviders loyalties and customer providers DETERMINANTS OF THE THREAT OF THREAT THE OF DETERMINANTS users control a large percentage percentage a large users control in the portof traffic among portalliances users that resu tenan retain local economy elsewhere can be replicated or service providers DETERMINANTS OF BARGAINING DETERMINANTS • in ports intensification Capital and • distribution Changes in regional • in leases and other Provisions • expansion barriers to Natural • to costs Magnitude of switching • of existing service advantages Cost • which individual port Degree to • and Business realignments • adding value of large Existence • Importance of the port the to • the port services by The provided • other ports to of switching Cost Ability to control negotiations by the Ability negotiations by to control threat of curtailing or canceling servicesthreat of curtailing or canceling

F O S

R R E E D I W V O O P

R G P

N I E C N I I V A R G E R SERVICE PROVIDERS SERVICE S A • Contractors • Concessions • Labor BARGAINING POWER OF BARGAINING POWER B DETERMINANTS OF SERVICEDETERMINANTS PROVIDER BARGAINING POWER service provider brings to the portservice brings to provider participates in financing the activity or stoppages slowdowns that facilitate in port operations absorb downtime management to and portproviders users other use agreements • Extent which service to provider • of "choke points" in the port Existence • port Ability of service vs. providers • among service Inter-relationships • in leases and rights conveyed Legal • and unique capabilities that the Experience BOX 1 BOX

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facing port authorities and port service neighboring Somalia. Dar es Salaam is providers: 1) rivalry among existing the major entry point to Tanzania, as competitors; 2) threat of new competi- well as the neighboring landlocked tors; 3) potential for global substitutes; countries of Zambia, Burundi, Rwanda 4) bargaining power of port users; and and Malawi. Little general cargo enters 5) bargaining power of port service Madagascar without passing through providers (see Box 1). These forces will Toamasina. There is obviously little, if impact ports of all sizes, driving require- any, rivalry between ports in such cir- ments for port expansion, service cumstances. In other situations, many improvement, pricing decisions and ports may be able to provide access to a other management actions. Winners common hinterland, creating intense and losers will emerge in the global port rivalry for market share. Numerous sector, largely dependent on how port ports on the U.S. East, Gulf and West managers strategically position them- Coasts compete for traffic to and from selves in the evolving competitive land- the Midwest. Likewise, a number of scape (see Box 2) large ports in Northern Europe and the Mediterranean compete for the Rivalry Among Existing Competitors European hinterland. In Asia, Hong The intensity of rivalry within the port Kong, Shekou, Yantian, Fuzhou and and between ports is the first of five other ports compete for access to the forces shaping the competitive land- Southern China market and numerous scape. In some ports there will be little, ports in Northern Asia are available to if any, rivalry, given the location of the service the Japanese and Korean mar- port, type of service being provided, kets. rules on number of companies able to Ability to service transshipment operate within the port, etc. In other sit- trade — While rivalry for hinterland uations, rivalry among competitors will market access can sometimes be limited, be intense and often result in pricing that strips the suppliers of profits. There rivalry for transshipment business is are several factors that determine the intense, even for ports that have estab- intensity of port rivalry. lished leading positions as load centers. Singapore established its role as the Hinterland market access — In some sit- world’s largest transshipment center as uations, only one port can logically pro- a result of an advantageous location on vide access to hinterland markets. This the Asia/Europe trade route and prox- may result from geographical features, imity to regional origin and destination lack of adequate transport infrastructure centers in Southeast Asia. Malta from all but one port, political issues or Freeport and Gioia Tauro established other factors. The port of Djibouti cur- their positions in the Mediterranean rently has a virtual monopoly on access transshipment market as a result of their to the Ethiopian market as a result of the location on the Asia/Europe trade route conflict between Ethiopia and Eritrea and proximity to the Southern Europe and lack of transport infrastructure from and Northern Africa markets. Colombo

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BOX 2

Checklist of Key Questions for Positioning in the Global Port Market

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

and Dubai have established themselves location of these ports has not precluded as regional hubs for traffic to and from rivalry for business. Singapore is in an the Arabian Sea market and the Indian increasing rivalry with Port Klang and Sub-Continent. However, the strategic more recently with Tanjung Pelapas.

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Other ports in the Mediterranean are in a way that enables more than one increasingly competing with Malta contractor to provide certain types of Freeport and Gioia Tauro for the region- services within the port, particularly al transshipment trade. Salalah and container terminal handling services, Aden are now serious rivals to Colombo giving the contractor monopoly status. and Dubai for the Arabian Sea and Much depends on the geographical lay- Indian Sub-Continent transshipment out of the port, the available traffic and markets. These rivalries are often the minimum capacity additions (taking intense and create substantial pressure into account the lumpiness of port on transshipment pricing. investments). In Beirut, a 20-year concession for handling containers in the Regional port capacity and demand — port has been given to one contractor, as An imbalance of port capacity within a the layout of the port was considered to region will influence the level of rivalry preclude more than one container termi- between ports. Excess capacity will nal operator. In other situations, such as cause rival ports to aggressively com- Jeddah, it was possible to segment con- pete for market share. Sometimes this tainer terminal facilities in a way that can lead to destructive pricing. For enabled the port to award long term example, the rapid growth in load cen- container handling concessions to two ter capacity in the Eastern Mediterranean has produced intense contractors, each operating in a separate competition between hubs, with the location within the port. Even more result that ports such as Limassol and competition has been created among Damietta have been forced to aggres- service providers in Hong Kong, where sively compete to retain customers three container terminal operators com- through pricing of services that may not pete with each other and a variety of be covering costs. Likewise, inability other service providers compete for within a region to generate sufficient business within the port. In Buenos traffic will increase rivalry for available Aires, the geographical layout of the business. The small hinterland of ports port and available traffic volumes ulti- in the Caribbean constrains the market mately enables not more than three ter- available to each port, creating the need minal operators to compete. to compete for all types of cargo rather than specialize in types of traffic for Stakes at risk — Rivalry will be influ- which the port might have comparative enced by the stakes at risk in preserving advantage. market share of regional traffic. The greater the stakes at risk, the more Ability to create competition within intense the rivalry to preserve market the port — The ability to segment opera- share. This takes on particular signifi- tions in the port to create competition cance in modern container ports, consid- among service providers will often ering the investment required to estab- determine whether rivalry can exist lish a new container terminal can easily within the port itself. Sometimes it is exceed $100 million. Whoever assumes difficult or impossible to divide facilities the risk for this investment will clearly

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have a big financial stake in ensuring stem from the importance of the port to that the new terminal captures and pre- the local economy. The Port of serves market share. Maersk Sealand Rotterdam, for example, is a major con- has invested heavily in a new container tributor to the local economy and pre- terminal in Salalah and clearly has a serving market share in regional traffic stake in ensuring that the facility is effi- flows is of vital importance to the local ciently used as their regional transship- and regional government. This has ment hub (see Box 3). Stakes at risk also resulted in an intense rivalry with other Box 3

Load Centers Competing for the Arabian Peninsula Market

Several major ports are positioning to be points of entry and exit for containers moving to and from the Arabian peninsula. It is producing a fierce competition for load center status. The outcome of this competition could significantly change the way ocean carriers service the Arabian View from Dubai Peninsula market.

Dubai — The port has established itself as a world-class transshipment hub serving as a load center for markets in the Arabian Gulf. Dubai now handles about 2.8 million TEU annually, about a quarter of which is transshipment traffic within the Gulf, with Saudi Arabia, Kuwait and Iran the major destinations. The port authority clearly plans to retain its role in current transshipment markets, as well as position as the load center for containers to and from Iraq once trade resumes. As part of its strategy to control market position, the port has been acquiring management contracts for other ports in the View from Salalah/Aden region, effectively gaining control over regional logistics networks.

Salalah/Aden — These two new transshipment hubs on the Arabian Sea clearly have designs on being load centers for the region. Their major advantage is proximity to the Europe/Asia trunk line route. Both require little diversion by line haul ships, allowing a quick pit stop to pick up and drop off containers for the Arabian peninsula and India/Pakistan markets. Already, the two new ports have drawn transshipment traffic that had previously been captive to Dubai and Colombo – and have drawn some Red Sea transshipment traffic from Jeddah. The terminal operators have made major invest- View from Jeddah ment in these facilities and obviously intend to promote their presence in the region.

Jeddah — This port now largely services the Saudi market and only 20 percent of the containers through the port are for transshipment. However, the proposed rail land bridge to Dammam could enable the port to function as a load center for the Arabian Gulf market. The investment in infrastructure is substantial and major hurdles are in the way, particularly establishing a process for allowing transit containers to move freely across the country without regard to contents. But if the rail investment is made and View from Beirut the hurdles resolved, Jeddah could be a major contender for traffic to and from the AG.

Beirut — Then there’s the new container terminal in Beirut that will begin operating in late 2000. This terminal has the potential to become the major load center for containers moving between the Arabian peninsula and Europe/North America. Cross-border issues are hurdles that must be resolved. But use of Beirut as a load center will avoid passage through the Suez Canal and save 3,400 miles sea voyage to the western Arabian Gulf. The line haul route could be served using two fewer ships in the weekly

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Northern European ports and underpins requirements imposed by Customs in a the plan to invest US$ 2 billion in a new port frequently impose constraints on deepwater container terminal and a new the port’s ability to compete with rival railway connection to Germany to main- ports for market share. In Jeddah, for tain position in the future market. example, clearance procedures have been the primary culprit limiting the Ability to absorb losses — The ability to port’s ability to grow as a load center for absorb losses and/or cross-subsidize the Red Sea and Middle East markets. operations within the port impacts the In the West African port of Cotonou, balance and intensity of rivalry. Global Customs processes have become such a terminal operators with strong financial hindrance that container long dwell balance sheets and multiple operations times are suffocating the port. worldwide may be willing to absorb losses in a particular region, at least for Limits on rivalry within ports — Limits a limited period of time, in order to that ports set on the number of eligible eliminate competition. Ports with multi- service providers impact the degree of faceted operations may be able and will- rivalry. Many port authorities have ing to cross-subsidize services in order policies limiting the number of steve- to lower charges on port activities where dores, tug companies, etc. that can oper- there is greater rivalry for business. In ate in the port. Sometimes these limits Djibouti, the port authority has been are set by entry criteria that effectively cross-subsidizing transit traffic to limit the number of competitors. In Ethiopia through higher charges on some situations these limits are not the export/import traffic and has also been result of port policy, but result from his- cross-subsidizing general cargo activities torical precedent limiting competition. in the port through high charges on han- Such a situation is difficult to change. dling containers. Likewise, port author- Japanese ports, for example, are largely ities involved in non-seaport related controlled by a number of small and activities, such as the Port of New York medium sized stevedoring companies and New Jersey, may be able and will- that have existed for many decades. ing to cross-subsidize port related serv- Entry of new stevedores has been diffi- ices through higher charges on non-port cult, if not impossible, and the Japanese related services. MOT attributes Japan’s ports being Ability to control operations — Rivalry non-competitive with Asian rivals to is also impacted by the ability of port this lack of competition. authorities and port service providers to control the efficiency of port services. Government willingness to subsidize There are situations where entities oper- operations — Rivalry between ports is ating in the port are outside the control sometimes influenced by the availability of the port manager or service provider, of public funds to offset losses, blurring effectively limiting the ability of the port the role of commercial forces. to compete with other ports for market Governments sometimes subsidize ports share. In particular, procedures and on the basis that they are vehicles for

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economic growth. European ports have been largely dominated by Singapore for many years been willing to subsidize and to a smaller extent by Port Klang. port access and quays to achieve larger Another example is the new container economic goals. The effect of these sub- terminal in Port Qasim in Pakistan, sidies is to create artificial forces that which came into being to provide com- influence the chance of rivals’ success. petition to container terminal facilities in There are indications that government the port of Karachi, which users subsidies in the Mediterranean may be believed were costly and inefficient. impacting the ability of transshipment centers to compete for business. New distribution patterns — Changes in distribution patterns can create new Threat of New Competitors port competitors. This is particularly the case in containerized trades, where a The second of five forces is the potential newly created regional load center can entrance of new port facilities or service siphon traffic from traditional ports in providers within the port. This would the region. In the Red Sea, for example, include creation of new regional load the newly created load centers in Aden centers that change the way cargo to and Salalah threaten to siphon a sub- and from a country’s hinterland is dis- stantial portion of the transshipment tributed. The significance of this threat business to Africa now moving through will vary from port to port depending the port of Jeddah. These new load cen- on a number of factors. ters are also siphoning business from the port of Colombo, as well as taking busi- Capital expenditure for new port ness from Dubai and other ports in the facilities — The capital cost required to UAE. Another example is the $240 mil- build a new port facility frequently pro- lion load center being built by PSA vides a barrier to new competitors. Corporation in Sines, which will draw Large up-front expenditures are often traffic from Lisbon, Leixoes and other required for dredging, quay construc- ports in the region. There are also tion, access roads and port superstruc- instances where a new port can provide ture. These start-up costs provide an access to a hinterland via overland tran- entrance barrier that can often deter all sit, providing competition to a port but the most aggressive players. But more locally sited. The new container there are instances where new entrants terminal in Beirut, for example, provides will take the risk of major investments access to markets via overland transport in new ports where they see opportunity that are now serviced through the port for market positioning. A good example of Aqaba (see Box 3). The new port of El is Pelabuhan Tanjung Pelapas, on the Sukhna at the western end of the Red southwest tip of peninsula Malaysia, Sea will be a strong competitor to where almost $750 million is being ear- Egyptian ports in the Mediterranean for marked to build a dedicated container the Egyptian market. port. The developers see the opportunity to tap into the large and lucrative Provisions in operating agreements — container market, which until now has Provisions in leases, concessions and

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other agreements, particularly those of La Spezia has a chronic lack of space involving investment by the operator, and has constructed the Intermodal will often provide some degree of pro- Center of S. Stefano Magra for this pur- tection from new competitors starting pose. up business in the port. For example, the terminal operator who has been Magnitude of switching costs — given the 20-year concession to operate Existence of switching costs will often the container handling facility in the determine the ability of new entrants to port of Beirut has exclusive rights to start up competing operations, either handle containers in the port during the within a port or between ports. period of the concession. In other situa- Switching costs can come in several tions, however, the port service provider forms. They could be the capital expen- can be threatened with new entrants. diture required to switch from one port Nowhere is this better evidenced than in facility to another. In some cases this Northern Europe with the recent success can be a very small cost, especially for of the Dutch tug company Kotug in carriers that have little fixed investment expanding its tug assist business in this in a facility. A pure transshipment facili- region’s ports, which have traditionally ty for containers, such as Kingston been the realm of long established play- Jamaica, can be particularly vulnerable ers. In Bremerhaven, Kotug’s entry has to switching as the carriers using the resulted in layoffs and cutbacks in the facility may incur little switching cost in three tug companies that had been oper- shifting to a competing facility. In other ating in a pool arrangement. cases this cost can be substantial. Carriers can have a considerable amount Natural barriers — Natural barriers that of equipment positioned in a port that constrain port capacity can limit the would need to be shifted to another port threat of new port entrants, particularly if they were to switch operations. Also, those requiring land or fixed facilities to some carriers have heavily invested in operate within the port. In many ports port and terminal infrastructure. In there simply isn’t space for additional instances where major bulk handling berthing, storage and other fixed facili- facilities have been created, switching is ties, providing some insulation from almost impossible. Another form of entry of new competitors. However, switching cost is the need to establish a these barriers can easily be overstated. service network in the new port, which In the long term many of these barriers could entail a considerable amount of can be overcome by building in adjacent learning and experience costs. Then locations, extending out into the sea, etc. there’s a form of switching cost resulting There can also be new methods of oper- from disruption in service during the ation introduced that do not require transition period. Ports, and service presence in the port. For example, an providers within a port, can often pro- inland container depot could substitute tect their market position by ensuring for storage and other operations now that these switching costs are maxi- performed in the port. The Italian port mized.

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Cost advantages and customer ity to source elsewhere. Various types of loyalties — Cost advantages of existing fruits and vegetables provide good service providers and customer loyalties examples of substitute global sources. will impact the threat of new entrants. Bananas, for example, can be sourced There may be economies of scale and/or from West Africa, Latin and South experience that enable established play- America, the Caribbean or Asia. ers to retain the position of cost leaders Manufacture of clothing is also globally if new entrants were to start up business footloose, with many potential locations in the port. This could result from a to source product. The efficiency of port variety of factors, including having the facilities in each of the export locations better location in the port, having sunk will impact the success of the product in investment in facilities and equipment, the export market, which ultimately employing experienced personnel, etc. impacts the level of activity moving While customer loyalties can be through the port. ephemeral, quality of service (e.g., responsiveness to customer needs, han- Substitute products for exports and dling rates, clearance time, etc.) can dif- imports — Foreign buyers may be able ferentiate the service provider and limit to substitute other products for the the threat of new entrants. Sometimes product they are now shipping through these customer loyalties can result from the port. For example, a power plant the threat of reprisal should the cus- utilizing imported coal as feed may be tomer shift to another service provider able to switch to oil or gas as feed if the or another port. economics shift in favor of the latter. Port costs to handle coal are one of the Potential for Global Substitutes factors that impact the economics of utilizing coal as feed and exports of coal The third force shaping the competitive through the port could certainly be landscape is the potential of port users impacted if the foreign buyer shifts to to shift to other global sources, impact- gas or oil as feed. ing the level of activity in the port. This force takes on greater importance as Magnitude of switching costs for substi- world trade is opened to competition, tution — There may be significant cost sourcing of supply becomes increasingly in switching to other sources, products global and vertical specialization or assembly sites that will impact the becomes an increasingly important fac- ability of port users to substitute global- tor in global logistics chains. Several ly. The greater this cost, the greater the factors will determine the importance of port’s bargaining power. Ability to shift this force on specific ports. to other global sources can be limited by the port users’ reliance on value adding Other global sources for products mov- services in or near the port involving ing through the port — The extent to integration of imported intermediate which there are other global sources goods with domestic produce for final available to customers now shipping sale to the domestic or export market. through the port will determine the abil- These value adding services can be cost-

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ly to replicate elsewhere and impact the the percentage that port costs are of total ability to shift to other global sources. delivered price, the more impact port For example, the large free zone in Jebel costs will have on buyer behavior. For Ali enables tenants to import and high value commodities such as elec- assemble intermediate products into tronics, port costs can be less than 1 per- final products, utilizing a large pool of cent of the delivered market value. For inexpensive expatriate labor for the low value commodities such as bagged assembly process. While many of the rice, port costs can be more than 15 per- value adding activities performed in cent of the delivered market value. Jebel Ali can be performed elsewhere, Shippers of electronics may be less influ- the alternatives may involve significant- enced by port costs in selecting ports ly higher labor cost and a less friendly than shippers of rice. However, small government environment. It may also cost penalties may not be acceptable entail walking away from a high sunk even when port costs are a small per- cost. Reebok, for example, has estab- centage of the total delivered price. lished a large final assembly and distri- These penalties may represent the differ- bution center in the port of Rotterdam to ence between profit and loss in the mar- service the European market. While this ketplace and, depending on whether the value adding activity could be shifted to port user has the option to ship through another location, there is a sizable sunk another port, not buy the product or cost associated with the existing facility find another market, influence the selec- (see Box 4). tion of port. Bargaining Power of Port Users Demand elasticity of exports and imports — Another factor determining Carriers, shippers and tenants utilizing the potential for global substitutes is the the port have varying degrees of bar- elasticity of demand for the country’s gaining power and control over port exports and imports. The greater the management actions. This is the fourth elasticity, the greater the potential that force shaping the competitive landscape buyers can do without the product. in a port. Bargaining power of port Doing without the product is a form of users is determined by a number of fac- substitution by the buyer that will tors. impact the volume of traffic in that product for the port. Concentration of port user power — The more an individual port user controls a Importance of port costs in total large percentage of traffic in the port, delivered price — Cutting through all of the more bargaining power the user has the above is the issue of how significant in negotiations with port management port related costs are as a percentage of and port service providers. In some sit- total delivered price. Many shippers uations, the port user can be so power- consider port costs to be among the ful that the port literally can not afford more controllable expenditures in the to lose its business. Even the largest logistics chain. In general, the higher ports must contend with extremely

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Box 4

Reebok Logistics Center in the Maasvlakte Distripark

Value adding activities have been created in many ports to enhance trade and generate employment for the local area. The key ingredients are efficient port operation, availability of good transport services and attractive prices for land, labor and energy. The newly opened Reebok state-of–the-art logistics center in Rotterdam illustrates how one port helped create a value-adding service that generates employment for 300 personnel and con- tributes $6 million in direct income to the local community.

Reebok Product Line and Logistics

Reebok has two product lines, footwear and apparel. In 1998, footwear accounted for 57 percent of international sales, apparel 43 percent. Reebok products are actively marketed in 170 countries or territories. The U.K. is the largest market for Reebok products in Europe, representing 30 percent of total European sales. Spain is another big market for Reebok products. Almost all footwear is supplied from plants in the Far East. Most apparel is supplied from plants in southern Europe. Footwear moves in containers from the Far East. Apparel moves by truck and container from plants in Portugal, Greece,Turkey, etc.

Restructuring of Logistics Activities

As part of a global restructuring of logistics activities, Reebok in 1995 decided that warehousing and distribution activities in Europe should be consolidated. In place of having warehousing facilities in each market, a bulk logistics facility would be established in mainland Europe to supply pick-and-pack warehouses in the U.K. and Spain, as well as directly supply other markets in Europe. Except for some very large accounts (which are serviced direct) and apparel for Southern Europe (which is warehoused in Spain), all product flow to the European market would pass through this logistics center. France, Belgium and the Netherlands were considered as potential locations. Following assessment of each of these locations, Reebok decided to locate the logistics center in the Netherlands. The site chosen is in the newly created Distripark 3 in Maasvlakte at the ocean edge of the port property. In November 1998 the facility began receiving product.

Why the Port of Rotterdam was Selected

Reebok had a variety of reasons for choosing this site. It is close to the new deepwater terminal in the port of Rotterdam, a container handling facility that is generally regarded as one of the most advanced and capable terminals in Europe. The location is on the coast, which provides easy access to short sea transport to the U.K. market.There is a good supply of warehousing labor in the Rotterdam area, despite the fact that the general labor market is tight. Most people in the Netherlands understand English, which was considered by Reebok to be important. Customs in the Netherlands is considered to be efficient and business friendly. While not an advantage, labor costs and regulations concerning labor practices were considered to be similar to those of other countries in Europe. But most importantly, space was available and the port wanted to have a launching customer in the new Distripark. So the port, in combination with the municipal government, proactively pursued Reebok and provided strong incentives to locate the facility in Maasvlakte. Based on a six-year operating lease with a five-year renewal option and substantial residual value guarantees by Reebok, the port funded construction of the state-of- the-art 700,000 sq. ft. logistics facility. The port also created the necessary infrastructure to connect the facility to the adjacent container terminal, facilitated creation of bus service fitted to the plant shift system and provided a contact person to deal with problems and issues. Reebok describes its relationship as "a partnership with the port."

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powerful carriers that have the option to carriers that previously had been indi- take their business elsewhere. Recently, vidual customers. Acquisitions can a major container carrier wielded its change the negotiating picture as well. power to get concessions from the Port P&O Nedlloyd’s recent acquisition of of New York and New Jersey as a condi- Harrison Line has resulted in the carrier tion of utilizing the port as a load center having a considerable increase in market on the U.S. East Coast. The port didn’t share in the East Africa trades. Ports want to lose a carrier that represented 20 such as Mombasa, Tanga and Dar es percent of the port’s container volume. Salaam are now facing a more powerful Given this control over a large port, con- port user, whose market share in the sider the bargaining power that the car- Europe/East Africa trades has increased rier has in dealing with a small or mid- from 9 percent to 12 percent size port where there are options for Presence of large value adding using other facilities. In the Caribbean, tenants — Bargaining power will be large cruise lines such as Carnival, Royal influenced by the existence of large Caribbean and P&O have great bargain- value adding tenants that the port wants ing power with the cruise ports that to attract and retain. A major tenant they serve. These three companies con- employing a large number of personnel trol more than 50 percent of industry and substantially contributing to the capacity and their decisions on which local economy is in a position to extract ports to call can have major impact on a concessions from the port that would local economy. Recently, Carnival not necessarily be available to smaller decided to reduce or eliminate cruise players. The port authority in Portland, ship visits to Grenada as a protest to the Oregon has targeted auto imports as a imposition of cruise taxes by the govern- strategic business sector that it wants to ment, an action that stands to seriously retain and grow. Three car manufactur- impact the economy of the small nation. ers (Hyundai, Honda and Toyota) now lease several terminals from the port Impact of changing business relation- authority to process and accessorize ships — Business realignments and imported cars. Keeping these three auto agreements among port users can result manufacturers in the port is a high pri- in powerful players that port managers ority objective and the port authority and port service providers must contend provides favorable terms to these large with in contract negotiations. These can users that may not be available to small- take the form of conferences, slot shar- er tenants. ing arrangements, strategic alliances, mergers, etc. The result in each case can Importance of port to the economy — be greater concentration of port business The more important the port to the among a smaller number of port users. national economy, the more pressure When representatives of the Grand there will be on port managers to attract Alliance sit down with a port to negoti- and retain valuable customers. Some ate future contract terms, the port is ports can be extremely valuable players dealing with a formidable alliance of in the national economy and the loss of

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major customers could have a big ripple mid-Mediterranean, Malta Freeport and effect on employment and local income. Gioia Tauro are equally situated to pro- For example, the port of Rotterdam is a vide transshipment service to carriers. key element in the Dutch economy and Each port must consider the potential development projects undertaken by the actions of the others when negotiating port over the past six years have created with current or prospective customers, 45,000 man-years in temporary employ- as the customer has the ability to take ment and 17,500 man-years in perma- his business to the other port. nent employment in the Netherlands. Current and prospective port users can Facility investments by port users — A employ the importance of the port to the carrier, shipper or tenant who has a local economy as a bargaining chip in major investment in facilities in the port, or has structured its operations in a way negotiations over tariffs, service, facili- that precludes easy transfer of opera- ties, etc. The larger the contribution of tions to another facility, faces switching the port user to the local economy, the costs that limit bargaining power. For greater the user's bargaining power with example, a joint venture of Saudi and the port. U.S. interests began operating a rice pro- Ability to replicate port services — Port cessing plant in the port of Jeddah in users will have strong bargaining power October 1995. It is the largest rice han- if the services provided by the port can dling facility of its type in the Middle be replicated elsewhere. Essentially this East and the investment in the facility comes down to whether there are alter- creates an exit barrier should the opera- native facilities available to the port tor become dissatisfied with the service user. The more opportunity there is to received from the port. Another exam- utilize other facilities, the less bargain- ple is the container load center in Salalah, where Maersk Sealand is a ing power the facility owner has over major investor in the terminal along the user. Nowhere is this better illus- with the Government of Oman. It’s dif- trated than in Northern Europe, where a ficult to pack up and leave this facility if number of large container handling there is unhappiness with port policies. ports are available for entry and exit in At the same time, sunk costs in facilities the European market. Carriers can react don’t preclude leaving when things get to tariff increases, efficiency issues, prob- too bad. ICTSI decided to pull out of lems, etc. by shifting or threatening to the port of Rosario after having invested shift to other ports. Recently, the Grand $27 million in a failed effort to operate Alliance decided to temporarily shift the container terminal. ECT left Trieste one of its five Europe/Asia services after a 11/2-year effort to operate the from Rotterdam to Antwerp on the basis Molo VII container terminal. Both con- that it was experiencing delays in tractors decided that future losses Rotterdam. This decision shifted, on an would be greater than the cost of pulling annual basis, some 125,000 TEU from out. Rotterdam to Antwerp, until the delays in Rotterdam were corrected. In the

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Bargaining Power of Service Providers to financing. A concession to the Dubai Ports Authority (DPA) to manage the The final force shaping the competitive port of Djibouti was largely based on landscape is the bargaining power of the perception that DPA could transfer port service providers. A variety of experience in port operations in Dubai operators and groups often have the and increase regional market access to ability to exercise control over the port Djibouti. by threatening to curtail or cancel services. Particularly important is the increas- Participation in facility financing — A ing role of a handful of port service service provider that participates in the developers who have accounted for financing of an activity is clearly in a more than 50 percent of all new port better bargaining position than one who development utilizing private capital does not. Many port services that are over the past few years. These large privately operated as concessions players can tilt the scale in negotiations involve some degree of financing by the with port authorities. The extent of operator and, in many cases, the contractor offering the best financing terms service provider bargaining power is is in position to get the concession. The determined by a number of factors. developer of the new container terminal in Aden chose PSA Corporation as the Experience and capabilities of service operator, partially because PSA was provider — Experience and unique willing to participate in financing the capabilities that the service provider $200+ million infrastructure develop- brings to the port is a factor determining ment. its bargaining position. The greater these capabilities, the more power the Choke points in the port — Existence of service provider has in dealing with the choke points in the port that facilitate port. A contractor that has operated in a slowdowns or stoppages of port opera- port for many years, has established a tions provides a power that is often cadre of very experienced personnel and employed to extract concessions from has accumulated a large inventory of port management. Sometimes the choke equipment needed to perform the job, point can be an activity in the port, would more likely be able to extract without which the port cannot function favorable terms from the port than a effectively. Tug service is an example. If start-up company. Likewise, a contrac- tugs are not available for ship assist, the tor with unique skills such as handling port may continue to function but not hazardous cargo and/or chemicals is in necessarily at the normal level of effi- a good bargaining position. Large glob- ciency. Sometimes the choke points can al terminal operators are also in a good be personnel in the port. A labor stop- bargaining position, as they are often page in cargo handling or other strategic perceived as bringing experience and services can shut port operations down. unique capabilities based on their opera- And sometimes the choke point can be tions elsewhere, loyalties of a customer trucking to and from the port, ware- base, networking possibilities and access housing operations and other services,

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where a slowdown for whatever reason negotiating terminal concessions. can quickly choke operations in the port. Service providers in these types of activ- Rights and obligations conveyed by ities have considerable bargaining contractual agreements — Lease agree- power in dealing with port manage- ments and other contracts to utilize port ment. facilities include provisions that convey legal rights and obligations to the port Ability to absorb downtime — The abil- service provider. These contract terms ity of service providers vs. port manage- will set boundaries on the port service ment to absorb downtime is a factor that provider and port in future negotiations. impacts the balance of bargaining The rights can be extensive, giving the power. Service providers with deep provider exclusive rights to operate in pockets may be willing to take a loss of the port for 20+ years with little if any revenue for a substantial period to get control by port management. Or they what they want from the port. can be very limited, giving the port the Meanwhile, the port can be under sub- right to exercise a great deal of control stantial government and commercial over the performance of the service pressure to resolve the conflict and get provider, including provisions in the the port back into operation. The recent contract specifying an investment pro- strike in the Israeli ports of Ashdod, gram that must be fulfilled by the con- Haifa and Eilat created a backup of ves- tractor. As the contract between the port sels in the ports and generated calls and service provider will set the bound- from many sides to reach resolution as aries for future bargaining position, the soon as possible. need for a well planned negotiation to Interrelationships between providers develop the contract can’t be overstated. and port users — The existence of inter- The Bottom Line relationships between service providers and port users can influence the power structure in the port. These interrela- Ports no longer operate in an insulated tionships can impact decisions regarding environment. They face the same com- port operations, leases, berthing rights, petitive forces that companies in other etc. Uniglory, for example, is the feeder- industries experience. There is rivalry ship subsidiary of Evergreen, which in among existing competitors, continuing turn is one of the major linehaul con- threat of new entrants, potential for tainer carriers. A port that wants to global substitutes, presence of powerful attract linehaul calls by Evergreen could customers and powerful suppliers. be willing to extend berthing terms to Dealing with these forces is a continuing Uniglory that are more favorable than challenge for the port manager. It would be given to a feedership operator requires that the port manager be keenly who is independent. P&O Ports is a sis- aware of port user requirements, know ter organization to P&O Nedlloyd. The their constraints in the global market former can utilize this relationship to and have a strategy for making the port strengthen its bargaining position in a partner in business development.

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SECTION 2 sourcing of raw materials and finished products has become increasingly glob- PORT DYNAMICS IN THE 21ST CENTURY alized and producers in various, often distant, areas of the world are increas- The 21st century will see radical changes ingly forced to compete with one anoth- in the business base underlying port er for the same markets. The basic forces operations. Increasingly, intense global that have triggered the greater interrela- competition will force changes in the tion and interdependency of the world way all players in the international economies remain active. Thus, there is logistics chain, including ports, do busi- no reason to think that the observed ness in the future. Innovative systems trends will not continue. and new technology will radically change requirements for port infrastruc- Vertical specialization — The increasing ture and increase the degree of special- vertical specialization of world trade has ization, raising the financial stakes of had significant impact on the global port investments and the need for a logistics system of many manufacturers. highly specialized workforce. It has added links to global supply Realignments and consolidations among chains and increased the transport inten- port users and port service providers sity of production processes. Firms have will continue, creating a fluid base of been increasingly concentrating on players with whom ports do business. exploiting their core competencies and Changes in distribution patterns and in subcontracting a number of non-core the structure of the maritime geography manufacturing and assembly activities will increasingly create a hierarchy of to outside contractors. Tasks traditional- ports and some historical port related ly performed at the start or the end of activities will be shifted to inland sites. the production line are increasingly Environmental and safety concerns will moving away from the main plant to be force on ports the requirement to impose carried out by manufacturing subcon- regulations and provide facilities that tractors or distribution centers. Pre- may have no commercial return on assembly and sequencing of parts for investment. on-line production chains are activities increasingly outsourced to specialist Globalization of Production logistics providers Customization of product, which can range from labeling The world economies are becoming or re-packaging of goods to re-configu- increasingly interrelated as a result of ration of items, is one of the fastest increasing trade and the growing trend growing areas of logistics outsourcing. toward globalization of production. Over the past half-century, most coun- Focused manufacturing — tries have seen an increase in exports as Manufacturers have been concentrating a share of GDP and there has been an production capacity in fewer locations, increase in vertical specialization of replacing the traditional system of world trade (see Box 5). In addition, nationally based production with

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Box 5

Increasing Vertical Specialization of World Trade

A recent study published in the Economic Policy Review of the Federal Reserve Board of New York traces the impact of vertical specialization of world trade over the past 30 to 40 years. The authors point out that a major feature of globalization has been the enormous increase in international flows of goods and services and countries are now trading much more with each other — and an increasing amount of this trade is due to vertical specialization.

Increasing Trade Flows Using IMF data, the authors show that the export share of GDP in most countries has increased since 1962. Reproduced right is a chart from their study. Each dot in the chart represents a different country. Dots that lie above the 45° line indicate that the country’s export share of GDP in 1995 was higher than that in 1962. The authors point out that export shares have been increasing for all types of countries, and countries as distinct as Bangladesh, the Congo, Germany, Ireland, Korea, Malaysia and the U.S. all lie above the 45° line.

Increase in Vertical Specialization In the study, the authors assess the role that vertical specialization is playing in these increased flows. Vertical specialization occurs when a country uses imported intermediate parts to create a good it later exports — i.e., the country links sequentially with other countries to produce a final good. For example, country 1 supplies intermediate parts to country 2, which in turn combines these intermediate parts with domestic and other import parts to produce a finished or semi-finished product, which is then shipped to country 3.

Exports Shares of GDP in 1962 and 1995

1.6

1.4

1.2

1.0

0.8

0.6 1995 Export Shares

0.4 = Country 0.2

0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1962 Export Shares

Source: D. Hummels, D. Rapoport and K.Yi, "Vertical Specialization and the Changing Nature of World Trade," FRBNY Economic Policy Review, June 1998, p. 80

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Box 5 (continued)

Increasing Vertical Specialization of World Trade

Drawing information from four case studies as well as OECD input-output tables, the authors find that vertical specialization has accounted for a large and increasing share of international trade over the last several decades. For most of the countries sampled, growth in vertical trade accounted for 25 percent or more of the growth in overall trade. As shown below, the percentage of change in export share of gross output attributable to increased vertical trade for the sampled time period has varied from 47.4 percent in the Netherlands to 3.2 percent in Japan.

Contribution of Vertical and Horizontal Trade to Change in Export Share of Gross Output Over Sample Time Periods

Change in Percentage Due to Time Period Export Share of of Change Increase In Country Sampled Gross Output Vertical Trade Horizontal Trade Australia 1968/89 0.06 13.4 86.6 Canada 1971/90 0.08 43.7 56.3 Denmark 1972/90 0.17 27.3 72.7 France 1972/90 0.11 28.4 71.6 Germany 1978/90 0.09 19.4 80.6 Japan 1970/90 0.03 3.2 96.8 Netherlands 1972/86 0.10 47.4 52.6 United Kingdom 1968/90 0.15 29.6 70.4 United States 1972/90 0.07 11.9 88.1

Source: D. Hummels, D. Rapoport and K.Yi, "Vertical Specialization and the Changing Nature of World Trade," FRBNY Economic Policy Review, June 1998, p. 92 Future Growth in Vertical Trade

The authors conclude "the nature of trade has changed to the point where countries increasingly specialize in producing particular stages of a good, rather than making a complete good from start to finish. This vertical trade is also what links heightened international trade to greater international production. In all likelihood, the forces that have led to increased vertical trade — lower trade barriers and improvements in transportation and communications technologies — will continue. Thus, we can expect the importance of vertical trade to grow as the world economy heads into the 21st century."

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"focused manufacturing." Instead of a Australasia, Eastern Mediterranean, factory manufacturing a broad range of Southeast U.S. and Africa. Textile man- products for a local market, the entire ufacturers can source in Southeast Asia, production of a particular product for a the Indian sub-continent, Africa, East continent or, in some cases the world Europe and a wide variety of other loca- market, is focused at a single location. tions. The sourcing decision ultimately While this has enabled companies to is determined by total delivered cost, maximize economies of scale in the pro- which in turn can be greatly dependent duction operation, it has often made on the logistics cost to acquire primary their logistical system more transport- and intermediate products and deliver intensive and transport-dependent. the finished products to market.

Expanded logistics reach — Companies Impact of globalization on ports — have steadily expanded the geographi- While ports have always been important cal scale, or "logistics reach" of their nodes in the logistics system, globaliza- sourcing and distribution operations. tion of production has sharpened the Extension of this reach on a global scale need for ports to be value adders, not has been one of the dominant trends in value subtractors in the supply chain international business and logistics over and has given ports a unique opportuni- the past 30 years. The emergence of a ty to become value-adding entities. A new generation of high value manufac- port is the interface between interconti- tured products, particularly in the elec- nental transport and a place in the hin- tronics industry, and a general reduction terland being considered for production, in the density of consumer products assembly or final distribution. Its capa- (i.e., lesser but better known brands) bility and efficiency can greatly influ- have contributed to an increase in logis- ence the decision for locating a plant or tics reach. Hewlett-Packard, for exam- distribution center, and often determine ple, estimates that the various parts in a whether a local producer can compete computer workstation in a New York globally or regionally with other pro- office were moved a total of 96,000 kilo- ducers. The challenge is for ports to meters from their points of production relate to the needs of their customers in places such as Singapore, Japan, and assist them in improving their com- France and the Western United States. petitive positions by providing low cost, efficient port services. Increased sourcing alternatives — Producers in one area of the world are Changing Technology increasingly competing with producers in other areas for the same international Major technology changes are taking markets. This is true across the spec- place in the ocean shipping sector which trum of primary and intermediate prod- impact requirements for port infrastruc- ucts. Examples of sourcing alternatives ture and services. The most obvious is are virtually endless. Wholesalers of the increasing containerization of global fruit and juice in Europe can source trade, a trend that is widely expected to from Latin America, Southeast Asia, continue into the future.

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Containerization of seaborne trade is tainerships is continuing. At the begin- less than 50 years old and deep-sea con- ning of 2001, 130 post-Panamax contain- tainerization is only 35 years old. Yet it erships were on order, including 63 has dramatically changed requirements ships with capacity exceeding 6,000 for cargo handling and port facilities, TEU. Among the ships on order is a raised the financial stakes of investing in new class of 10,000 TEU capacity con- these facilities and radically impacted tainership for Maersk (see Box 7 and manpower and labor skills required to Box 8). handle cargo, creating serious labor redundancy issues and retraining needs Future containership designs — Ships in many ports. In addition, the ocean with 10,000 to 12,000 TEU capacity are transport industry is employing increas- widely expected to make their appear- ingly sophisticated information technol- ance within the next five years. They ogy to manage logistics; and ports, if are expected to be deployed on the they are to remain competitive, must be Europe-Far East route. At the Asian key players in future IT logistics net- end, the ports of Singapore, Hong Kong, works. Yantian, Shanghai and Yokohama are seriously planning for ships of this size. Containerization of world trade — At the European end, the port of More than 60 percent of world general Rotterdam is planning the Maasvlakte II cargo trade moved by sea is carried in expansion in order to be ready for these containers. On trades between highly mega containerships, while the port of industrialized countries the percentage Algeciras can receive these vessels now. approaches over 80 percent. This is a remarkable market penetration for a Looking further out, containerships with technology that dates only from the capacity of 15,000 TEU or greater are a mid-1950s, when the first converted ship real possibility. The industry is abuzz carrying 58 containers made its initial with rumors that orders for ships of this voyage between New York and size are just a matter of time. A new Houston. Since then there has been a term, Malacca-Max, has even been continual increase in both number and coined for the largest of these vessels. average size of containerships (see Box This ship would be capable of carrying 6). There is now a world capacity of 18,000 TEU. It would be 400 meters more than 6 million TEU in operation long, 60 meters wide and have a draft of and about 1 million TEU on order. Even 21 meters, which would be the maxi- more significant is that there are about mum depth for transiting the Malacca 130 post-Panamax containerships now Straits, making it effectively the maxi- in operation. These ships have a capaci- mum sized container ship that theoreti- ty exceeding 4,000 TEU and, with a cally can be envisaged. length in excess of 295 meters and a Also under consideration is introduction beam of over 32.3 meters, they are too of containerships capable of consider- big to transit the Panama Canal. ably faster service speeds than ships now in service. One carrier, Norasia, is The trend toward bigger and bigger con- contemplating orders for 2,000 TEU

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Box 6

Evolution of Containerized Shipping

Container shipping got its start in April 1956 when the tanker Ideal X owned by SeaLand (then known as Pan Atlantic Steamship) made its initial voyage between New York and Houston carrying 58 trailers on deck. The trailers were detached from their chassis and lifted aboard the ship with a dockside gantry crane. This initial voyage was rapidly followed by plans to convert six dry cargo ships to full containerships fitted with onboard cranes. The first of these began operating in October 1957, and had capacity to carry 226 35 ft. containers, equivalent to about 480 TEU. By 1963, the company was employing converted tankers between the U.S. East and West Coasts able to carry 476 containers (about 830 TEU). Meanwhile, in 1960 Matson began containerized service between the West Coast and Hawaii, utilizing cargo ships able to carry 436 24 ft. containers on deck (about 520 TEU). There was also an unsuccessful attempt by Grace Line in 1960 to introduce container service between the U.S. and Central/South America. International service using containerized vessels began in 1966 with the introduction of SeaLand’s weekly container service between the U.S. East Coast and Europe.

First purpose-built containerships — Ships built prior to 1969 were converted from breakbulk ships or tankers. They generally had capacity in the 750 to 1000 TEU range, draft of about 9 meters, service speeds of 18 to 21 knots and were fitted with shipboard cranes to handle containers. In 1969 the first ship specifically designed for containership service was built. This began a new generation of larger and faster containerships with capacity in the 1000 to 1500 TEU range and service speeds of 20 to 23 knots — and some ships could achieve higher speeds to 27 knots. These ships were designed to utilize dockside rather than shipboard cranes. Removing the cranes both increased cargo-handling productivity and allowed more containers to be stowed on deck.

Containerships get to Panamax dimensions — Ships built in the early 1970s had capacity in the 1000 to 2500 TEU range, draft up to 10 meters and service speed of 22 to 26 knots. Built during this period were the first Panamax-size containerships, with dimensions narrow enough to pass through the Panama Canal, which limits ships to 289.5 meters length, 32.3 meters beam. This generation included a containership design that moved the technology goalpost on service speed. In 1972/73, SeaLand took delivery of eight 33-knot Panamax-size containerships capable of carrying 1900 TEU. To make this speed, the ships had 120,000 bhp installed power. They turned out to be an economic failure when fuel prices went skyward as a result of OPEC action in the mid-1970s. To date, the speed of these SeaLand ships has not been exceeded by subsequent designs. The late 1970s/early 1980s saw further increase in containership size, with capacity moving into the 1500 to 3000 TEU range, including a number of Panamax design ships. However, the abrupt rise in fuel cost brought about a slower generation of containerships during this period. The design emphasis was on achieving fuel efficiency and service speed generally fell into the 20 to 24 knot range. Drafts deepened to 10.5 meters.

During the second half of the 1980s, capacity of Panamax containerships grew to more than 4000 TEU through design improvements. Included among Panamax ships built during this period were 12 4400 TEU "econoships" designed by U.S. Lines to operate on a round-the-world service. These were relatively slow 19-knot ships with a small power plant designed to maximize fuel efficiency. While these ships were too slow for the intended service, they initiated the concept of a round-the-world service that Evergreen and other carriers continue today.

Post-Panamax ships enter service — Even more important during the second half of the 1990s was the introduction of the first post-Panamax ships by American President Lines, who ordered five 273 meter long, 39 meter wide ships with capacity of 4400 TEU for use in transpacific service. These were the first containerships unable to transit the canal and paved the way for increasingly larger post-Panamax ships over the next decade. According to APL, the principal advantage of the post-Panamax ship is virtually unlimited container capacity. Other advantages include the fact that a large Panamax ship must carry as much as 12,500 tons of water ballast and an equivalent size, but wider post-Panamax ship requires little or no ballast and consumes less fuel. Also, for the same TEU capacity, the post-Panamax ship is 5 percent cheaper to build, as length is the most expensive dimension.

In the 1990s, post-Panamax containerships were ordered by most of the major linehaul carriers, including Maersk, OOCL, Hanjin, Evergreen, Hyundai, Cosco, NYK, MOL and NOL. The most notable orders were those of Maersk and P&O, who took delivery of a string of ships with capacity of more than 6000 TEU, designed for service speed of 25 knots at maximum draft of 13.5 meters. Additionally, through design changes the capacity of Panamax size containerships increased to 4800 TEU. In the late 1990s, Hapag Lloyd ordered seven 4800 TEU containerships with service speed of 25 knots and draft of 13.5 meters, yet designed within the size limits of the Panama Canal.

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Box 7

TEU Capacity in Service by Containership Size Class

2,000,000

1,500,000

1,000,000 TEU's in Service

500,000

0 <2000 TEU 2000-4000 TEU >4000 TEU Vessel Capacity 1980 1990 1998 Box 8

Post Panamax Ships on Order as of February 2001

Company No. of Ships on Order TEU Capacity Total TEU % of Total

Cosco 17 5,250-5,618 92,323 12% CMA/CGM 12 6,250-6,500 77,000 10% K Line 12 5,500-5,608 66,216 9% MSC 10 6,408-6,700 66,416 9% NYK 11 6,200 68,200 9% NOL 10 5,500 55,000 7% Hapag Lloyd 6 4,805-7,200 38,495 5% Costamare 5 4,890-6,252 29,898 4% CP Ships 6 4,800 28,800 4% Evergreen 5 6,000 30,000 4% Hyundai 5 6,500 32,500 4% Mitsui OSK 5 6,000 30,000 4% OOCL 5 5,468-7,400 31,250 4% P&O 4 6,788 27,152 4% Yangming 6 5,500-5,551 33,202 4% Nord Deutsche 4 5,551 22,204 3% Conti 2 5,600 11,200 1% Lloyd Triestino 2 5,364 10,728 1% Maersk 1 9,146 9,146 1% Undisclosed 2 5,750 11,500 1% Total 130 771,230 100%

Source: Fairplay Newbuildings, January 2001

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ships capable of 32 knot service speed required to load and unload a large gen- and has been exploring concept designs eral cargo ship, a process that could take for ships capable of 40 knots. Another a week to ten days in port. carrier, FastShip, plans to order four Containerships require only 50 to 60 1,430 TEU vessels capable of a 38 knot men to load and unload cargo. service speed, with specially designed Assuming a four gantry crane operation, terminal facilities at both ends of the a container ship requires some 30 work- route capable of discharging and load- ers directly allocated to the vessel. This ing the ship in four hours (see Box 9). figure, moreover, depends on the type of terminal operation that is used; e.g., Impact on port operations — The con- more for straddle carrier operation, less trast between container and earlier for rubber-tire gantry (RTG). A typical breakbulk operations is startling. Most general cargo berth can handle roughly significantly, it has much reduced the 130,000 to 150,000 tons per year of cargo ship’s time in port and at berth. throughput. A modern container berth, Containerization has dramatically equipped with four ship-to-shore gantry reduced personnel requirements for cranes, will handle 400,000 container cargo handling, raised berth productivi- moves annually (typically 600,000 mil- ty and increased the capital intensity of lion TEU). Assuming three-quarters of port operations. Prior to containeriza- the containers are full and the average tion, about 200 men, working simultane- full load is 10 tons per TEU, the ously in four gangs, were typically throughput of this berth is some 4.0 mil- Box 9

FastShip Container Terminal

FastShip plans to start a containerized service between Europe and the U.S. East Coast designed for high value, time sensitive cargo. Four 1423 TEU vessels capable of 38 knot service speed would make the 3266 mile ocean crossing in less than four days, with the goal of providing seven day door-to-door service between major destinations in Europe and the U.S. To provide this service, the developer plans a new type of highly automated terminal designed to minimize turnaround time.

Assuming the project proceeds, new terminals would be built in Cherbourg and Philadelphia specifically for the FastShip service. A proposed concept by TTS Handling Systems is a novel approach to achieving fast port turnaround. In the TTS concept, each terminal would be designed to accommodate container pallet trains that would be preloaded with double stack containers. These trains would carry the platforms on and off the ship via a specially designed link span. Prior to the ship arriving in port, rows of container platforms would be loaded with outgoing containers. These platforms would be positioned on 24 lanes of rail track in the marshalling area. When the ship arrives, a train would pull a lane of container pallets from the ship and another train would pull a lane of platforms from the marshalling area into the ship. This sequence of activity would continue until 24 lanes of inbound containers aboard the ship are unloaded and replaced with 24 lanes of outbound containers.

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lion tons annually. A super post- three days average dwell time and truck Panamax container crane with 57 meters turnaround of less than 30 minutes. outreach will cost about $ 6.0 million. Water depth at the future terminal will Four to five of these cranes are needed need to be at least 15 to 16 meters and to efficiently handle the largest post- increasingly larger cranes will be Panamax containership now coming required to accommodate ships with a into service (see Box 10). Overall, the deck stack of up to 28 rows across. infrastructure improvements and superstructure (cranes, straddle carriers or Growing role of information RTGs, tractors and trailers, etc.) needed technology — Equally important in the for a modern two-berth container termi- future is the need for ports to expand the use of information technology (IT) to nal will easily cost $100 million. In con- support port user requirements, particu- trast, a typical 3 to 6 ton shoreside crane larly relating to containerized traffic, used for general cargo handling in the although not exclusively. IT is being 1950s would have cost, at today’s prices, increasingly employed throughout the about $1 million. ocean transport sector and has revolu- Need for container port productivity tionized the way intermodal traffic is improvements — Arecent study con- handled. IT systems electronically link cludes that "the economics of containerport administration, terminal operators, ship operation are critically dependent truckers, customs, freight forwarders, on port productivity . . . (and) continued ship agents and other members of the general worldwide improvements in port community (see Box 12). The tech- port productivity will so fundamentally nology provides port users with real time data on the status of cargo, paper- alter the container shipping cost envi- work and availability of port facilities, ronment that, in the absence of any tech- and enables ships and terminals to be nological constraint, ship size optimums part of an integrated office infrastruc- for all routes will continue to increase as ture. IT reduces time for delivering they have done in the past (see Box 11). cargo, provides more accurate transfer A typical container terminal today has a and recording of information, reduces density of 100 to 500 TEU per acre manpower to prepare paperwork (depending on the yard stacking system involving port use and operation, offers in use), crane productivity of 25-30 gross advance information on ship, barge, moves per gantry crane hour, average truck, wagon, container and cargo container dwell time of five to six days movements, improves planning and and truck turnaround of one hour. But coordination of berths, handling equip- future terminal requirements will be ment, storage facilities, etc. (see Box 13). considerably more demanding. In order Ports unable or unwilling to keep pace to accommodate the mega container- with information technology will be left ships coming into service, new terminals behind in the competitive ocean trans- will require a density of 1000 to 2000 port market. TEU per acre, crane productivity of 200 moves per ship-hour at berth, maximum

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Box 10

Future Containerships Will Require Increasingly Larger Container Cranes

Panamax — A typical Panamax containership is about 290 meters long and has 13 meters draft. The ship is limited in breadth to 32.2 meters to allow passage through the Panama Canal. This breadth limitation constrains the number of rows to 13 containers. Up to 4800 TEU can be carried in these vessels. The outreach of the crane must be capable of spanning 13 rows of containers stacked 14 to 15 high.

Post-Panamax — These ships are too wide to transit the Panama Canal. The first post-Panamax ships delivered in the late 1980s carried 4300 TEU. Recent ships entering service for Maersk and P&O are designed to carry 6000 to 7000 TEU. The new post-Panamax vessels are almost 43 meters wide and are capable of handling 16 to 17 rows of containers on deck. Draft is 13.5 to 14 meters. The container crane must be capable of spanning 17 rows of containers stacked 15 to 16 high.

Super post-Panamax — Designs are available for containerships able to carry 9000 TEU and it is widely expected that orders for such vessels will be placed in the near future. The width of these vessels will be 44 to 46 meters and the draft will be about 14 meters. They will accommodate 18 rows of containers on deck, 16 below deck. The crane required to handle the containers on this vessel will be a massive structure capable of spanning 18 rows stacked 16 to 17 high.

Mega-containerships — There are concept designs for containerships able to handle 15000 TEU (or greater). The massive vessels would be about 400 meters long and almost 70 meters wide. These dimensions are substantially greater than the largest crude carriers now being built, which till now have defined the limits of commercial vessel size. Some concepts call for accommodating 28 rows of containers on deck. To handle the containers, it will likely be necessary to utilize a different type of container crane and special berthing basin for the vessel.

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Box 11

Impact of Port Productivity of Unit Voyage Cost of Large Containerships

A recent study of economies of scale in large containerships gives an indication of the unit cost benefits that can be obtained by use of increasingly larger containerships — and the benefits that can be achieved by increased cargo handling productivity that reduces port time. The study prepared by K. Cullinane and M. Khanna and published in the Journal of Transport Economics and Policy models the impact of using containerships with nominal capacity to 8000 TEU, assuming current cargo handling rates and rates that would be 100 percent higher.

Declining Unit Cost With Larger Ships Total Voyage Cost Per TEU as a Function To the right is a chart taken from the study of Ship Capacity and Route Distance (assuming current cargo handling productivity) that shows the relationship between voy- 1,200 age cost per TEU, ship capacity and route distance on three major linehaul routes. 1,000 Unit cost declines at a decreasing rate as Europe–Far East -- 11,500 miles ship capacity increases. In deriving these unit costs, the authors assume that port 800 time for various size ships reflects current Trans Pacific -- 8,000 miles cargo handling productivity, which in turn 600

is a function of the number of cranes Trans Atlantic -- 4,000 miles assigned to a ship and the handling rate 400

per crane. Based on a questionnaire by the TEU in $US Per yage Costs Vo authors, current practice is to typically 200 employ one to two cranes on ships under 1000 TEU capacity, three to four cranes on 0 ships 3000 to 4000 TEU capacity and five 1000 2000 3000 4000 5000 6000 7000 8000 cranes on ships of 6000 TEU capacity. Capacity in TEU Crane productivity under current practices Source: K. Cullinane and M. Khanna, "Economies of Scale in Large Containerships," Journal of Transport is assumed to average about 22 moves per Economics and Policy, Vol. 33, p. 201 hour. On this basis, five cranes working a 6000 TEU containership can load and discharge 2000 20 ft. boxes and 2000 40 ft. Impact of Increasing Port Productivity on Voyage Cost Per TEU boxes at a rate of 110 moves per hour, and 300 the ship can be fully discharged and loaded Cost per TEU at Current Port Productivity Cost per TEU Assuming Port in 72 hours. Productivity Doubles 250 Increasing Port Productivity 200 The authors then examine the sensitivity of reducing port time through increased cargo handling rates. They show that a 150 cargo handling rate double that of the current rate will significantly reduce the unit 100 yage Cost Per TEU in $US Per yage Cost

cost, as the ship will be able to carry more Vo containers in a given time period. For 50 example, doubling the cargo handling rate will reduce the unit cost of a 6000 TEU ship 0 from $114 to $91 per TEU on a trans- TA TP E-ATA TP E-A TA TP E-A

Atlantic voyage. The unit cost of a similar 4,000 TEU Ship 6,000 TEU Ship 8,000 TEU Ship ship on a trans-Pacific voyage would drop Source: K. Cullinane and M. Khanna, "Economies of Scale in Large Containerships," Journal of Transport from $182 to $159 per TEU and on a Economics and Policy, Vol. 33, p. 202 Europe-Far East voyage from $242 to $218.

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Port requirements for large cruise was only one ship of that size. Today ships — The cruise industry is produc- there are 32 mega-ships serving the ing requirements for more ports and Caribbean and Mexican Riviera market enhanced facilities in existing ports to and there are at least 22 more on order. accommodate the growing number and These ships are typically 260 to 280 size of cruise ships. This industry has meters long, some as long as 310 meters, and require infrastructure and port serv- had tremendous growth over the past ices capable of receiving large numbers ten years. Particularly significant is the of tourists. growth in number of mega-cruise ships, i.e., those over 70,000 and up to 140,000 With the growth in numbers of ships, gross tons that carry 2,000 to 3,000 pas- the cruise lines need more ports in order sengers or more. Prior to 1988, there to vary their itinerary. In selecting a Box 12

Control • Terminal access • Port entry & exit • Equipment usage reports • Equipment location • Vessel quality assurance Planning SchedulingControl • Capital projects pipeline • Ship arrivals • Facility maintenance • Berth occupancy • Project status/variance • Tug & pilot requirements reports • Water & utilities • Bunkering service

Engineering Cargo Bookings • M&R requirements • Carrier inquiry • Equipment records • Booking confirmation • Bill of lading

PORT USER INFORMATION Security NETWORK Cargo Bookings • Advance manifest & loading list • Perimeter control • Customs documentation • Area access authorization • Entry approval • Crew health certification • Ship records

Safety Intermodal

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

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Box 13

Felixstowe Cargo Processing System

The port of Felixstowe handles container throughput of more than 2.5 million TEU and has installed a sophisticated information technology system to electronically link members of the port community. The system, managed by Maritime Cargo Processing, covers more than 70 percent of containers passing through British ports and over the past year handled 32.5 million transactions and 22.5 million electronic data interchange messages. It is an interactive Microsoft-based system with more than 700 uses.

The system provides electronically: Customs declarations for exports

• manifests and associated amendments • ship planning notifications and amendments

• Customs release notes • hazardous goods reporting

• bonded removal documents Port operator benefits include: • ship’s out-turn/discharge reports and amendments • information for pre-planning physical operations • local transshipment documentation • single gateway via FCPS to port users’ systems

• lines’ commercial release • automatic writing-off of manifest/Customs’ entries

• acceptance of rent/storage charges • paperless releasing of import cargo • paperless notification of Customs’ status • delivery instructions to transport operators (road/rail) • paperless transshipment notification/approval

• export delivery advice • paperless export load lists • enhanced facilities for late runners • export arrivals • EDI DG notifications • export loadlist • EDI status messages to customers • loading reports • local messaging facility • export Customs declarations • full audit facilities • Customs examination/sealing requirements According to the system operator, plans call for expand- • port health, Customs preventive and other governing FCPS within five years to a global internet based real ment departments’ activities time system.

• requests to out-turn in sheds/warehouses

• shed/warehouse out-turn reports and amendments

cruise port, cruise ship operators look at: 4) existence of head taxes; and 5) physi- 1) location of the port and cruising dis- cal capabilities of the port to accept their tance relative to other ports on a particu- ships (see Box 14). The challenge for lar itinerary; 2) "marquee" value and ports wanting to be cruise destinations activities available for passengers; is to develop a strategy jointly with 3) visitor safety and comfort; tourism officials to maintain tourism

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product quality and maximize visitor here remains what guarantees a port has spending. For ports able to satisfy if the cruise operator stops his calls cruise operator needs, there is a possibil- before the end of the agreed period. ity that the operator may be willing to Such an agreement could be the basis establish long-term agreements to bring for arranging financing by a developer to acquire the physical facilities and its ships to the port on a regular basis services in the port needed to accommo- for periods up to 25 years. The key issue date cruise ships. Box 14 Other technology impacting port services — Introduction of podded drive Physical Requirements to Accept propulsion systems has the potential to Cruise Ships reduce requirements for harbor tug services in port. These high power The handling of massive cruise ships with large numbers of passengers in a very short turnaround time is a azimuthing systems significantly huge logistics problem. The newer cruise ships enter- improve maneuverability of a ship, ing the market today are vessels with capacities of potentially eliminating the need for tug 2,000 to 3,500 passengers. Cruise ships spend an aver- assist services for berthing. While pod- age of 7 to 9 hours in port, during which passengers debark and embark and various services are provided ded drive to date has largely been limit- to the vessel. The combination of large ships and ed to cruise ship and ferry propulsion, demand for quick turnaround places significant strain there are indications that use of the tech- on port facilities and services. According to Gee & Jenson, a designer of cruise facilities, to accept mod- nology may spread to other types of ern cruise ships a port must be able to provide: ships, particularly where maneuverabili- • minimum 500 ft. entrance channel width, 34 ft. ty is especially important (see Box 15). navigational depth, 32 ft. berth depth, 500 ft. Self-unloading bulk carriers have been service apron length, 50 ft. apron width, 50 to 100 very popular on the U.S. Great Lakes ton design load range for bollards, cleats and dol- phins, and 1300-1500 ft. minimum turning basin and their use is spreading to other diameter trades. These bulk carriers have the • protected passageway between ship and termi- capability to discharge without use of nal capable of embarking all passengers within 2- shoreside equipment, reducing the need 3 hours, disembarking all passengers within 1-2 hours and ability to stay connected to the cruise for special facilities to unload bulk ship over the full tidal range cargo. The need to have large land areas • staging area for three to five 40 ft. containers, to store the bulk cargoes will remain. adequate bus and taxi queues to support passenger embarkation/debarkation, facilities to collect and dispose of waste, potable water and other Shifting Bargaining Power services to support the ship in port Bargaining power results from the rela- Cruise ships are a $300 to 500 million capital invest- tive strength of the parties involved in a ment. Their successful operation is highly dependent negotiation. The stronger the bargain- on maintaining a tight schedule with no disruptions. A standard in the industry is that cruise ships can ing power, the more likely the party will never be denied or have access delayed to and from a get the greater gain in a transaction. In berth. This is a very real challenge that ports wanting the port sector, the major parties to a to be cruise ship destinations must have as an objective. negotiation are port users and port service providers. Events taking place are

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Box 15 Adding to this situation is the growing role of global logistics service providers Podded Electric Drive Can Impact who have considerable strength in deal- Requirements for Ship Assist in Port ing with both shipping companies and Podded electric drive is a recent technology that uti- terminal operators. Finally, there is the lizes a sealed "pod" encapsulating an electric motor unmistakable trend for carriers to wish directly coupled to a propeller. Electricity from the ship’s power plant to the fully submerged watertight to own and manage their own port and pod is provided via cable. The pod is steerable and inland terminals. These changes are cre- provides side as well as fore and aft thrust. Use of the ating a shifting playing field on which pod eliminates the requirement for a rudder, shaft and stern thruster — and frees up space inside the ship negotiations will take place among port that would be otherwise occupied by a conventional users and port service providers. propulsion engine. Consolidation among ocean carriers — Currently, the technology is largely limited to cruise ship and large ferry propulsion. However, a recent sur- Over the past decade there has been vey of shipowners and shipbuilders indicated that pod- substantial consolidation in the ocean ded electric drive has potential use in a variety of ship shipping sector (see Box 16 and Box 17). types. Generally, the results indicate that the technology has greatest possibility on ships where (1) maneu- While this has been occurring in all sec- verability is especially important, (2) space and/or tors of the industry, it is most apparent weight savings have substantial value, and/or (3) cur- in container shipping where it is esti- rent propulsion systems interfere with efficient layout. mated that 25 carriers now control 60 Impact of Podded Electric Drive on Port Services and percent of container fleet capacity. This Infrastructure –Because the ship is more maneuver- sector has witnessed a significant num- able, tug assist in harbors may not be necessary, which could impact future requirements for harbor tug serv- ber of major mergers and acquisitions ices. In addition, the sideways thrust of podded drive over the past ten years, a trend that could affect the underwater structure of piers during appears to have room to run. vessel docking and undocking, and accepting vessels with this propulsion device may require some beefing up of the berth. The consolidation movement in the container shipping sector began with slot reshaping the relative strength of each of sharing arrangements, where carriers these parties. On the one hand, consoli- purchased slots in other carriers’ ships dation now occurring among ocean car- to provide service flexibility and more riers is producing increasingly stronger, extensive geographical coverage. This more formidable customers that port expanded into multi-trade alliances authorities, terminal operators and other among carriers that focused on achiev- port service providers must contend ing efficiencies and better service by with in pricing and service negotiations. sharing vessels, utilizing common termi- On the other hand, a relatively small nals, joint feeder service, joint purchase number of companies have been acquir- of containers, etc. The current activity in ing terminals in ports in all areas of the mergers and acquisitions is a third step world, creating terminal operators with in this pattern of cooperation. It simply global coverage that have financial takes the alliance concept to its ultimate depth and negotiating strength to with- stage — full ownership and control stand demands of terminal users. under one corporate umbrella.

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The three largest container carriers illus- Evergreen, a Taiwan-based company trate the patterns of growth in the con- that traces its origins to 1968, illustrates tainer shipping sector. Maersk Sealand, growth primarily through internal by far the largest player in container expansion (although the company did shipping with almost 250 ships and acquire Lloyd Triestino). Evergreen is 550,000 TEU capacity at the end of 1999, now the second largest player in the illustrates a progression from global container shipping sector, with more alliance to single corporate ownership. than 130 ships and 310,000 TEU capaci- Until 1990 both Maersk and SeaLand ty. The third largest player, P&O operated as separate entities, each a Nedlloyd, results from a 1996 merger major player in its own right. In 1991 between P&O Containers and Nedlloyd. they formed a global alliance to improve The company operates about 120 ships service and generate operating efficien- with about 270,000 TEU capacity. cies. Continuing the progression, in Interestingly, the combined company is mid-1999 Maersk purchased the ocean not a natural progression from an transport assets of SeaLand for $800 mil- alliance. Prior to the merger the two lion. The combined company is almost companies were members of different twice the size of its nearest competitor. alliances, with P&O a member of the Box 16

Top 20 Container Carriers (as of September 1999)

Maersk Sealand Evergreen P&O Nedlloyd MSC Hanjin NOL/APL Cosco NYK Mitsui Zim Israel CP CMA/CGM Hyundai Yangming OOCL K Line Hapag Lloyd UASC China Shipping Sud Americana

250 200 150 100 50 0 100 200 300 400 500 600 No. of Ships TEU in Thousands

Source: Containerization International, November 1999.

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Box 17

PacMan in the Ocean Shipping Sector

A substantial number of mergers and acquisitions among ocean carriers have taken place over the past several years, realigning the competitive landscape. Some of the more important recent consolidations are summarized below.

Container Carriers

At least a half dozen major mergers or acquisitions have taken place among ocean container carriers since the mid- 1990s, concentrating control of capacity in the container sector among fewer and fewer companies. • Maersk/SeaLand — In mid-1999 Maersk announced it was acquiring the ocean shipping division of SeaLand. This $800 million purchase was a natural progression of an alliance between the two companies that began in 1991. The consolidated group now operates about 250 ships on 35 liner services, covering virtually every corner of the globe. In terms of container fleet capacity, it is almost twice the size of Evergreen, its nearest rival. This was the second acquisition by Maersk in 1999. Earlier in the year, Maersk acquired Safmarine for $240 million to expand its presence in the north/south trades. • P&O/Nedlloyd — In September 1996 P&O Containers announced its merger with Nedlloyd to form one of the largest container lines in the world. The combined company would operate 112 containerships and have a combined turnover of nearly US$4 billion. Subsequently, in February 1998 P&O Nedlloyd purchased Blue Star Line for $100 million to strengthen its position in the Australian trade. The company is the third largest container carrier (after Evergreen) in terms of TEU capacity. • Hanjin/DSR-Senator — In early 1997 Hanjin Shipping bought a controlling stake in DSR-Senator, creating a combined company with 80 ships totaling 200,000 TEU capacity. This company is now the fifth largest container carrier in terms of TEU capacity, following fourth place Mediterranean shipping. The consolidation was a logical progression to a global alliance that the two companies participated in since 1996. • NOL/APL — In late 1997 Neptune Orient Lines announced its acquisition of American President Lines for $825 million, creating a merged company with 76 containerships with a capacity of 200,000 TEU. NOL/APL is now the sixth largest container carrier. • CP Ships — Over the past five years the company has acquired five companies to raise its presence in the container sector to 11th position in terms of TEU capacity. Until 1995 CP Ships was a niche player on the St. Lawrence Seaway/Northern Europe trade route. CP’s role began to expand in March 1995 when the company acquired CAST, a competitor on this route. Then in 1997 CP acquired both Lykes Line and Contship Container Lines, and in 1999 created a joint venture with TMM to gain more powerful presence in the Latin American trades. The company now controls about 133,000 TEU capacity. • CMA/CGM — In 1996, the French containership carrier CMA acquired the state owned CGM, creating a company that now is the 12th largest container carrier with capacity of 127,000 TEU.

Other Shipping Segments

While a pattern of consolidation has been most obvious in the containerized segment, M&A activity has been occurring in all segments of the business. For example, • Car carriers — In 1999, two major players in this specialist trade,Wallenius and Wilhelmsen, created a joint venture company to assume control of their complement of car carriers and ro/ro ships. The resulting company controls 80 ships and has $1.4 billion in annual sales. In another deal, Leif Hoegh has recently taken full control HUAL, the sixth largest car carrier, by purchasing the 50 percent share owned by Ugland. • Cruise shipping — This sector has been consolidating over the past decade and four companies now control more than 60 percent of the world cruise shipping capacity. The largest player in this sector, Carnival Corporation, has acquired five cruise companies since 1989. • Tanker and bulk shipping — A number of mergers have recently occurred in this sector. One of the largest is the merger in 1999 between MOL and Navix, creating the world’s largest shipping company with a mixed complement of 422 ships. Another merger in 1999 was the $450 million acquisition of Bona Shipholding by Teekay Shipping, creating a company that operates 81 Aframax tankers.

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Grand Alliance, Nedlloyd part of the Emergence of global terminal Global Alliance. Their merger effective- operators — The past decade has seen ly resulted in a complete re-modeling of the emergence of terminal operators both the Grand Alliance and the Global who have established regional or world- Alliance. wide presence. Like companies in other sectors, they see business opportunities Looking forward, many expect consoli- in a period of globalization and have dation among ocean shipping compa- been capitalizing on the trend toward nies to continue. There certainly appear privatizing port facilities. According to to be more economies of scale and scope a database maintained by the World to be realized in the container shipping Bank, 62 transactions involving privati- sector and further consolidation among zation of container terminals took place container carriers can be expected. between 1990 and 1998. Many of these Consolidation will also likely occur in transactions involved a relatively small other sectors of the shipping industry, number of players. continuing a trend that has been obvious over the past several years. The Among the principal international ter- result will be more powerful companies minal operators are Hutchison Port with whom ports and port service Holdings, Maersk Sealand, P&O Ports, providers must contend. Sea-Land Terminals, ICTSI, PSA

Box 18

Key Milestones of Hutchison Port Holdings in the 1990s

1998 Acquires Thamesport Containerport 16 and Harwich 1996 Int'l Port Concession 1999 to Operate Acquires 35% Terminals in Interest in Cristobal and ECT Balboa 12 1997 1994 JV to Develop Acquires Container Midstream Terminal in Holdings Jakarta in HK 1995 JV for 8 1992 Freeport JV s for 2 River Container and a Coastal Port Container Terminal in China 1993 JVs for 4 Container 1991 Terminals in Acquires Yantian and Port of Shanghai

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

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Corporation, Dubai Ports Authority, part of the merger transaction. The Stevedoring Services of America and company continues to operate termi- BLG-Eurokai. These terminal operators nals in the U.S., Hong Kong, China, now account for about 40 percent of the Australia, Russia, Finland and the world’s annual container liftings. Dominican Republic.

•Hutchison Port Holdings launched • ICTSI, based in Manila, operates ter- its global expansion in 1991, utilizing minals in the Philippines, Pakistan, the experience and capabilities it Argentina, Saudi Arabia and Mexico. developed operating container termi- Recently it entered a joint venture to nals in Hong Kong. It now operates manage a terminal in Thailand and container terminals in more than 17 signed a concession contract to man- ports and handles more than 14 mil- age and operate the Dar-es-Salaam lion TEU annually (see Box 18). container terminal. In 1999 the company handled about 2.2 million TEU. • Maersk Sealand now manages 32 terminals worldwide and is involved in • PSA Corporation in the mid-1990s 36 other terminals, most of which embarked on a major effort to devel- conveyed with the acquisition of op international presence in port SeaLand. Algeciras is generally seen operations, utilizing its experience in as the prototype of a modern Maersk Singapore. PSA now operates termi- Sealand terminal that has been nals in Singapore, Yemen, Portugal, designed to play the role of a global China, Italy, India and Brunei. In or at least a regional hub. One of the 1999 PSA handled about 18 million company’s most impressive invest- TEU, 2 million of which was from ments has been the new transship- foreign ventures. The Corporation’s ment terminal in Salalah, which is a mission statement explicitly men- joint venture with the government of tions that PSA over the next ten Oman. years aims to operate a string of ports overseas, handling some 10 • P&O Ports, based in Australia, man- million TEUs and managing up to a ages more than 20 ports worldwide third of its port, logistics and related and handles about 6 million TEU business overseas. annually. The company recently acquired International Terminal • Dubai Ports Authority has joined the Operating Company, giving it an global container terminal race and extensive terminal operating pres- has recently set up a new company ence on the U.S. Atlantic and Gulf to seek out overseas port operating Coasts. contracts. DPA now operates terminals in Beirut, Jeddah and Djibouti, •Sea-Land Terminals remains a major as well as its base facilities in Jebel player in container terminal opera- Ali and Port Rashid. tion, despite the transfer of shipping and terminal operations to Maersk as • SSA, based in Seattle, has for more

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than 50 years been involved in cargo in 1998. With this type of profit poten- handling in U.S. ports. Building on tial, further expansion of current players this experience, the company has can be expected and it should be no sur- expanded globally and now operates prise to see some new players come into terminals in Panama, Vietnam, South the sector. But the market is maturing Africa, India, Indonesia and Mexico and some caution is required. The oper- and plans new ones in Egypt and ating margins are becoming slimmer as Bangladesh. governments look for greater financial returns; many of the attractive terminals • BLG-Eurokai, a German stevedoring have already been privatized; and, final- company handling about 3 million ly, there are more parties competing for TEU annually, has gained interna- privatization projects such as carriers tional presence by acquiring stakes and global terminal operators in addi- in terminals in Portugal and Italy, tion to local operators. including the Medcenter Container Terminal at Gioia Tauro, and pro- Some consolidation is already occurring vides technical support for a new among the players now in the terminal container terminal in Sepetiba operating business. As a result of the (Brazil). Maersk Sealand merger, the terminals of each company have been placed under In addition, other shipping companies the combined company. P&O Ports has have developed container terminals in recently acquired International Terminal various parts of the world to support Operating Co., one of the largest steve- their shipping operations. Evergreen doring companies on the U.S. Atlantic operates terminals in Taiwan, Panama, and Gulf Coasts. Bremerhaven based U.S., Italy and Vietnam. Cosco operates BLG has recently merged with Hamburg terminals in Hong Kong (in JV with based Eurokai to form BLG-Eurokai. It HPH), China and Italy. NOL/APL has would not be surprising to see further terminals in the U.S., Pakistan, Vietnam mergers in this sector, perhaps involving and Japan. some of the largest players.

There are many indications that the Potential emergence of other global port trend toward global terminal operation, service suppliers — While much interna- like the trend toward consolidation in tional activity has been taking place the shipping sector, has much room to involving container terminal conces- run. This activity appears to be quite sions, global players could emerge as a profitable. In 1998 Hutchison Port major force in providing other port serv- Holdings generated an operating profit ices as well. Harbor tug services have of HK$3.9 billion on turnover of HK$9.4 already attracted global players and billion, an operating margin of 41 per- other areas that could attract global or cent. Ports and related services account- regional players are pilotage service, ed for 18 percent of total Hutchison provision and maintenance of port infor- Whampoa turnover, but 30 percent of mation networks, maintenance dredg- the parent organization operating profit ing, etc.

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Emergence of global logistics service Box 19 providers — Contributing to the realignment in bargaining power is the emer- Ten Largest Global Logistics gence of companies who offer full serv- Service Providers ice logistics solutions to major shippers. These logistics service providers have Company Revenue 1998 Employees US$ Billion substantial strength in dealing with GEODIS 10.500 23.000 shipping companies, terminal operators Schenker 10.500 16.000 and other port service suppliers, adding TNT Post Group 7.350 30.000 to the growing complexity in achieving Deutsche Bahn Cargo 7.080 46.000 a balance in port service negotiations. NFC/Exel 6.900 32.000 Kühne & Nagel 6.250 12.000 They make decisions that impact all par- Danzas 5.900 16.000 ties involved in the supply chain, Maersk Moeller 5.800 N.A. including port service providers. Panalpina 5.090 10.500 Logistics service providers manage the Deutsche Post Fracht 4.800 30.000 combined logistics requirements of many large shippers they represent, giv- and MISC) notified the port of ing them considerable strength in deal- Rotterdam that for operational reasons it ing with shipping companies, terminal was temporarily switching one of its operators and others in the logistics five Europe/Asia services to the rival channel. In response to market demand, port of Antwerp. This service represent- some substantial players have targeted ed 125,000 TEU per year to the port. It this activity, including Federal Express, may only be coincidental, but a month who recently announced that it would later the Rotterdam municipal council enter the global logistics market for decided not to increase harbor dues for ocean freight (see Box 19). the year 2000, citing growing competition between ports in general and tariff These developments are changing the developments in directly competing way port services are bought and ports in particular. sold — Alliances and consolidation among carriers result in their having At the same time, the emergence of more business volume on the negotiat- global terminal operators can result in ing table, placing ports and terminal pricing schemes that may not always operators in an increasingly awkward favor the small volume or regional carri- position when it comes to negotiating er. These global terminal operators may strength. In some situations, the stakes be willing to offer incentives to high vol- are so high that the port and/or termi- ume customers and there is at least the nal can hardly afford to lose the carrier’s possibility that the terminal operator business. This can often result in the could cross-subsidize international oper- port having to make concessions to ations as necessary to compete for a retain the traffic (see Box 20). Recently, major carrier’s business. Another possibility is that a truly global terminal for example, the Grand Alliance (P&O operator could offer a package deal to a Nedlloyd, Hapag Lloyd, NYK, OOCL

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carrier that would provide a lower price ing, staging and storing containers are or give concessions if the carrier uses increasingly shifting inland, thereby only its terminals wherever available in becoming more de-centralized. These the world. developments are creating a hierarchy of ports and changing traditional port Changing Distribution Patterns operations.

As containerization has spread in ocean Hub and spoke distribution — Ocean shipping, distribution patterns have carriers have been increasingly utilizing increasingly evolved into hub and spoke regional hubs for transshipment of con- network. Facilities for devanning, clear- tainers. This is a worldwide trend that Box 20

How a Major Port User Obtained $600 Million in Concessions from the Port of New York and New Jersey

In 1998-99 the Maersk-SeaLand alliance (now a single company) had a highly publicized negotiation with major North American ports to determine which port would become the future U.S. East Coast hub for the shipping alliance.

The Threat to Take Their Business Elsewhere

The Maersk-SeaLand alliance in 1998 gave notice to the Port Authority of New York and New Jersey that it was considering leaving the port when its lease expired in 2000. Seven ports on the East Coast, including New York, were long listed as prospective super hubs for the alliance’s future linehaul traffic. By December 1998 this list was reduced to three finalists (New York/New Jersey, Baltimore and Halifax).

High Stakes Competition

This was a very high stakes competition that New York/New Jersey needed to win. Losing the alliance’s business would have major implications for the port and local community in New York and New Jersey. The Maersk-SeaLand alliance represented 20 percent of the container volume moving through New York/New Jersey and it was estimated that future traffic generated by the alliance through the hub would provide as many as 3,000 permanent jobs. Political action in both states to win this competition was intensive.

The Final Deal

Ultimately, the alliance selected the port of New York/New Jersey as its future hub. But winning the competition was a very expensive proposition. The two states offered to make $450 million in improvements in the port — and then New Jersey sweetened the deal by offering an additional $100 million to pay for dredging costs and another $20 million for infrastructure improvements.

Implications for Future Port/Carrier Negotiations

This deal has implications for other ports in future negotiations with large shipping companies. At a speech before a port industry group, an official of the Port Authority of New York/New Jersey said the Maersk Sealand negotiation was "the quintessential example of the application of the increased power available to a consolidation of liner companies." The executive director of the port of Baltimore observed that "as we move forward, the big carriers are getting bigger and even the small are getting bigger through vessel sharing agreements (and) it’s very troubling for all the ports. An industry consultant observed that this was "a classic case of port negotiation 101 (and) they have shown the shipping industry what to do to get the best deal from port authorities."

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is accelerating as larger containerships ports to reckon with depths in excess of come into service and the advantages of 16 meters in the not unlikely event con- hub and spoke operation become more tainer vessels in excess of 10,000 TEU apparent. The hub and spoke concept is would be ordered in future. intended to maximize utilization of large containerships while providing market A transshipment hub should have termi- coverage to a maximum number of nal facilities that enable quick ship turn- ports. This is accomplished via a net- arounds. This includes adequate num- work of regional and sub-regional hubs bers of cranes, sufficient container han- with onward service to outlying loca- dling/storage areas and first rate com- tions. Large linehaul ships, often with puter system to run the entire terminal. As discussed in an earlier section, con- 4000+ TEU capacity, provide service tainer cranes capable of spanning at between regional hubs. Progressively least 18 rows and 6 tiers of containers on smaller ships are used to pick up and deck will be required to handle the distribute containers within the region 8,000+ TEU ships now being built. (see Box 21). There is already a demand from carriers Becoming a hub — The most important to install ship-to-shore container cranes attribute carriers look for is the strategic with a capability to handle 22 rows of location of the hub relative to primary containers across. Capability should be origins and final destinations of contain- provided to berth one or more feeder- er traffic. Beyond location, other attrib- ships front or rear of the mother ship utes include the ability to safely accept along the same quay — requiring quay large ships, extent of terminal facilities, lengths of typically some 1,000 meters for a terminal designed to receive two efficiency of container handling opera- main-line vessels and their feeder ves- tions, availability of frequent feeder sels — and container yard depth behind services with an appropriate geographi- the quay should be not less than 400 to cal coverage and attractive cargo-han- 500 meters. The latter factor much dling charges. Most carriers believe 15 depends on the container dwell time, meters depth is adequate to accept the the selected stacking and recovery sys- largest containerships in service in the tem, and the stacking rules among many foreseeable future, although some carri- others. ers have recently specified 16 meters depth for entrance channels. Container handling productivity is of Containership draft has not been obvious importance to a carrier in select- increasing in proportion to the growth ing the transshipment hub. Carriers of TEU capacity, with most of the capac- measure productivity in terms of how ity growth in post-Panamax ships the long it takes to turn around the ship — result of increasing the width of the i.e., enter port, discharge containers, ship. A depth of 15 meters should load containers, leave port. Much of accommodate all but the largest contain- this is dependent on the availability of erships now in the concept stage. It is adequate facilities and suitable systems nevertheless indicated for potential hub and the absence of administrative

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Box 21

Hub and Spoke Container Distribution

Global distribution of containers is increasingly accomplished via a network of regional and local hubs with onward service to outlying locations. Utilizing a transshipment hub, a carrier can (1) service marginal markets that do not justify direct call with large linehaul ships, (2) interchange containers between liner strings at strategic crossing points and (3) realize economies from improved port asset utilization. All of these advantages ultimately result in greater profit to the ocean carrier.

Hierarchy of Ports to Maximize System Efficiency

The hub and spoke network involves a hierarchy of ports, some of which serve as regional or local hubs connected by feeder loops to outlying ports. Large linehaul ships, often with 4000+ TEU capacity, are utilized to provide service between regional hubs and progressively smaller ships (or barges) are used to pick up and distribute containers within the region.

Mega-Containerships Drive Need for Regional Hubs

Linehaul ships of 4000+ TEU are now common, 6000+ TEU ships have already been introduced on major routes, 8000+ TEU ships are being built and 10,000+ TEU ships are under consideration. The bigger the ship, the more time needed in port for loading and discharge. Assuming a handling rate of 165 TEU per hour, each capacity increment of 1000 TEU requires an additional half day in port to load and discharge containers on the round trip voyage. To offset this additional port time, the operator has the choice of (1) increasing the service speed of the ship, (2) adding another ship to the service string, (3) offering less frequent service, or (4) reducing the number of port calls. Mega-containerships are now being designed with service speeds of 24 to 26 knots; higher speeds for the largest size ships are economically impractical. The capital cost of an additional containership is $80 to 100 million, which makes adding a ship to the string an expensive proposition. Customers now expect same day of the week sailing, ruling out reduced service frequency. This leaves minimizing the number of port calls as the viable option, which then creates the need for regional hubs and feeder loops. Essentially, the operator offsets the additional time to load and unload containers by reducing the number of ports the ship enters and leaves.

Future Role of Multi-porting

While hub and spoke networks are producing a hierarchy of ports with associated mainline and feeder service, there is a countervailing development of increasing multi-port routes with direct port-to-port connections. For example, the increasing use of load centers in the Mediterranean has led to an increase in the number of routes having the Mediterranean as an end region, rather than a region connected by passing routes. A next step that can be expected is that these new routes will lead to more ports of call in the Mediterranean.

barriers. However, the capability to pro- hub. This in turn requires a flow of traf- vide trained personnel on a seven-day fic that will make it attractive for com- week, 24 hour per day basis to operate mon carriers to serve the hub. In effect, cranes, position containers, handle doc- there is a chicken and egg situation. For umen-tation, etc. has a major influence the hub to be attractive to linehaul carri- over the productivity of the terminal. ers there must be an established net- And, ultimately productivity determines work of common feeder service that can the cost of utilizing the hub. be utilized to pick up and distribute containers. For feeder service compa- It is essential to have adequate feeder nies to call regularly at the hub, there services to and from the transshipment must be at least one and preferably sev-

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eral major linehaul carriers whose con- 22). In such a situation, a carrier who tainers need to be picked up and distrib- represents a significant portion of the uted. terminal’s business can assert considerable pressure on the terminal owner Benefits of hub status — The most obvi- and/or port to increase the service level ous benefit is the income generated from offered and at the same time reduce operations of a transshipment hub charges and make concessions by threat- because of the double-handling of con- ening to vacate the hub. The owner of tainers. Consequently, container the facility would be faced with the throughput in hub ports can be greatly dilemma of a $100 to 200 million invest- boosted particularly when expressed in ment lying idle if the customer departs. TEUs. More importantly, transshipment This pressure could force the handling hubs provide local importers and rates below the full cost of providing the exporters direct access to linehaul serv- transshipment facility. A long-term ice, reducing transportation time (and commitment from a carrier to utilize the possibly freight rates) to and from over- facility before making major investment seas markets. Reduced transport time would be one way to minimize the pos- directly impacts the competitiveness of sibility of hub hopping, although this exporters and the cost of imports, in does not constitute a solid guarantee. turn creating jobs and income throughout the economy. Many developing Another and possibly better way to countries have created free trade zones retain hub traffic is to involve one or in combination with the hub port as several carriers in the equity structure of engines for economic growth. Jebel Ali the new facility. illustrates how a hub port in conjunction Another consideration is that there are with an associated free trade zone can fewer terminal services on which to create significant economic activity. The impose charges on transshipment traffic port, which began operating in 1979, than on local traffic and, in general, the now has 67 berths and is serviced by 100 larger the percentage that transshipment shipping lines. About 1,450 companies traffic is to total volume, the smaller the from 85 countries have been attracted to additional revenue potential of the ter- start up operations in the free trade minal. Additionally, ports with a mix- zone. ture of local and transshipment traffic Problems hubs face — Hubs compete in frequently set transshipment charges a highly competitive market segment low to attract “motherships” to the port where customers have options to use in order to improve throughput levels, other facilities and pricing. An issue achieve economies of scale and lower confronting the developer of a trans- handling cost. Service for shipment hub is how to prevent “hub import/export traffic can thereby be hopping” in a situation where the num- improved. A port highly specialized in ber of competing hub facilities is grow- transshipment business is at a distinct ing rapidly and carriers have the ability disadvantage competing with ports that to take their business elsewhere (see Box have a mix of local and transshipment

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Box 22

Hub Options on the Asia/Europe Route

More than two dozen transshipment hubs lie along the linehaul route between Asia and Europe. About half are east of Suez, half west of Suez. This large number of hubs provides plenty of opportunity for “hub hopping.”

Northern Europe — Major container terminal facilities in Northern Europe are located in Rotterdam, Hamburg, Felixstowe, Antwerp e and LeHavre. All five ports are involved in both transshipment and local container traffic. Rotterdam is the largest port in Europe, handling about 6.4 million TEU in 1999, and a boasts regular connections with more than 1,000 ports worldwide. Hamburg, the second largest port, handles about two-thirds the number of containers that Rotterdam handles. Antwerp and Felixstowe are smaller in throughput.

Mediterranean — There are a number of transshipment hubs in the Mediterranean and several more under development. Algeciras serves as a transshipment hub for the Western Mediterranean,West Africa and Northern Europe. It handled about 1.8 million TEU in 1998. Gioia Tauro, Marsaxlokk and Cagliari are trans-shipment hubs in the mid-Mediterranean and Damietta, Limassol, Piraeus and Port Said serve as hubs in the Eastern Mediterranean. Other transshipment hubs are being built or planned, including new container terminals in Sines, Beirut, Ashdod and East Port Said

Arabian Sea/Gulf — UAE ports in Dubai, Khor Fakkan and Fujairah have developed a strong presence in container transshipment. These three ports handled about 3.5 million TEU in 1999, most of which was transshipment traffic. Containers passing through Dubai principally originate or terminate in the Arabian Gulf. Containers through Khor Fakkan and Fujairah are mostly transshipped to/from Pakistan,Western India, Arabian Gulf and East Africa. A three-day diversion from the east/west linehaul route is required to call at ports in the UAE, which has placed them at a disadvantage to the new transshipment hubs in Oman and Yemen.

Indian Ocean/Red Sea — Centrally located along the east/west linehaul route are Colombo, Jeddah, Salalah and Aden. Calls can be made at any of these ports with virtually no diversion from the linehaul route. Colombo is a major transshipment hub for Southern India and handled 1.7 million TEU in 1999. Jeddah is principally an import/export channel for Saudi Arabia, but about ten percent of traffic through Jeddah has traditionally been transshipped to other points in the Red Sea. Both Salalah and Aden are new facilities that have begun operating within the past two years. These new hubs had a combined throughput of about 1.2 million TEU in 1999 and plans call for significant future growth in transshipment traffic, much of which will be attracted from the UAE ports, Colombo and Jeddah.

Asia — At the eastern end of the route are Singapore, Hong Kong, Kaohsiung, Busan, Kobe and Yokohama. Hong Kong lays claim to having the world’s largest overall container volume (16 million TEU in 1999), the majority of which origi- nates in or is destined for China. Singapore, which has the world’s second largest container volume (15.9 million TEU in 1999), is the major transshipment hub for Southeast Asia and the Indian Ocean. Busan is a transshipment hub for containers into and out of Northern China, and Kaohsiung is a transshipment center for Central Asia. Japanese ports such as Yokohama, Kobe,Tokyo and Nagoya are major centers for container activity, but the majority of containers are distributed inland by rail or highway. A variety of other ports such as Manila, Port Klang and Vung Tau function as local hubs for their respective areas.

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business, where revenue from the for- cient oily ballast water reception facili- mer is frequently used to cross-subsidize ties are available at oil loading termi- the latter. This is only acceptable in as nals, ports with ship repair facilities and far as transshipment generates addition- in those ports in which ships have oily al economic value. residues to discharge to shore. To be in position to ratify this convention, states Inland container terminals are shifting need to offer reception facilities for tank activities away from the port — To washings (slops), contaminated ballast maximize intermodal efficiency and free water, oily water from engine room up valuable real estate in the port area, bilges and for residues from fuel oil inland container terminals are increas- purification, particularly heavy fuel oil. ingly displacing activity traditionally Providing such a reception facility performed in the port. While there are entails a significant capital expense that many advantages to inland container produces little, if any, financial return. terminals, from a port’s viewpoint there How to pay for this facility is a major can be serious drawbacks as they divert issue confronting port authorities. economic activity away from the local area and open the possibility of competi- But environmental concerns relating to tion from other ports (see Box 23) ships in port go beyond the issue of oily water discharge. They involve the entire Environmental and Safety Concerns range of environmental issues from water pollution, air pollution, aesthetics, Given the growing concern about pro- noise, etc. Ports increasingly will be tecting the environment, ports are faced with the need to find suitable increasingly faced with the need to solutions for disposing of dredged mate- implement regulations that impact the rials and implement regulations and freedom of port users and to make sig- operating procedures for terminals and nificant investment in environmental anchorages to address these types of and safety facilities. These have limited issues (see Box 24). commercial value and often produce only indirect social payback. How to Issue of sub-standard ships — Despite implement these regulations and/or the fact that many ships have valid cer- finance related facilities is an important tificates issued by their flag states and issue. classification societies, a number of Growing environmental concerns — ships do not comply with international Eliminating oily ballast water discharge standards for safety, pollution preven- from ships is a major environmental tion and shipboard living and working concern. This issue is well recognized conditions recognized in international internationally and provision of ade- conventions. Political and social pres- quate reception facilities in port is sures have been placed on governments required under the IMO MARPOL to implement policies to reduce the Convention 1973/78. Regulation 10/7 amount of sub-standard shipping in and 12 of the pollution convention their waters. At an international level, requires each state to ensure that suffi- the Paris Memorandum of

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Box 23

Duisburg Inland Container Terminals

The first Inland Container Terminals (ICT) appeared along the Rhine during late 1960s. The Rhine, which is the main inland waterway connection in Western Europe, has the largest container traffic in Europe and is for a significant part navigable with containers stacked up to 5 high. The port of Duisburg, which is situated along the Rhine, is the largest inland port of Europe. It serves as a main inland hub for all larger ports from Antwerp to Hamburg. The larger volume, however, goes through the port of Rotterdam. Main terminal facilities in Duisburg at this moment are the DeCeTe (Duisburg Container Terminal) terminals and the Rhein-Ruhr terminal. Currently ECT is building a tri-modal terminal in Duisburg.

As do most of the European river container terminals, Duisburg offers tri-modal facilities, including direct access to rail transport and container stuffing and stripping facilities on the terminal. Rail plays a very important role, especially in the further distribution of cargo from Duisburg to destinations deeper inland in Germany, Eastern and South Eastern Europe.

Currently Duisburg offers a wide range of intermodal services. These include: • Services to and from most of the barge terminals along the Rhine, including those in the port of Rotterdam; • Services to and from the ports of Hamburg, Bremen, Rotterdam and Antwerp by rail; • Services to several destinations in Germany by rail (e.g. Germersheim, Donauwörth, Nürnberg, Augsburg, and München); and • Services to several destinations in Eastern and southeastern Europe by rail (e.g. Northern Italy, Switzerland, Austria, Hungary, the Czech Republic, and the Slovak Republic, Poland, Russia)

The presence of ICT at Duisburg is characteristic of a partial shift of the collection and distribution function away from the seaports. Besides, these terminals help to relieve the seaport areas of potential congestion as they will function as satellites for these seaports.

Within Europe, the Rhine plays a central role in this context. The Rhine area presently consists of some 35 barge terminals for handling boxes. Most of these inland container terminals offer tri-modal facilities. Direct access to rail transport and container stuffing and stripping facilities improve the competitiveness of these ICTs. An important issue in this context is the key role ICTs play in the emerging door-to-door services of a large number of container barge operators desirous of extending their logistics services.

From a seaport’s point of view, inland container terminals attract economic activity away from the port area. Other ports might profit by competing to be the point of entry and exit for the ICTs. Smaller ports may benefit from the tendency of emerging ICTs by effectively competing with the larger ports. This may lead to a certain degree of deconcentration.

At present, the container throughput of these river terminals is rather modest, with about 100,000 TEUs for Duisburg and Strasbourg and about 200,000 TEUs for Germersheim, the three largest terminals.

The impact of inland terminal network development on the concentration pattern in and competitive advantages of seaport areas remains uncertain. The actual tendency (concentration or deconcentration) will primarily be determined by the success of the port authorities and port companies in developing strong functional ties with the nodes in the hinterland network. Also the ability to attract and retain some of the mega-carriers that are active in door-to- door transport logistics will be an important factor. A final important factor is the extent to which the load centres are able to benefit from public-private involvement in decision making on and financing of port infrastructure projects and cross-border hinterland network connections.

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Box 24

How a Major Transshipment Terminal and Pretty Bay Beach Coexist

Malta Freeport illustrates how a container terminal can live in harmony with its neighbors. The terminal is one of the three largest transshipment facilities in the Mediterranean, receiving more than 1,700 ship calls annually. It is situated in the southeast corner of the island, in Marsaxlokk Bay. This area is one of the tourist spots in Malta and maintaining the integrity of environment was a great concern to the terminal developer.

Ten years ago a decision was made to dredge the bay to accommodate deep draft ships calling at the terminal. This entailed removal of about 250,000 m3 of silt from the bay to deepen the channel, turning basin and water depth along the quays. Six valleys drain into Marsaxlokk Bay and vibrocore testing revealed that a few bottom layers contained discrete sand that could be used to create a beach. These layers were located in the middle of the bay where the turning basin was to be created. It was decided that some of the dredged material could be used to improve and expand the beach called Pretty Bay near the terminal site that had eroded due to wave action on the retaining wall of the coastal road. Expanding the beach would prevent waves from hitting the retaining wall, minimizing further erosion, and provide a considerably larger beach area.

To create the beach, about 20,000 m3 of sand dredged from the turning basin was pumped to shore and sprayed. This saved 10 percent in the contract dredging costs, as the alternative was to transport the sand five kilometers outside the harbor to a disposal site. More importantly, the new beach has attracted economic development in the neighboring village of Birzebbuga. New holiday flats have sprung up, a new restaurant has opened and there has been a general increase in tourist activity. The deeper beach also allowed the coastal road to be widened, reducing congestion in the peak tourist periods.

Recognizing its role as a good neighbor, the terminal has instituted strict standards on ships calling at the terminal. The first sign of unsanitary discharge from any ship at the terminal will cause immediate stoppage of cargo handling on the offending ship, followed by investigation of the cause of the incident. Contributing to harmony of beach and terminal is the natural flushing that occurs in the bay, which is self-cleansing as a result of circulation and has remained consistent even after the terminal and breakwater developments.

Understanding (MOU) on Port State inspection norms (as possibly illustrated Control, which came into effect in 1982 by the recent ‘Erika’ disaster). and includes 18 signatory countries, requires each maritime authority to While enforcement of policies to elimi- inspect a total of 25 percent of the indi- nate sub-standard ships has a com- vidual foreign merchant ships entering mendable objective, the enforcement the port state during a year. If ships do practice can impact the competitive not meet a set of standard criteria, port position of individual ports. For exam- states may detain the ships until proper ple, if a situation exists where the strict- measures are taken by the shipowner. ness or accuracy of inspections varies The Paris MOU has led to more than among port states, sub-standard ships 17,000 inspections in ports worldwide. may alter their routes and choose more In 1998 the number of inspections accessible ports of call in a same range. reached 26.5 percent, slightly more than Ports with lax inspection procedures the agreed rate. Since 1995 the number would therefore have an unfair competi- of detentions is showing a decreasing tive advantage. One approach to offset tendency suggesting either a positive this negative competitive impact is to impact of the measures or less rigorous focus on rewarding good behavior,

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rather than penalizing bad behavior. An number of global terminal operators, is example of an innovative approach that creating a small number of powerful rewards good behavior is the Green players that change the way port servic- Award, initiated by the port of es are bought and sold. Distribution Rotterdam (see Box 25). patterns are increasingly evolving into hub and spoke networks, creating win- Impact on Port Operations and ners and losers among ports that Management achieve hub status. All through this is the increasing concern about the envi- Developments taking place in interna- ronment and safety, which impacts the tional logistics, shipping technology, way ports deal with their customer base. industry consolidation and environmental regulations are driving major SECTION 3 changes in the way ports will operate in the 21st century. As the world CHALLENGES AND OPPORTUNITIES economies become more intertwined, ports are being increasingly cast as part- Changes taking place in the port sector ners in assisting customers to compete present difficult challenges to port for business share in the global market. administrators, terminal operators and Technology in the shipping sector, par- other port service providers. But these ticularly relating to containerization and changes also present opportunities for information exchange, is changing at a new ways of doing business and open rapid rate, creating the need for major the door to entry of new players financial commitments to stay ahead of throughout the range of port activities. the technology wave. Mergers and In short, it’s a brand new era for every- acquisitions in the shipping sector, along one involved in the port sector and the with the growth of a relatively small opportunities as well as the challenges Box 25 are substantial. Transferring Port Operations to the The Green Award Initiative Private Sector

The Green Award initiated by the Port of Rotterdam has the objective of stimulating good behavior The traditional closed fraternity of rather than punishing bad behavior, by offering dis- entrenched players with widespread counts on port tariffs for extra clean and extra safe involvement of public entities in owner- ships. Ships and crews meeting standards above the required minimum can apply for a Green Award ship and operation of ports is no longer certificate provided by the Bureau Green Award. acceptable. Port authorities worldwide Certified ships and crews can apply for tariff reduc- are under increasing pressure to turn tions by port service providers. These include the major ports in the Netherlands, Portugal, South over operations in the port to the private Africa and Spain and Sullom Voe in the United sector. They are being forced by com- Kingdom and providers of towage and pilot servic- petitive pressures to step into a landlord es. The reductions amount to up to 7.5 percent of port fees. At present the Green Award is limited to and regulatory role, focusing on admin- tankers and is being expanded to dry bulk carriers. istrative activities that public entities do best.

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The need for change — Traditional ways Mombasa was transferred to a commer- of doing business in ports are being cial terminal operator, outdated equip- challenged worldwide by demands for ment was temporarily replaced, bureau- gains in port efficiency, increased cus- cratic procedures streamlined and pro- tomer responsiveness and lower costs to ductivity of the terminal improved. move cargo through the port. It has More generally, 112 privatizations since been widely demonstrated that use of 1990 involving ports, have generated private sector companies throughout the private investments exceeding $9 billion range of port operations provides an to rehabilitate terminals and renew opportunity to eliminate traditional, superstructure in the ports that were bureaucratic operating procedures and privatized. controls, and modernize facilities and equipment through new financing chan- This is not to say that port privatizations nels. It is also widely accepted that have been without problems. There service providers with operating and have been a number of incidents of pri- administrative experience in other ports vatizations involving ports that have not have the opportunity to transfer this worked out. In Indonesia, the Koja con- experience and bring to a port best prac- tainer terminal under private manage- tices and appropriate modern technolo- ment ran into difficulties and the public gies employed elsewhere. But even port company took back the facilities. more important, by passing the reins of The city of Rostock has demanded port operations from the public to the return of the terminal it contracted to a private sector, privatization offers the private group for operation, citing lack ability to shift the financial burden of of compliance with the original contract. port expansion and development to the Following a dispute with the Port beneficiaries of the expenditures. Authority of Trieste, the commercial terminal operator (Europe Combined Impact of privatizing operations — Terminals - ECT) selected to operate the There are numerous success stories container terminal in the port under a where port authorities have transferred 30-year contract withdrew from the con- to the private sector operations previ- tract after eighteen months. The termi- ously performed by public employees. nal operator awarded the concession to In Buenos Aires, for example, the award operate the container terminal in the of terminal concessions to four compet- port of Rosario is reported to have lost ing companies in 1994 has brought more than $40 million under the con- down handling charges significantly tract as a result of work disputes and through improved labor productivity. has cancelled the contract. . And unfor- After transferring major port facilities to tunately, the success story in Kipevu the private sector between 1995 and was reversed when the commercial ter- 1998, Panama attracted more than $380 minal operator terminated its contract million in investments for moderniza- with the port as a result of breakdown tion and expansion. When management of equipment that the government failed of the Kipevu container terminal in to refurbish or replace.

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Lessons learned from past quantifiable targets for productivity privatizations — Amajor lesson gains and market development. This learned in port privatizations is the need business plan should be accorded signif- for transparency and open competition icant weighting in the selection process. through a structured international ten- Incentives and penalties should be pro- dering process. Many examples can be vided in the contract should there be a given of attempted port privatizations significant deviation from targets in the that have bogged down due to legal business plan. challenges to the selection of the company to be awarded a concession contract. It is important to develop beforehand a Montevideo is a recent prominent exam- well-reasoned plan for transitioning to private operation and have a clear ple of how things can go wrong in a pri- understanding of how the port will vatization process. Attempts at privatiz- function after the various port services ing services in the port have failed four are privatized. A number of important times due to court challenges and the questions should be addressed. What privatization has yet to take place. The changes in laws and regulations are Government has now announced plans needed to allow private sector operation to auction off the terminal on the stock in the port? How much management market. and operational autonomy will be grant- Conflicts and legal challenges can be ed to the private operators? What will minimized by clearly presenting the bid- be the role of the port authority in regu- ding rules and selection process in the lating rates and practices of private bid documents. Criteria to be used for operators in the port? Who will be responsible for common area mainte- selecting the successful bidder should be nance and upgrade, and how will the stated and a pro-forma contract provid- cost of these activities be recovered from ed with the bid documents so that port users? Will the port continue to everyone is competing for the same con- have a marketing and planning function tract. The role of the port administra- after privatization, or will this be left to tion after the privatization and any lim- the individual service providers? What its on the contractor’s ability to operate resources will be required to carry out should be stated in the bid package. the functions that remain with the port Bidders should be requested to provide authority? What type of re-training pro- a business plan that will become part of gram and severance package will have the final contract. In the plan, bidders to be structured to address the issue of should state how they will address labor redundant personnel? issues that may arise as a result of any downsizing of port operating personnel Contingency plan — The best and tight- and/or changes in work practice rules. est contract will still not assure there They should be asked to give references won’t be problems in operation of port of how these issues were dealt with in services under a private contractor. other ports in which they operate. The There should be a contingency plan for bidders should be requested to state default by port service contractors

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where work stoppage could impact the Box 26 functioning of the port or where inadequate resources are made available by Estimated Available Market in the operator. the Port Sector Opportunities for the Private Sector Estimated Annual Revenues (billions of $) The worldwide market for port services is estimated to generate available rev- Container Terminal Operations 30 to 40 enues of $45 to 60 billion annually. Tug Assist Services 4 to 5 Maintenance Dredging 4 to 5 While these numbers are very rough, Information Technology 2 to 3 they indicate the size of the available Environmental and market to companies active in the port Ship Safety Services 1 to 2 Other Port Services 4 to 5 sector. This is a large available market that should be of interest to a wide variety of global, regional and local port this market internationally and now service providers (see Box 26). operates tug services in the Netherlands, Belgium, Germany, Panama, Nigeria, Terminal operations — This area is the Mexico, Argentina, Venezuela, Gabon, most advanced in terms of private oper- Singapore, Malaysia, Indonesia, ation of port services. Of the 112 port Netherlands Antilles and the Bahamas. privatizations captured in the World Other global, regional or local tug opera- Bank PPI database, 62 have been conces- tors could certainly find this market sions or management contracts involv- interesting if they can break the existing ing terminal operation. But there are public or private monopolies. We many more opportunities. There are roughly estimate that the harbor tug more than 2,800 ports worldwide, many service market represents available rev- of which still have publicly operated ter- enues of $4 to 5 billion annually. minals that are candidates for private takeover involvement in management Maintenance dredging — This activity and operations under concession agree- has traditionally been performed by ments or management contracts. We commercial dredging contractors under roughly estimate that the available rev- contract to port authorities or by port enue from container terminal operation authority personnel using publicly is on the order of $30 to 40 billion annu- owned dredges. It is estimated that ally. maintenance dredging is a $4 to 5 billion available annual market and this activity Tug assist services — Port authorities in can be completely turned over to the many ports own and operate the harbor private sector. Port authorities that own tugs used for ship assist. This activity is and operate their own dredging equip- ripe for privatization and is relatively ment could corporatize the dredging easy for the private sector to provide. It function and sell the business along has already attracted the attention of with its assets to the private sector. But Smit, who has been actively pursuing more innovative concepts for privatizing

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maintenance dredging might be consid- operate a ballast water treatment plant ered. For example, maintenance dredg- in the port, with revenues derived from ing could be outsourced on a concession receiving charges and resale of recov- basis similar to the recent concession ered oil (see Box 27). A private compa- awarded for channel dredging and ny could install and operate the vessel maintenance in the Rio Paraná, where a management system in the port under a portion of the project revenues will concession agreement. The functions of come from direct charges by the conces- port state control could be contracted sionaire to future channel users and the under a management agreement to a Authority receives a concession fee. A competent inspection company or classi- more radical concept could be a contract fication society, assuming the latter between a dredging company and con- properly apply the inspection rules. A tainer shipping company to maintain company could be contracted to main- specified water depths at the carrier’s tain and operate aids to navigation on a terminals on a worldwide basis. Much local or regional basis, such as now per- depends, however, on the volumes to be formed by MENAS in the Arabian Gulf dredged and the timing of the dredging. area (see Box 28). Altogether, it is estimated that the available market from Information technology — Increasingly environmental and ship safety activities sophisticated information technology is is $1 to 2 billion annually. spreading throughout the port sector as port users demand more timely infor- Other port services — Warehousing and mation to support their logistics sys- storage, container freight station opera- tems. This is producing a variety of tion, port security, pilotage, equipment opportunities to design, install and maintenance, etc. are all activities that operate IT systems in ports throughout can be operated by the private sector. It the world. IT services can be totally out- is estimated that worldwide these activi- sourced by port authorities and terminal ties represent an available market of operators and the market is estimated to some $4 to 5 billion annually. represent $2 to 3 billion in annual available revenues. Among options that can be considered for structuring IT service contracts are joint ventures between the port authority and the IT provider, an arms length concession for IT services or a concession based on in-kind service compensation.

Environmental facilities and ship safety — This is an area ripe for innovative privatization concepts, as many of these functions can be performed by the private sector. For example, a private company could be given the concession to

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Box 27 Box 28

Ballast Water Treatment Plant in the Middle East Navigation Aids Service Port of Portland The Middle East Navigation Aids Service (MENAS), a In the late 1970s, the Port of Portland (Oregon) made registered non-profit organization based in London, a major investment in a ship repair facility designed maintains the lighthouses, light buoys, RACON bea- primarily to accommodate large tankers operating in cons and other aids to navigation in the Arabian the Alaskan trade. Included in the project was con- Gulf that are outside port limits. Over 500 naviga- struction of a water treatment facility to receive oily tion aids are installed and maintained in this area. ballast tanker wash water. The plant is available to MENAS’ services extend from Kuwait down the ships loading or discharging cargo in the port, as well as ships entering the shipyard for repair. Arabian side of the Gulf to Didamar Island in the Strait of Hormuz and then south to Masirah Island The Plant and channel in the western Arabian Sea off the coast of Oman. The complete system includes eight connection stations, receiving lines, holding tanks, a heating plant, MENAS operates the lighthouse tender and buoy decant tanks, separators, processed water storage, oil lifting vessel Relume to provide the maintenance storage and water quality testing laboratory. services required for the lights and buoys in the Gulf, Storage capability is provided for 157,000 barrels of and obtains its income from charges (light dues) slops, 11,500 barrels of recyclable oil and 30,000 bar- levied on vessels entering the Gulf. These charges, at rels of disposable water. Ballast water can be £l.70 per 100 NRT for each visit a vessel makes, have received from a ship at the rate of 3,000 barrels per remained constant for ten years. Income has risen hour. Most of the recovery process is achieved from the increasing numbers of vessels entering the through tank settling over time. Received ballast is typically kept in the tank for 30 days and skimmed Gulf in recent years, particularly from the higher each day. After 30 days the tank is heated with inter- numbers of containerships calling at Dubai and nal steam coils to finish the separation process. Jebel Ali. Recovered oil is sold and disposable water is either pumped through the city sewer system or directly In addition to fixed navigation aids, MENAS broad- into the river depending on the water quality. The casts navigational information to shipping in the port sets standards for acceptability of wastewater. Gulf area as NAVTEX warnings. These are also copied to Muscat Radio in Oman, which re-transmits them Economics of the Facility as NAVTEX warnings, and to the Area IX office, where they are included in the Area IX weekly Notices to The facility cost $5.2 million to construct in the late Mariners. Permanent changes to channels, pipelines 1970s. Revenues are generated by the facility from a etc. are then notified to mariners via a printed charge against the ship for receiving ballast water MENAS Notice to Mariners, distributed free of charge ($4 to 5 per barrel) and sale of recovered oil on the to vessels by all shipping agents in the Gulf area. open market. Recovered oil is sold to remarketers for blending and resale for use as boiler fuel. The The MENAS warnings are withdrawn after the British selling price of the oil has typically been $1.50 to Admiralty publishes its Notices to Mariners covering 2.00 per barrel, but prices as high as $20 per barrel the same changes. have been realized in periods of extreme demand. Up to 400,000 barrels of recovered oil have been generated by the plant in a year.

Potential to Employ Elsewhere

This type of plant could be considered for use in other ports. But there are factors that impact the attractiveness of the concept. Supplying steam to the plant is the principal operating cost and it would greatly help the economics to have access to a cheap source of steam. It would be important to have proximity to a market that can use the recovered oil, which is not usable for all applications.

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Box 29

The Port of Hong Kong — Why is it so Successful? A Success Story

By any standard, Hong Kong has established an enviable presence in the world port sector. The port annually receives about 42,000 seagoing vessels and 190,000 river trade vessels. In 1999, Hong Kong handled more than 16.1 million TEU, making it the largest port in the world in terms of container throughput. To accommodate traffic through the port, there are eight major container terminals, with a ninth now under construction and two more planned. Looking out- ward, container traffic is pro-jected to grow to 24 million TEU in 2006, 33 million TEU in 2016. The port has the ability to provide shippers with a full network of competitive services and frequent sailings to all areas of the world. Hong Kong’s cargo handling productivity ranks among the world’s highest. One of the container terminals in Kwai Chung handles more than 1 million TEU annually at a single berth — more than twice the world standard. This terminal is capable of loading/discharging 1200 TEUs in ten hours with three gantries that average 40 moves per hour. The success of Hong Kong is based on a number of factors, including the port’s location relative to major markets, a natural harbor and, perhaps more than anything else, a business friendly environment with heavy reliance on the private sector. Reliance on the Private Sector

Virtually all activities in the port are performed by the private sector. Three private firms operate the eight container terminals in Kwai Chung container port. HIT, the largest of these companies, controls four of the terminals and handles 60 percent of the containers passing through Kwai Chung. The remaining traffic is shared among Modern Container Terminals and SeaLand Orient Terminals. Four private operators provide mid-stream operations and more than 100 private operators offer warehousing services. Three firms provide tug service in the port, the largest of which is Hong Kong Salvage and Towage. Seven companies provide stevedoring services, six companies provide ship repair. Hong Kong Pilots Association Ltd., which is owned by the member pilots, provides pilot service in the port.

The government’s operational function in the port is limited to collecting refuse, preventing and cleaning up oil discharge, providing vessel traffic services, managing a ferry terminal, maintaining 61 harbor moorings and coordinating search and rescue in the South China Sea. The Marine Department performs these functions as part of its responsibility to facilitate safe and expeditious movement of ships, cargoes and passengers within Hong Kong waters. A Port and Maritime Board has been established to set overall policy for the maritime sector in Hong Kong, but this Board does not generally become involved in oversight of commercial operations in the port. Overall, the government has a hands-off approach to port operations, relying on competition within the private sector to shape and control activities.

Expansion and improvement of facilities in the port is entirely funded through the private sector. While the government develops long term strategic land use plans for the port, it relies on the private sector to finance, build, own and operate new facilities in response to market demand. For example, since 1972 the private sector has built eight modern container terminals in the port and a ninth is now under construction. In awarding such terminal contracts, the government earmarks an area of water to be put out for tender, defines the responsibilities the developer is to undertake and selects the bidder who offers the highest price for the development site. Once awarded, the contractor is responsible for making the entire investment in infrastructure and superstructure on the site. The government’s role is limited to providing the agreed water depth in the approach channel to the terminal. Implications for Other Ports

A general reliance on the private sector to provide the necessary port services and infrastructure, with the govern-ment providing minimum oversight needed to protect the public interest has obviously worked very well in Hong Kong. While other factors have contributed to the success of the port, a business friendly environment, reliance on market forces and the government’s hands-off approach to managing port services have greatly contributed to Hong Kong’s leading position as an international shipping center. This model is worth considering, particularly in ports that have sufficient traffic volume to enable competition among service providers to thrive.

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Box 30 Checklist for Negotiating a Terminal Privatization

1.The Proposed Transaction

√ What are the government’s primary and secondary objectives in privatizing the terminal — generate proceeds to the government from the transaction, increase efficiency of port services, attract foreign investment to improve port infrastructure, rationalize the public labor force, reduce the government’s fiscal burden, etc.? √ What area and specific activities in the port are to be privatized in the transaction — and what is not included in the transaction? √ What modality is best suited to the transaction — outright sale of assets and land, long-term lease of the facility under concession arrangement, management agreement to operate the facility, other? √ How will the negotiations with the proposed contractor be conducted and who will be assigned to the government’s negotiating team to complete the transaction? √ Who will prepare the term sheet to be presented to the proposed contractor and what schedule will be set for completing the transaction? 2. Structure of Payment to the Government

√ How is the compensation to be structured — is there an initial cash payment to the government or is the proposed compensation to the government based on some form of rent, revenue sharing, royalty or other deferred payment arrangement? √ Is a portion of the initial payment for the terminal rights non-cash compensation based on providing equipment and services — if so, how does the contractor propose to establish the fair value of the equipment and services? √ What is the discounted present value of the initial payment and flow of deferred payments from the proposed contract? √ How does this discounted present value compare with the discounted present value of the projected profits or surpluses of the terminal as currently operated?

3. Risk Being Assumed by the Government

In the event of losses being incurred by the contractor under the proposed agreement, will in any circumstances the government be liable for these losses? √ Under what circumstances can the proposed contractor hold the port authority or government responsible for terminal disruptions, missed performance targets, unexpected operating costs, etc.? √ Is there any possibility that the government could directly incur losses under the agreement?

4. Performance Targets

√ What throughput does the proposed contractor project for the terminal over the next ten years from local traffic, transit traffic and transshipment traffic? √ How does the proposed contractor plan to reach these throughput projections? √ Does the proposal state targets for increasing minimum productivity standards (e.g., minimum average crane moves per hour) in the terminal? √ How does the proposed contractor plan to reach these minimum productivity targets? √ Is there a provision for penalties and incentives in the proposal for meeting the planned throughput and productivity targets? √ What assumptions has the proposed contractor made, or conditions has it set, as to the role of the port authority and/or government in achieving these targets?

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Box 30 (continued) 5. Operational Issues

√ What services are to be provided by the port authority to the terminal after takeover by the proposed contractor — and how will these services be paid for? √ Who will be responsible for maintaining the civil structures and water depth alongside the quay? √ Will the proposed contractor provide new management and senior operating personnel — if so, who will they be and what will be their qualifications? √ How many personnel does the proposed contractor plan to employ in the terminal? √ Will existing personnel in the terminal have priority for future job positions in the terminal after take over by the proposed contractor? √ Will the proposed contractor utilize the salary level and structure currently in effect for personnel employed in the container terminal — if not, what will be the changes? √ What interaction does the proposed contractor foresee with other service providers operating in the port — and how does it plan to cooperate with the other providers? √ If a concession or management agreement, will the port authority have full and unfettered rights at all times to enter and inspect the terminal after transfer to the contractor? √ Will the proposed contractor carry all-risk and liability insurance on the container terminal, what specific risks will be covered, what will be the limits on liability coverage and will insurance cover the actual cost of replacement of the equipment?

6.Terminal Handling Charges

√ What structure and level of terminal handling charges does the proposed contractor plan to impose on containers and other cargo through the terminal? √ How much profit is built into these charges? √ Are these charges competitive with other ports in the region? √ What role will the government have in reviewing and approving any changes in the structure or level of container handling charges? √ If the contract provides for revenue sharing, what portion of terminal handling revenue is to be paid to the government? √ What process is to be employed to ensure that the government receives all of the compensation it is due?

7. Potential Contractual Conflicts

√ What is the provision for disputes resolution — i.e., the process, venue, applicable rules and laws? √ What language will be paramount in event of any ambiguity in the contract? √ Will the proposed contractor agree to be subject to all prevailing local laws? √ Are there provisions for terminating the contract with the proposed contractor should terminal throughput and/or productivity targets not be met — if so, what is the process for terminating the contract? √ Is the terminology in the force majeure provision acceptable to the government — if not, what changes are required to make it acceptable? √ What provisions has the proposed contractor included in the proposal concerning its obligation for payment of taxes to the government? √ Will the proposed contractor provide a bank guarantee as security from the time the government accepts its proposal until the handover is complete? √ What performance guarantee will the contractor provide as security for complying with the obligations taken on in the proposed contract?

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Box 30 (continued)

8. Handover of the Terminal

√ What is the proposed timing of the handover of the terminal to the proposed contractor? √ What specific steps will be taken by the contractor to plan for and implement the handover? √ Will the proposed contractor have transition personnel in the terminal for a time period preceding the handover to organize the process — and how will these personnel interact with the current staff? √ What is the role of the port authority in the handover process? √ What responsibilities will the port authority and government continue to have after the transaction?

9.Terminal Development

√ What commitments are being made by the proposed contractor to improve and expand the terminal? √ What type of training program will be provided by the proposed contractor for terminal personnel? √ Will the proposed contractor install a world class computerized information system — and in what other ports is this system now used? √ When will this system be installed? √ Will provision be made to connect this computer system to the current or future computer system operated by the port authority — and to what extent will the port authority have access to data in the terminal system? √ What role does the proposed contractor envisage for the port in competing for transshipment business with other ports in the region — and are there any potential conflicts of interest as a result of the proposed contractor operating terminals in one or several of these other ports?

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

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

HE551.P757 2003 387.1'068—dc21

2003045093 42705_MOD3_COVER_AGS 5/27/03 8:24 AM Page 1

PORT REFORM TOOLKIT

MODULE 3 ALTERNATIVE PORT MANAGEMENT STRUCTURES AND OWNERSHIP MODELS

THE WORLD BANK 42705_MOD3_TEXT_AGS 5/27/03 7:51 AM Page 1

MODULE 3 STRUCTURES & OWNERSHIP MODELS

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

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

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

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

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

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

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

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

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

Value Added Development Efforts in the Port of Rotterdam

Distriparks

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

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

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

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

Trade, Distribution and Marketing Centers (TDMCs)

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

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

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differing primarily in where the bound- effects. For example, competition "for ary line is drawn between the public the market" can replace competition "in and private sectors. At one end of this the market," and competition "for the spectrum, full public control over plan- market" can be engineered into con- ning, regulation and operations results testable offers of rights in ways that in what this report will refer to as a assure pro-competitive outcomes. Service Port. At the other end, the almost total absence of public owner- It follows that one of the objectives of ship, control or regulatory oversight public policy should be to create con- results in a Fully Privatized Port. testable market structures for port services and to manage competitive behav- The alignment of public and private ior. This might be done through licens- interests in recent years has resulted in a ing, leasing, concessioning, and other diminishing role for governments in the methods designed to bring about an effi- port industry. This trend is clear. The cient allocation of resources. This mar- total absence of public involvement in ket surrogate view of the role for gov- the port sector, however, still remains an ernment in the port sector is followed in exception, limited primarily to situations most countries with market oriented in which surplus port capacity may exist economic policies. in a national market and where competition for port services is already intense. The need for some form of government intervention in markets for port services When governments undertake to is related to the unique economic char- increase national economic welfare acteristics of seaports, some of which through port development, they may tend to make them natural monopolies: choose to apply one of two distinct normative frameworks: the market surro- • The provision of port services entails gate framework or the public interest large fixed costs and low marginal costs. The marginal benefits associ- framework. In seeking to increase eco- ated with using port services exceed nomic welfare, governments may the marginal costs of providing these attempt to remedy market imperfections services. and capture non-market externalities within appropriately engineered and •Arelatively large minimum initial contested transactions. Alternatively, capacity of basic infrastructure is they may pursue explicit goals devel- required for technical reasons. oped through public consultative processes designed to determine • The infrastructure is frequently indi- demand for public goods. visible and, as a result, increases in infrastructure capacity can only be With respect to the market surrogate realized in "quantum chunks." framework, the primary task of government is to identify and eliminate market • Both initial construction and port imperfections and anti-competitive expansion require large amounts of behavior or to regulate its undesired capital. As a result, the need to

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

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

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

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

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

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

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

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

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

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

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

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

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

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Box 5

Strong and Weak Points of Port Management Models

Public Service Port:

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

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

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

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

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

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

Fully Privatized Port:

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

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

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Box 6

Basic Port Management Models

Type Infrastructure Superstructure Port Labor Other Functions

Public Service Port Public Public Public Majority Public Tool Port Public Public Private Public/Private Landlord Port Public Private Private Public/Private Private Service Port Private Private Private Majority Private

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

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

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

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

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

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

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

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

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

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

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

Elements Influencing Inter-port Competition

Inland Transport System

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

Transshipment (sea-sea transfer of cargo)

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

Freight Forwarders and Multimodal Transport Operators (MTOs)

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

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

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

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

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Box 10

Overview of Value Added Services in Ports

VALUE ADDED SERVICES

Value Added Value Added Logistics Facilities

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

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

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Box 11

Potential for VAL and VAF

HIGH

CONTAINERS AF POTENTIAL V

GENERAL CARGO

RORO LIQUID BUILT

DRY BULK HIGH LOW VAF POTENTIAL

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

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

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

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

European Rules on Port Subsidies

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

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

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

Investments in a dedicated terminal that are not fully charged to the client are considered illegal State subsidies and are not allowed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Modernization of Port Administration communication technology (ICT).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Box 17

Corporatization of the Jaya Container Terminal, Colombo

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

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

JCT’s mission was:

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

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

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

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REFORM TOOLS greater detail in this section.

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

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

• The public entity having final Lease and Rent Contracts responsibility for the port sector (most probably a national govern- Full Concession Including

ment) wants to privatize the entire ONCESSIONS sector, including responsibilities that BOT/BOOT/etc. C generally are considered belonging to the public domain. Ownership of port land, planning, investment and Built, Own, Operate (BOO) management are all transferred to private sector entities, which have no formal commitments to any public Divestiture by License institution. "Comprehensive privatization" is the goal (see Box 19 for an example of this type of privatization process). Divestiture by Sale

This section focuses on the implementation of "partial privatization," since that approach has been used successfully to Private Supply and Operations balance public and private interests and still meet the objectives of port reform. Box 18 shows the spectrum of port reform tools that will be discussed in

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

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

The Experience of the Hanseatic Landlord Ports

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

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

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

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

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

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

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

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

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

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

The main characteristics of the shared

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

• There is no established maximum FLAT RATE LEASE

level; LEASE PAYMENT

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

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

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

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

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

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

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

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

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

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the Port Authority is confident of finding ferring to the principal, at no cost or clients, and is prepared to take the risk at a pre-determined price to the that port capacity will go unused. As a principal, a fully operational facility. rule, Port Authorities should permit pri- During the concession period, the vate operators to finance most of the promoter owns and operates the additional capacity (including the quay facility and collects revenues in wall). The Port Authority can then con- order to repay the financing and centrate on access infrastructure and pro- investment costs, maintains and tective works relating to port extension, operates the facility and makes a and on renovation projects. Port margin of profit." Authorities may sometimes have difficulties amassing from taxes the invest- Denton Hall Projects Group; A ment funds necessary to finance such Guide to Project Finance; 1998 common access facilities and protective Edition, p.47 works. In such cases, they have sought to acquire funds either from an BOT is a frequently used form of con- International Finance Institution (such as cession model that in many respects The World Bank) or from private lending has the character of a temporary priva- institutions. For specific port facilities, tization. BOT schemes have some fea- such as container or bulk terminals, pri- tures of a contract (e.g., clauses that vate funding can be arranged through a cannot be changed such as duration concession agreement as described and payments) as well as those of a above. BOT schemes are a specialized license (e.g., permitting changes in form of concession designed to increase activities or performance by the conces- private financial participation in the cre- sionaire within the broad framework of ation of port infrastructure/superstruc- the license agreement). ture without changing the landlord Under the BOT approach, the govern- structure of the concerned port. ment grants an exclusive concession to The core of a BOT arrangement is a con- the private sector to build and operate a cession for a specified period of time port project. In return, the private sector involving the transfer or re-transfer of (sometimes a consortium of banks, con- all or some of the project assets (see Box tractors and operators, sometimes a 21). An illustrative definition of a BOT global operator) undertakes the risk of arrangement is: completing the project and operating it profitably. The concession runs for a "A project based on the granting of a number of years, after which the project concession by a principal, usually a assets are transferred back to the gov- government, to a promoter, some- ernment. After termination, the govern- times known as the concessionaire, ment/Port Authority can lease out the who is responsible for the construc- facilities, or grant another concession, tion, financing, operation and main- enter into management contract, which tenance of a facility over the term of may or may not have a new construc- the concession, before finally trans- tion component.

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BOX 21

BOT Schemes and Port Development

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

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

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

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

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

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

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

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

San Martin - Rosario Waterway Concession

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

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

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

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

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

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

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

•Terms for the transfer of "public •Greater competition. tasks," to the successor company or These features, it was argued, would other entity such as aids to naviga- result in improvements to the port sys- tion, pilotage, handling of dangerous tem’s financial and operational perform- goods, and protection of the environ- ance. ment; Note, however, that not all of the above- • The tax regime applicable to the suc- mentioned benefits are due exclusively cessor companies; and to comprehensive privatization; other port reforms may generate similar bene- • Authority for the government to dis- fits. solve the Port Authority once it is satisfied that the objectives of the A vast majority of maritime nations con- enabling legislation have been met siders comprehensive privatization to be and to transfer all remaining proper- incompatible with national and regional ty, rights and liabilities to the succes- interests. Specific reasons why govern- sor company. ments and Port Authorities have refrained from pursuing full privatiza- Privatization legislation may include tion are diverse, but often include one or additional elements, depending on the more of the following: local situation, the structure of the former Port Authority and the specific •Apublic monopoly can easily legal, institutional and socio-economic become a permanent private mono- situation in the country concerned. poly;

In the UK, the benefits of comprehensive • The macro-economic benefits of large port privatization most often cited are: port complexes to the regional and national economy are perceived to be •The generation of revenue for the threatened by comprehensive priva- Treasury; tization;

• The ability of privatized companies • The danger of discriminatory treat- to diversify their businesses; ment of customers;

•Greater access to capital markets; • The risk that, in practice, privatization may undermine competition; • The removal of restrictions on investment and borrowing; • Fear of over-investment in and

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

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

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BOX 23

Impetus Behind Full Privatization in the UK

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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pilotage function. Pilots can be Box 25 self-employed and work under the oversight of a Maritime Authority The Creation of a National Pilotage Monopoly that serves as the regulator and in the Netherlands licensor of the individual pilots, or pilots can organize themselves into In 1988,The Netherlands Pilotage Service became an independent organization, the pilots acting as private entrepreneurs. The objec- a private company. tives of the government in the privatization of the pilot services were to reduce the governing executive burden and to improve efficiency The pilotage company should have and adequacy of the pilot services. its own infrastructure and facilities A public entity, the Nederlandse Loodsen Corporatie (The Netherlands such as pilot boats, communication Pilot Corporation, NLC) was created to manage the register of equipment, pilot stations, etc. licensed pilots and be responsible for education and training of Sometimes a pilot organization licensed pilots. All licensed pilots constitute the NLC. (especially in smaller ports) might In every region, the licensed pilots have set up a legal entity, the also operate a vessel traffic man- Regionale Loodsencorporatie (Regional Pilot Corporation, RLC).The agement system (radar). The Port licensed pilots are all shareholders of the Loodswezen Nederland BV Authority or Maritime (Pilotage Service of the Netherlands Ltd.) which is responsible for the exploitation of the independent private enterprise. All supporting Administration should regulate the staff is employed by this company. The company collects the pilotage privatized pilot organization with fees and makes payments to the pilots in accordance with the finan- respect to the following points: cial statute.

The ownership of the capital goods used by the pilots is incorporated •Training requirement and pilot in the Loodswezen Materieel BV (Pilotage Services Matériel Ltd.). qualifications; Individual pilots, united in regional partnerships, the so-called "Pilot Associations," render the pilotage services. Supporting services are • Standards for obtaining a cer- provided by the Loodswezen Nederland BV. Five Foundations are tificate or license, and its revo- responsible for education, social allowances, management of pension funds and allowances for special situations. cation; Privatisation in The Netherlands did not bring an end to the debate • Roles and responsibilities of the about pilot services. The Government Audit Office directed harsh crit- organization for operation of a icism at the privatisation process and asserted that the efficiency improvements did not benefit the shipping lines or the government, vessel traffic management sys- but solely the pilots. Notwithstanding the counter arguments the tem; Government Audit Office’s criticism,The Netherlands’ privatization of pilots is not considered a successful one. •Communication equipment and channels; To a certain extent, the government’s objectives have been attained. The increase in the amount of pilot activity and the reduced number of licensed pilots have led to higher efficiency. However, pilotage •Investigation of incidents and became a virtual monopoly and the efficiency improvements have led follow-up actions; primarily to a very substantial rise of the pilots’ incomes.

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

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

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

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

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

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

Prevailing Service Providers Under DifferentDiagnosis Port Management Models

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

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

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

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

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

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REFERENCES

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

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

Stephen McDonagh, Port Development International, March 1999.

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

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

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

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

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

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

HE551.P757 2003 387.1'068—dc21

2003045093 42705_MOD4_COVER_AGS 5/27/03 8:26 AM Page 1

PORT REFORM TOOLKIT

MODULE 4 LEGAL TOOLS FOR PORT REFORM

THE WORLD BANK 42705_MOD4_TEXT_AGS 5/27/03 7:54 AM Page 1

MODULE 4 LEGAL TOOLS

INTRODUCTION AND OVERVIEW conditions. Other times, a law lays the groundwork for the public sector to par- Transformation of port structures often ticipate in port development and infra- requires new legislation. This Module structure investments, or enables the pri- identifies fundamental points to consider vate sector to carry out port activities that when developing such legislation, with previously resided in a public sector examples from existing port reform monopoly. The reference provisions pre- regimes. The examples provided should sented in this Module are not meant to be used for reference purposes only. cover completely each and every issue. Because every country has a unique legal They are meant to be used as tools for and institutional context, it is impossible port reform, to shape the legal foundation in practice to present a model law that fits for marketable and bankable regulatory the wide variety of fundamentally differ- and contractual arrangements. ent legal systems. With such a diversity of legal and policy regimes worldwide, the The examples are derived from a variety exact purpose of a port law may vary of institutional structures covering not from country to country. Sometimes, an only tasks and responsibilities of Port existing law is changed to accommodate Authorities, but also related institutes new institutional structures, made neces- such a National Ports Council (or sary because of changed socio-economic Commission), a Port Fund and others. In

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the case of a Port Authority that is part body to be known as the Maritime of a municipality, no specific law is nec- and Port Authority of Singapore, essary because the legal basis of such which shall be a body corporate authority is part of municipal legisla- with perpetual concession and a tion. However, the fundamental ele- common seal, by that name, be capa- ments of this Module might still be con- ble of: sidered in drafting such legislation. a) suing and being sued; It is often thought that the sole purpose of a Ports Law is to create an institution- b) acquiring, holding and develop al framework to develop and manage ing or disposing of property, both seaports. It should, however, be empha- movable and immovable; and sized that a Ports Law should also establish a flexible business framework that c) doing and suffering such other enables a Port Authority to compete suc- acts or things as bodies corporate cessfully in national and international may lawfully do and suffer. transport markets. Some countries have opted for a corpo- A Ports Law often creates one or more ratized Port Authority. Apropos of that, Port Authorities, as well as a host of the Polish Ports Act states: other port-related bodies, such as a Ports Joint Stock Companies, administer- Council/Commission or a similar advi- ing ports of fundamental importance sory/regulatory body. It might also set to the national economy, are estab- operational conditions for private opera- lished under this Act and operate on tors. Finally, such a law may regulate the basis of the Commercial Code, organizational and financial relations unless otherwise provided for by this between public organs (such as the Act. State, regional governments, and/or municipalities) and the maritime admin- Companies mentioned in Paragraph istration. 1 have a public service character. General Approach for Drafting a Ports Law A Ports Law may be very detailed or merely set forth basic principles of port A Port Authority should be formally management and operation. Regardless established by the Ports Law, either as a of the form adopted for the port’s public or commercial (e.g., joint stock or regime, to create a solid basis for clearly limited liability company) entity. Two delineating port functions and responsi- examples illustrate some key juridical bilities, a core set of provisions should attributes to be considered. be included. These provisions and their key features are described below. On this matter, the Ports Law in Singapore states: Preface. Apreface states the objective of the law and some general conditions. There is hereby established a The approach adopted is a function of

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the underlying legal system. For exam- Box 1 ple, some countries use a combination of statute and implementing regulations; Eastern Europe: Decentralizing others pass a decree that applies a priva- Port Management tization or concession law to a port or ports. The objective might be to create In the past, Eastern European ports were managed new Port Authorities or to reform an mainly by centralized authorities.. After the introduction of market reforms, it became necessary to existing Port Authority. Also, the preface decentralize port management and modernize for- should indicate whether transfer of mer State-dominated structures. More independent rights to private parties (e.g., lease, con- port authorities were established, often with some form of State participation.The prefaces of the rele- cession, BOT) is permitted. It might be vant laws reflect these changes. Examples are the necessary in such instances to make cor- Ports Laws of Poland (December 20, 1996) and of responding changes in laws governing Latvia (June 22, 1994). public property (e.g., in the case of the • The Act regulates the principles for establishing so-called "Maritime Domain"). Finally, governing bodies for ports and sea harbors, their the law should regulate the organiza- organizational structure and their operation.The limits of port areas are stipulated in separate reg- tional, financial and fiscal relations ulations.The Act is not applicable to naval between the related public organs (such ports.(Poland) as the national government, regional governments and municipalities) as well • This Act establishes principles of operation and management of ports and the safety of naviga- as with regulators such as the maritime tion within port areas (Latvia). administration, the fiscal authority and the competition commission. Box 2 Two approaches have been developed Latin America: Allowing Private for drafting the first section of a typical Stevedoring Operations port law:

•Apreface stating only the objective Until the 1980s, Central and South American ports were usually part of the State and managed as pub- of the law (See Box l and Box 2); or lic service ports. Recently, many countries in the region have changed port structures to allow private •Apreface of general conditions, elab- stevedoring operations.The "General Conditions" of orating the objective and a number the Mexican Ports Law (1993) describes the objectives of such a Law: of boundary conditions. In several cases the definitions used in the law •This Act has a public character and shall be are included in the first section. observed in the entire territory of the State.The objective of the law is to regulate ports, terminals, marinas and port installations, their construction, In Asia and Africa, the institutional use, acquisition, exploitation, operation and ways structures of many ports were often pat- of administration, as well as the execution of port terned after their European counter- services. parts. The vast majority were public service ports responsible for all port these countries, new Port Laws are services. Dockers were employed by the aimed at converting Service Ports into public Port Authority or Port Trust. In Landlord Ports, requiring the separation

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of public landlord responsibilities from responsibilities of a (public) Landlord cargo-handling activities. (See Box 3) Port Authority have been combined New Port Laws regulating the tasks and recently with the establishment of private operating companies in accordance Box 3 with the national Commercial Code.

Some situations require a law to specifi- Singapore: Transforming a Service cally regulate the development and con- Port into Landlord Port struction of a terminal by a private operator through authorizing the award of a A useful example of a change of structure of a Port Concession Contract. (See Box 4) Authority is represented by two laws enacted in the Republic of Singapore. Prior to the change, the port Box 4 functioned as a public service port. As the Port Authority increasingly became engaged in terminal operations abroad and other commercial activities, Panama: Enabling Legislation for a public functions and commercial functions were Concession separated. A new statutory board (Maritime and Port Authority of Singapore or MPA) was set up.The commercial and marine activities of the original Port of In Panama a Concession Contract was concluded Singapore Authority were corporatized.Two Acts between the State and a private operator.The text of implemented the changes, one providing for the dis- the contract was included in a specific law authoriz- solution of the Port of Singapore Authority and the ing its conclusion.The opening text of the Law is: other establishing the MPA (Republic of Singapore, Acts No. 6 & 7, 1997).The prefaces of these Laws •Law of 1995, whereby Development, were, respectively: Construction, Operation, Administration and •An Act to provide for the dissolution of the Port Management Contract of a container Terminal in of Singapore Authority and for the transfer of the North Coco Solo Area, Province of Colon, its property, rights and liabilities to a successor between the State and the Corporation Colon company and others, to make financial arrange- Container Terminal, S.A. is approved. ments for that company and for matters connected therewith, to repeal the Port of Singapore Act (Chapter 236 of the 1985 Revised Edition) and to make consequential amendments to other written laws. Definitions. The second element should comprise definitions of the main terms •Be it enacted by the President with the advice used in the law. The port business, espe- and consent of the Parliament of Singapore, as cially as a specific mix of public and pri- follows:……. vate interests and financiers, will require •An Act to establish and incorporate the that the interplay of these interests be Maritime and Port Authority of Singapore, to balanced and result in well circum- provide for its functions and powers, and for matters connected therewith; and to repeal the scribed functions. The law should like- National Maritime Board Act (Chapter 198 of wise define maritime and port infra- the 1985 Revised Edition) and to make conse- structure, identifying which are under quential amendments to certain other Acts. the authority of the State and which are •Be it enacted by the President with the advice under the authority of a Port Authority. and consent of the Parliament of Singapore, as Sometimes it may be necessary to desig- follows:…. nate several types of ports such as "ports of national interest" and "ports of

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regional interest," or as in the French “Operational Infrastructure” means port Ports Law of 1965: "Ports Autonomes facilities and constructed works dedicat- and Ports d’Intérêt National," with each ed to commercial handling of sea-going exhibiting its own definition. and inland vessels such as quaywalls, piers, jetties, roll-on roll-of facilities, It is highly advisable to precisely define berthing aids and also secondary con- critical functions, features and port necting roads within the port area, administration bodies. In the port field, including all appurtenances and compo- investors and lenders will review defini- nents thereof; tions of a port law closely to determine if there are ambiguities that may affect “Superstructure” means sheds, silos, security interests or lender rights. As warehouses and housed facilities of all there is no internationally accepted ter- kinds, and all infrastructure not identi- minology the following list is only an fied under Basic and Operational illustrative compilation of the most Infrastructure; often-used terms. “Maritime Access” means fairways, “Port Authority” means every port dredged channels and other waters pro- undertaking agency established under viding access to Ports, equipped with the subject law; Aids to Navigation for commercial sea- going and inland vessels; “Port (or Seaport)” means one or more port areas forming an autonomous func- “Aids to Navigation” means all floating, tional and economic entity, of which the stationary and on-shore objects dedicat- boundaries are established by authority ed to assisting sea-going and inland vessels in the safe navigation at sea and in of [relevant government body] and inland waters including buoys, beacons, whose activities are governed in accor- lighthouses, vessel traffic systems, tidal dance with [national or other relevant] measuring systems and fixed objects law; and markers; “Port Infrastructure” means all infra- “Harbor Master” means the Harbor structure located within the Seaport or master appointed under [section] of this in the land and sea accesses containing Law and such Harbor Master’s Basic Infrastructure, Operational appointees, representatives, deputies or Infrastructure and Superstructure; delegates appointed in accordance with “Basic Infrastructure” means sea-locks, such section; breakwaters, piers, sea walls and other “Port Services and Port Facilities” means protective works not directly involved port terminal services and facilities for in the transfer of goods, maritime handling, storage and transportation of accesses and canals, primary roads to goods on port land and for handling of and from the ports, and also railway passengers carried by vessels; tracks, pipelines and buffer-zones situated at the borders of the port; “Pilot” means any person not belonging

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to a vessel who has the conduct thereof; Commercial Code. Provisions should be included on shareholding, for example, “Authorized Pilot” means a pilot or conforming changes made to com- employed or authorized by a competent mercial or corporate laws. Authority to pilot vessels; There is an important point affecting “Dues” includes port dues, cargo-related Port Authorities established as Joint dues and pilotage dues; Stock Companies. Generally, Port Authorities are responsible for operating “Port Dues” means dues levied in the entire port. In the event of a respect of a vessel for entering, using, Landlord Port situation, a corporatized and leaving the port; or privatized Port Authority must “Public License” means a license grant- ensure a level playing field among many ed under the Act and for the purposes of terminal operators and other service this Act; a public licensee shall be con- providers. To avoid conflicts of interest, strued as the recipient of a Public the law should explicitly regulate the License and subject to its terms and con- powers and duties of the Port Authority ditions. vis-à-vis private operators with respect to investments and share participation. Objectives and Functions of a Port Authority. The third section should Powers and duties of a Port Authority delineate the objectives and functions of with respect to land management a Port Authority. require specific attention in the law. A Landlord Port Authority is responsible Usually, a Port Authority exercises juris- for land management and overall port diction over a port territory, which development. Special attention should should constitute an economic and func- be paid to the matter of regulating own- tional unit. The establishment of a Port ership and use of port land under the Authority as this legal entity is one of law. A Port Authority may own the land the major elements of a Ports Law. The or have a perpetual or time-specific law provides the legal status for the Port right to use the land. Powers to act as a Authority, which might be a public enti- landlord may need to be specifically ty or a corporate entity under the elaborated, as well as the limitations of Commercial Code of the relevant coun- such powers, such as the interdiction of try, such as a joint stock company. The the sale of port land. While the law should also indicate which public Authority is engaged in, or provides for, entity has the right to establish a Port construction of operational infrastruc- Authority in the event that the State is ture, the maintenance of such infrastruc- not doing so. This might be a region, ture constitutes a duty for the Authority. province, city or a combination. The Ports Law should specify the exact responsibilities of the Port Authority In the case of corporatized or privatized and those of the State with respect to Port Authorities, linkages will be needed investments in basic and operational to the Mercantile, Corporate or infrastructure, maritime accesses, port

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access roads, rail and waterway infra- sion, lease) and other conditions structure, as well as hinterland connec- (public license) for private operators tions. to provide port services;

Generally, the objective of a Port • Co-ordination of berthing and Authority is to efficiently and economi- unberthing of vessels; cally manage the port. In a public Landlord Port its objectives should be • Ensuring public order in the port aligned with the macro-economic goals area; of the State and the needs of the region • Safeguarding the port environment; (such as the creation of jobs, strengthen- and ing of the economic structure, etc.). (See Box 5) • Port marketing. Box 5 (See Box 6) Caution: Single National Ports Box 6 Authority Can Be Hazardous to Economic Health Functions of Corporatized Port Authorities Since ports generally compete among themselves both in the international and national transport markets, a National Ports Authority, comprising all The Polish Ports Law chooses a straightforward ports of a country, is not a preferred option. landlord model for its Corporatized Port Authorities. Occasionally, a National Ports Authority is estab- Their responsibilities are formulated as follows: lished on the grounds that there is only one major port in a country as well as a number of smaller The functioning of the entities managing the ports ports with a regional function. However, even in comprises inter alia: such a case, a more effective system could consist of an autonomous Port Authority for the major port, •Managing land and infrastructure; and a Secondary Ports Directorate within the Ministry of Transport, which exercises the overall •Forecasting, scheduling and planning port tutelage on the national port system. development;

•Construction, development, modernization and Fundamental port functions should be maintenance of port infrastructure; and considered in the law, such as: •Acquisition of new land for port use. • Administration, management and physical development of the port area; Corporatized Ports - •Maintenance, rehabilitation, renova- Special Considerations tion and construction of basic and operational infrastructure; If a Port Authority is established as a joint stock company, matters of share • Establishment of contractual (conces- issuance and capitalization arise. The

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Ports Law should include clauses per- Box 7 taining to the way this is effected, consistent with the provisions of relevant Division of Shares in Corporatized commercial, mercantile and securities Port Authority laws. One example of a Government seeking to be direct- One key consideration is whether a ly involved in port management is Poland. Under the Government, be it national or local, new ports law, the Polish State retains 51% of the shares of its corporatized national ports, thus exer- intends to exercise direct influence in the cising control over the Board of Directors, and gives Port Authority via its shareholder’s these shares preferential treatment in the event of rights (e.g., the nomination of the liquidation of a port enterprise.The relevant clauses are as follows: Chairman of the Board or the Port Director). In the event of a corporatized •A joint stock company named ‘Port Authority of Authority, the Government or other Gdansk’ S.A. shall be established by the State Treasury, which will retain at least 51% of the public body usually owns 100% of the company’s shares whilst the Municipality of shares. In some countries the shares are Gdansk will hold at least 34% of the shares. divided between a national government, •A joint stock company named ‘Port Authority of local government and other public or Gdynia’ S.A. shall be established by the State private shareholders in such a way that Treasury, which will retain at least 51% of the the involved public entities retain a company’s shares whilst the Municipality of majority voting position. In some corpo- Gdynia will hold at least 40% of the shares. ratized situations voting shares can be •A joint stock company named ‘Port Authority of allocated to private investors. Once pri- Szczecin-Swinoujscie’ S.A. shall be established by vate investors have a majority voting the State Treasury , which will retain at least 51% of the shares, whilst the Municipalities of Szczecin position, the Port Authority can be con- and Swinoujscie will each hold 24,5% of the sidered as being privatized. (See Box 7) shares.

Capitalization can be effected through •The shares owned by the State Treasury and the Municipalities are registered shares and have a transfer by law of all relevant properties preferential nature establishing priority rights to to the new Port Authority. These might Port Authority assets in the event of liquidation. include all operational infrastructure, related land and superstructure, includ- Depending on the port policy of the ing such assets as equipment and other country concerned, limits can be rolling stock. When a Landlord Port is imposed on the sale of shares. In many created, together with a new corpora- cases a Government may want to retain tized Port Authority, one or more sepa- the right to determine port policy. This rate operating companies with the legal requires the possession of the majority structure of a limited liability company of the voting shares or of a "golden might be set up to take title to the super- shares.” A clause in the law guarantee- structure and equipment. The value of ing such majority position should then the initial shares could be determined be considered. on the basis of their book or market value, whichever is less.

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PORT AUTHORITY AND TERMINAL Box 8 OPERATIONS Violated Neutrality: One important issue to be treated in A Port Director with Two Hats port laws is the relation between a Port Authority and port services providers, In 1998 the shareholders of Rotterdam’s largest con- in particular the cargo-handling compa- tainer terminal, ECT (Europe Combined Terminals), nies operating in the port’s territory. decided to put the company up for sale. Agreement Generally, it is undesirable for a public was reached with Hutchison Port Holdings from Hong Kong to buy the terminal.To protect Dutch Port Authority to be directly involved in interests the Municipal Port Authority, together with terminal operations. A port law may the Dutch ABN-AMRO Bank, retained the majority of explicitly prohibit a Port Authority from the shares, although Hutchison gained operational providing cargo-handling services. A control of the terminal.The Port Director of the Rotterdam Municipal Port Authority was nominated further step to avoid conflict of interest as a member of the Supervisory Board of ECT, appar- issues would be to prohibit a Port ently in a move to exercise as much local influence Authority from being a shareholder in a as possible.This, however, clearly violates the neutrality of the Port Authority since the Port Director: terminal operating company located in its port area. Notwithstanding potential •As a public servant has to represent the inter- conflicts of interest, a Port Authority ests of the entire port; with the overall responsibility to devel- •Must advise the Municipality on matters involv- op the port area may sometimes opt to ing competing container terminals in the port; make strategic investments to develop a sector of the port business. However, • Has the legal task as a Board Member of ECT to represent and defend the interests of this com- indirect involvement, even if it takes the pany and its personnel; and form of becoming an equity shareholder of or lender to a private port operator, • Has to advise the Municipality about public investments, including those regarding the ECT should be limited both in time and terminal. money. (See Box 8) The combination of potential conflicting functions Licensing may result in loss of confidence by the local port community. A Port Authority might be authorized to exercise licensing and regulatory func- extensive, because it usually has the tions with respect to marine and port legal power to revoke licenses for viola- services and facilities. Regulation of tions without administrative appeal. The marine activities is related to the Harbor law may authorize the issuance of pub- Master’s function, as well as to the lic licenses to operate terminals. Because transport of dangerous goods and pro- public licenses require extensive over- tection of the environment (such as rules sight by the Port Authority and report- pertaining to discharge of ship wastes ing by the licensee, their utility should into port waters, tank cleaning and the be balanced against the bureaucratic use of port reception facilities). The burden for the Port Authority and the licensing power of the Port Authority port licensees. The same goals may be with respect to port services can be better achieved through

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Box 9

Maritime Domain: A Potential Impediment to Port Development

An European country enacted a Ports Law in 1996 that included port land and even inland terminals as the so-called "Maritime Domain.” This concept developed among Mediterranean countries to protect local coastlines from undue commercial exploitation. However, the inclusion of ports has potentially far-reaching negative effects for the commercialization of port operations and may seriously impede the reconstruction of the national ports sector. Proposals are under consideration to put the port sector on a normal commercial footing, but the current law is still valid. The main issue to be resolved is the current law’s provision that no private property is allowed in the Maritime Domain. Relevant articles are: MARITIME DOMAIN BASIC PROVISIONS

Article 48 The Maritime Domain is the public estate of interest to the Republic of …, is under its special protection, and shall be used and/or exploited under the conditions and in the manner prescribed by law.

Article 49 The Maritime Domain includes the internal waters and the territorial sea, its seabed and subsoil, as well as parts of the dry land that are by their nature intended for public maritime use or are declared as such.

In respect of Paragraph 1 of this Article the following shall be considered as the Maritime Domain: the seashore, ports and harbors, breakwaters, embankments, dams, sandbars, rocks, reefs, mouths of rivers flowing into the sea, sea canals, and live and inanimate natural resources (fishes, minerals, etc.) in the sea and in the marine subsoil. (cf.. Official Gazette of the Republic of …,)

Article 51 There is no property or other proprietary rights in the Maritime Domain on any basis.

Anyone is free to use and/or to be benefited by the Maritime Domain according to its nature and purpose in conformity with the provisions of this Law.

Special use and/or economic exploitation of a part of the maritime domain may be conceded to physical and legal persons (concession) provided that such use is not in contradiction with the interests of the Republic of …. Special use of the Maritime Domain is any use that is not general use or economic exploitation of the marine domain .

concession/leasehold contracts, as these text may be used: are more flexible for both parties. However, in the event of inclusion of a No person shall provide: public license authority in a Ports Law, (i) any marine service or facility; or rules should be set for transfer, renewal and cancellation of a license. Unlike for (ii) any port service or facility, a concession or lease, where breaches are matters of contract and law, license unless he is authorized to do so by a breaches fall under administrative (or public license granted by the Port even criminal) processes for their resolu- Authority. tion. Every public license granted by the In this regard, the following reference Authority shall be in such form and

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for such period and may contain Box 10 such conditions as the Authority may determine. Marine Management Tasks: To Be Separated from Usually, a corporatized Port Authority Corporatized/Privatized Port Tasks does not have the power to grant a public license. It can only set conditions for Key functions of marine management are: the provision of port services under commercial contracts (such as leases, •Control and co-ordination of vessel move- rent contracts or concesssions) with port ments in the port and the port approaches; service providers. •Monitoring of the pilot organization; Marine Management •Dissemination of nautical and operational Marine management tasks form part of information to all concerned parties: either a national maritime administra- •Provision of safe berthing practices: tion or of a public Port Authority. Marine management, which is essential- •Control of handling and storage dangerous ly a public safety task, should be per- cargoes, control of safe loading and discharg- formed separately from a corporatized ing practices: or privatized Port Authority to prevent a conflicting mix of commercial and safety • Keeping law and order (together with the reg- objectives. A Ports Law should make ular police); and that separation of objectives clear. Because of overriding safety concerns, •Combating marine accidents and co-ordina- which may run counter to the tion of search and rescue operations. profit–making objectives inherent under this type of Port Authority, combining other involved parties; marine management tasks with managing a corporatized or privatized port •To control maritime transport, load- may not be the best option for managing ing and discharging of dangerous navigational port safety. (See Box 10) goods;

The function and duties of a Port •To exercise regulatory functions with Authority with respect to marine safety respect to protection of the marine and environmental protection can be environment; described as follows: •To discharge or facilitate the discharge of international obligations of •To regulate and control navigation the Port Authority with respect to within the limits of the port and the marine safety and protection of the approaches to the port; environment; •To disseminate nautical and other •To promote measures for the safety relevant information to ships and all

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of persons who work at or visit the • Keeping and placing buoys, beacons port; and other navigational aids as well as provision and maintenance of •To combat or to provide for combat- lighthouses; ing marine accidents in the port including fire fighting and ambu- • The landing of personnel belonging lance services; and to an armed service;

•To secure public order in the port • Cleaning of basins, works and prem- area and to exercise police functions ises; in co-operation with the civilian police authority. • The use and manning of harbor craft (sometimes requires fire fighting If the Harbor Master’s function forms capabilities); part of a national maritime administration, its powers and duties are usually •Provision and maintenance of pon- regulated in a Maritime Code. Often, toons; however, the Harbor Master (Port Master or Port Captain in some jurisdic- • Manning and use of tugs and boats; tions) is part of a Port Authority’s organization. If so, the Ports Law should • Special police powers for patrol boat include a section dealing with the specif- personnel (may also be included in ic powers and duties of this function. the Harbor Master’s function); Generally a Harbor Master may issue •Disaster control and emergency com- general and specific directions to ship- munication procedures; and ping within the framework of his powers. He is usually the operational com- • Fire fighting procedures and opera- mander responsible for marine safety tions. and for combating the effects of incidents involving ships and/or terminals. Financial Issues At the same time, he is involved in regulating traffic and acts as the main nauti- It is very important to regulate a Port cal adviser to the Port Authority’s gov- Authority’s financial powers and have erning board. (See Box 11). them conform with applicable fiscal and public administration laws. A Port Regulation of Other Port Functions Authority, whether public or private, may do very well in attracting invest- A variety of other aspects may be regu- ment, especially from private sources, if lated by a Port Authority under a Ports it is managed like a commercial busi- Law, such as: ness. Many ports, however, are part of an overall State or municipal structure • Inquiries with respect to any case and subject to the same financial rules where damage has been caused by or and regulations as other parts of the to a vessel in port; public administration. Especially in the

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Box 11

Harbor Master’s Powers and Functions

The statutory powers and duties of the Harbor Master are the focus of a Port Authority’s safety function.They can be incorporated in a Ports Law or be included under a Maritime Code with a cross reference in the Ports Law to such provisions.

The Harbor Master may:

• ensure compliance with laws and regulations on nautical safety and international conventions aboard a vessel, including fishing vessels and other categories of vessels regardless of flag and affiliation;

•provide for verification of vessel documents and of necessary qualifications of the crew;

•regulate, restrict or prohibit the movements of vessels in the port and in the approaches to the port;

•register a vessel’s arrival in and departure from the port;

• direct a pilot service and when necessary assign a pilot to a vessel in regions not requiring compulsory pilotage;

• (only when dealing with public quays) direct where any vessel may be berthed, moored or anchored and the method of anchoring;

•give directions to a vessel and/or a terminal to ensure safe transport, loading and discharging of dangerous goods in the port;

• inspect a vessel within the framework of port-state control;

• ensure the keeping of law and order in the port area;

•co-ordinate the combating of marine or other incidents;

• in the event of any risk for loss of human life to any person or damage to any property, direct the removal of any vessel from any place in the port area to any other place and the time within which such removal is to be effected;

• declare berths, locations, anchorages and fairways which may be used by vessels and the areas which are prohibited or restricted areas.

case of a Public Service Port Authority, itive market, clear financial powers for the administrative costs of burdensome port management should be included in procurement procedures can be high, for a Ports Law. These include the power to: example when a Cabinet of Ministers is the only body authorized to approve the • Levy charges, rates and fees; purchase of quay cranes or other high- cost equipment. • Make a reasonable profit;

Since a port is a functional and econom- •Take loans, issue bonds and securi- ic entity that often operates in a compet- ties;

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• Establish its own procurement rules; Sometimes, in order to involve major and sectors of the ports community in the development, a National Ports • Keep financial records and to present Commission (or Ports Council) is annual audits conducted by inde- established by law. Generally, the pendent accountancy firms. Commission has an advisory role. The general objective of a National Ports Examples of legal language used to Commission is to provide input to the define certain aspects of financial development of a national ports policy. authority include: Generally, the Commission provides this advice to the Council of Ministers • Ship and port dues and charges and through the person of the Minister of income from real estate, whatsoever Transport. Commissions may be asked their nature, arising in the Port to contribute to the development of the domain, are earned and destined for national ports policy by offering advice the Port Authority, with exclusion of on: all other Authorities. • The prioritization of policies that • The tariffs are determined by the will maximize private participation Port Authority. The proceeds of the in the port sector; tariffs shall be sufficient to meet the financial needs of the port, including • The preparation of a national ports operational expenses, the mainte- (restructuring and investment) plan nance of assets, the payment of inter- based on an objective methodology est, allocation for depreciation of for the evaluation of project propos- assets and other standard commer- als received from the port authori- cial elements (including sharehold- ties; ers’ dividends and a reasonable profit). • The allocation of public sector funding for port development; • The Port Authority can take loans, and issue bonds and securities. • The administration of an investment fund established specifically to National Ports Commission finance port development;

Especially in countries where the port • Measures to prevent monopolistic sector is still under development, the practices in the ports and to encour- national government has an important age competition; and role to play. This role may be expressed • The role of the maritime sector in the in a national ports policy formally overall national transport strategy authorized by the Parliament. The and national export policies. preparation and implementation of this policy usually is the responsibility of a The President and the members of the Transport/Port Ministry. Commission should be appointed from

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among persons with extensive experi- any public license or any agent or ence in the management of ports, ship- employee of the licensee. ping, inland transport, commercial, financial or economic matters, applied • The Port Authority shall not, where, science or the organization of workers, without its actual fault or privity, any and who have extensive experience as loss or destruction is caused by any persons engaged in port operations, or vessel or to any goods or other thing have demonstrated their ability in other whatsoever on board a vessel, be fields of port-related operations (includ- liable for damages beyond an aggre- ing in particular the fishing industry gate amount [currency of country] and the shipbuilding industry). for each ton of the vessel’s tonnage.

If a country decides to institute a Ports Inclusion of such provisions should be Commission, it should be empowered considered in light of the overall goals with the necessary tools to function for port development. For example, lim- effectively. Therefore, a Ports itations of liability may have a chilling Commission should be assisted by an effect on some investors, who would Executive Secretary and a small profes- have to seek someone other than the sional staff. Members of the staff should Port Authority to assume liability risks receive remuneration in accordance with that exceed the limit. Therefore, the Port applicable conditions for civil servants. Authority should be provided with the Finally, the costs of the Commission power to waive such liabilities or read- should be borne by the State in order to just the liability limit. ensure its independent status. Offenses Liability A Ports Law may explicitly list a num- If a Port Authority carries out marine ber of specific administrative, civil and services such as pilotage, towage and criminal offenses and empower the other related activities (for example, Public Port Authority to assess fines for Vessel Traffic (Radar) Services), liability their violation, subject to administrative for the effects of default, negligence or or judicial appeal. Such offenses may any other wrongful act should be limit- pertain to: ed as much as possible. Therefore, the law might contain a clause outlining • damage to Port Authority property; such a limitation. Examples of such a clause are: • unlawful operation of port services;

• Notwithstanding the grant of any • evasion of dues; public license, the Port Authority shall not be liable in any circum- • unsafe operation of vessels; and stances for any injury, loss, damage • pollution of the marine environment. or cost sustained by any person as a result of any default or omission of

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Implementation Problems the need to pay for the substantial investments that will be required to Implementing a new Ports Law presents modernize and upgrade the infrastruc- a wide variety of issues and often results ture. in disagreements among the parties involved. The major issues encountered The need to replace top management. in implementing new Ports Laws are Ports functioning within the framework described below. of competitive markets require a different management ethic to lead the diffi- The effects of port reform on the existing cult reform process and steer the new work force. Port reform is often trig- Port Authority safely through the shoals gered by overstaffing at ports and of competition and other commercial restrictive labor practices. However, the activities. objective of a new Ports Law is not labor reform, but port reform. Labor reform Creation of a clear definition of the port may be a by-product when a port must area. This definition should be estab- rationalize its workforce to improve effi- lished at the outset of reform and not be ciency and reduce costs. A Ports Law postponed to a later date (e.g., until later might set conditions for the transfer of Decree of a Council of Ministers). personnel from the existing Port Significant differences of opinion often Authority to the new one. arise with port cities as to what areas are part of the port and what area are part Since port reform is often accompanied of the city. If a Decree is required by the by a reduction of the size of the port’s Ports Law, it should be enacted at the workforce, the Ports Law may establish same time as the law itself. and regulate a Port Workers Fund to soften the impact of labor force reductions. The Fund can be used for redundancy payments and/or retraining programs.

The valuation of assets and the capitalization of a new Port Authority. A valuation should be conservative. Often, ports in the process of reform have to dispose of a large variety of outmoded equipment and poorly maintained port infrastructure and buildings. This obsolescence and maintenance backlog must be fully taken into consideration when assessing the value of the port’s assets. Otherwise, private sector bids in port privatization may reflect significant discounts as the bidders take into account

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FULL CONCESSION AGREEMENTS In some aspects, a leasehold might be considered a long term rent contract. But Legal Nature contrary to a rent contract, a leasehold conveys a possessory interest. Therefore, As more elaborately discussed in a leasehold can be transferred or sold to Module 3, concession agreements are a another private party under the condi- relatively new development in ports. tions stipulated by the Port Authority. Business opinions differ about the legal This is a very important feature for nature of a concession agreement – as advancing the business plan of port well as its configuration. Some conces- investor operator. sion agreements have more in common with a privatization model, while others Full Concession, Leasehold and resemble a leasehold contract. Because Land Rent comprehensive privatization constitutes an unrestricted and irrevocable transfer What differentiates a concession agree- of port land from the public to the pri- ment from a leasehold? When would vate sector, a concession agreement, one instrument be preferable over with or without BOT types of arrange- another? Box 12 summarizes the formal ments, cannot be conceived as being differences and similarities. comprehensive port privatization but The main reason to apply a full conces- only partial port privatization. sion contract is fiscal. In the 1980s many Concession agreements are a new (and ports (especially Service Ports) were in in many cases very successful) development of the Public-Private Partnership dire financial straits: government-con- model and are most successfully applied trolled, over-manned, badly maintained, within a Landlord Port structure. without market orientation and often not able to provide even essential port Concession agreements were originally services. This situation did not occur developed for Service Ports. Landlord solely in developing countries, but also Ports usually did not need concession in many developed countries. In devel- agreements, but used leasehold agree- oping countries, however, the financial ments instead. Both types of agreements resources necessary to modernize port have much in common and some facilities and to provide for redundancy authors consider a leasehold contract to payments for excess personnel were be a variant of a concession. To avoid usually lacking. Concession agreements misunderstanding, the term "full conces- provided a timely solution: private sion agreement" will be used to describe investors provided the money to mod- a concession in its broadest form; i.e., a ernize port facilities and often were will- series of contracts that define the rela- ing to take over some port personnel lia- tionship between the Government and bilities. This freed up Government the private sector regarding the right to resources for use in other parts of the exploit port land and facilities as well as economy. For all their advantages, con- the obligation to construct port infra- cession agreements do have a price, structure and superstructure. most particularly the surrender by the

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Box 12 Full Concession, Lease and Rent Contracts – Landlord Port

Characteristics Full Concession Leasehold Land Rent

Terms 25-35 years 25-35 years 10 years

License Maybe, depends on Maybe, depends Maybe, depends on legislation on legislation legislation

Government guarantees (loan, taxes, exchange Yes No No rate,competition conditions, etc)

Obligation to assume por personnel liability Often, depends on No No local situation

Port assets may be pledged as security Yes Maybe, depends No on legislation

Performance monitoring by Port Authority Yes Yes or no No depending on the contract

Traffic guarantee by Concessionaire, Lessee or Yes, depends on Usually not No Renter contract

Private Investment in port infrastructure Yes No No

Private investment in port superstructure & Yes Yes Yes equipment

Tariff control by Government or Port Authority Depends on No No situation

Terminal management Concessionaire or Lessee Renter his chosen operator

Payments Fixed and variable Lump-sum, Fixed mini-max or shared revenue

Legal character of private party Joint Venture, often Mainly Limited Limited Liability including shipping Liability Company Company line

Responsability for environmental conditions Yes Depends on Usually not legislation

Business Plan required Yes Depends on con- No tract conditions

Reversion of user rights after contract period Yes Yes Yes

Compensation for newly built facilities Depends on To be transferred to Not applicable contract new lessee or to be removed

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Government of full and complete con- pass to the Government at the end of the trol over port development. concession. For many large terminal operators, the BOOT model is a pre- Full Concession and BOT Schemes ferred option.

If the concessionaire obtains the right to BTO (Build, Transfer, Operate). To construct significant parts of the opera- address instances in which legislation tional facilities as well as the basic port forbids ownership by private parties infrastructure, a concession could be over what is considered public infra- combined with a BOT arrangement. In structure or part of the maritime domain the case of legislation designating part ownership may be directly transferred of the infrastructure to be of a public to the Government after construction character, the concession may be consid- (e.g., Costa Rica, Croatia). Generally, this ered a public license. However, the part form of public-private partnership is of the concession constituting a public considered more complicated than the license is generally not negotiable. The more common BOT scheme, especially Government authority granting the with respect to liability and increased license usually reserves the right to uni- government involvement. Under the laterally modify license conditions. BTO model, "ownership" over port facilities becomes an issue for lenders and The most important BOT arrangements investors, especially when fixed assets combine many variations of long-term are required as collateral for financing. leasing with pre-agreed investment In such cases, lenders may require some commitments. In port reform, the most form of Government guarantee regard- commonly used models are BOT, BOOT, ing adherence to the terms of the conces- BTO and WBOT. sion agreement.

BOT (Build, Operate,Transfer). Legal WBOT (Wraparound BOT). Finally, the title to the newly constructed port infra- WBOT concept packages a BOT with a structure, and sometimes other assets, privatization of the public infrastruc- remains with the Government/Port ture. Under a WBOT structure, existing Authority until the end of the conces- Government-owned port facilities are sion period. The concessionaire con- expanded by the private sector, which cludes a long-term leasehold agreement, holds title only to the additional infra- which conveys rights similar to holding structure. Under this model, a private title over the land. This agreement is operating company would then: usually attached as an annex to the concession. •Operate the entire port facility under a project development agreement BOOT (Built, Own, Operate Transfer). (PDA); It is also possible that legal title in the land is acquired directly by the conces- • Manage the Government-owned port sionaire. Under a BOOT model, the par- facility under a management con- ties agree to have title over all assets tract;

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• Expand the facility under a conces- Box 13 sion/BOT contract; and Contents of a Typical Concession Agreement • Have both the management contract and concession/BOT contract "wrap Definitions around" the PDA. Appointment of the Operator Term of the Agreement Full Concession Agreement Structure General Rights and Obligations of the Operator General Rights and Obligations of the Port Authority Transfer of Rights, Obligations and Assets While the principal framework for the Performance Parameters relationship between the Port Authority (Transfer of) Employees and the concessionaire is specified in the Force Majeure main concession agreement, there are a Liability for Loss and Damage of Goods Lease of Facilities number of other documents that form Activities Permitted by the Authority part of the concession. The concession Liability for Damage agreement and related documents can Regulations by the Authority Access to the Site be used in a number of circumstances Miscellaneous Conditions including when: Construction and maintenance BOT Arrangements •Aprivate operator concludes a con- Investments under a BOT Arrangement cession agreement for an existing Functional and Technical Design Design and Construction Flaws public terminal; Building Conditions Construction under a BOT Arrangement •Aprivate operator concludes a con- Zero Date cession agreement with a BOT Drop Dead Date Extension Events arrangement for an existing terminal Completions Tests and Take-over that must undergo large-scale recon- Handback and Transfer of Facilities struction and be thoroughly re- Lender’s Security Change in Law equipped; and Freedom to Set Tariffs Concession Fee •Aprivate operator constructs an Security and Safety entirely new terminal under a con- Access cession agreement with a BOT Unclaimed Cargoes and Containers Taxes arrangement (greenfield project). Information and Communication Insurance and Indemnity Box 13 lists the important topics usually Termination and Prolongation treated in a concession agreement and Option to Continue Termination due to non-compliance related documents. Bankruptcy, etc. Expiry of Concession Pre-concession Documents Arbitration Costs Often, either pursuant to the terms of an Governing Law award or for purposes of securing financing commitments, the parties execute various pre-concession documents

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that either outline the fundamental • Technical Operations Agreement. An terms of the concession or become incor- agreement that specifies joint use of, porated into the concession itself. and responsibilities for, technical Among these are: facilities, such a shore cranes or operational infrastructure. • Letter of Intent (LOI). Apre-concession agreement stating the conces- Definitions sionaire/sponsor’s intention to design, construct and build or reno- Every concession agreement includes a vate a new/existing port facility, and list of definitions to delineate precisely the Port Authority’s willingness to both the subject matter and the concepts establish terms for a privately oper- used throughout the agreement. These ated facility under a concession definitions will vary from country to agreement and to cooperate with the country and legal system to legal system. Examples of the most commonly concessionaire/sponsor in comply- used definitions include: ing with certain local requirements (e.g., permits, registrations, qualifica- • Approved Detailed Project tions to do business). The LOI is pre- Report/Approved (DPR). The pared in accordance with draft func- detailed project report approved by tional specifications that were origi- the Port Authority for the develop- nally submitted as part of the bid ment of the various phases of the documentation. site, the approved form of which shall be signed for identification by • Detailed Project Report (DPR). A the parties to this agreement and document submitted to the Port shall include any amendments to the Authority as an outline of the func- DPR approved by the Port Authority tional design/general technical in accordance with this Agreement; design and time schedules (milestones) for the various phases of the • Bank. Every shore structure (exclud- construction. Once approved by the ing a quay wall), measured in each Authority, the DPR would be incor- case from the crest line of the ground porated in the concession agreement, to the bed line, and including related at which point the milestones artificial structures; become binding. • Basic Port Infrastructure. • Joint Development Agreement (JDA). Immovable assets destined for gener- An agreement among members of al use of the port area, such as: the sponsor group that allocates proj- — maritime access channels; ect responsibilities (e.g., shareholding, financing, construction, tax — port entrance; advantages). This agreement might include a Port Authority or even a — protective works including break Ministry. waters, shore protection;

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— accesses to the port for inland in Section [number]; transport (roads, tunnels, etc.); and • Container Services. Container terminal management and operations — hinterland rail connection. including container handling services for stevedoring, landing, trans- • Basic Structures. All immovable porting and warehousing; stuffing property, with the exception of such and stripping and consolidation of property that is subject to the right to containerized cargoes; and wharfage; lease. Basic structures include all pieces of stone, foundation remains, • Depreciated Replacement Value. poles, pipes, cables, scaffolding, Shall have the meaning assigned to it pavements, demarcations and struc- in accordance with the [reference to tures on or at the grounds, which appropriate document, accounting were founded, placed or built by the practice, method of depreciation, Port Authority or by the former users etc.]; before the commencement of the right of lease as part of a concession; • Financial Closing. The fulfillment of all conditions precedent to the initial • Buildings. Structures that were availability of funds under the already present on or in the ground Financing Documents and receipt of at the issue of the right of lease as commitments for the equity required part of a concession and to which for (Phase 1 of ) the project/immedi- this lease bears upon; ate access to funds;

• Cargo Handling Services. Cargo ter- • Financing Documents. All loan minal management and operations agreements, notes indentures, securi- including cargo handling services for ty agreements, letters of credit, share stevedoring, landing, transporting, subscription agreements, subordinat- cargo consolidation and warehoused debt agreements, and other docu- ing of general, liquid and/or bulk ments relating to the financing of the cargoes; and wharfage; Project as the same may be amended, • Concession Area. The port areas supplemented or modified from time within the port of [name], known as to time; [name], as more fully described and delineated in Annex [number] to this • Force Majeure. An event or circum- Agreement; stance or a combination of events or circumstances beyond the reasonable • Concession Fee. The monthly price control of either party, which materi- per meter for the use of leased prop- ally and adversely affects the per- erty and, in addition to such amount, formance by that party of its obliga- a Throughput Royalty to be paid in tions under this Agreement and that recognition of the Port Authority’s cannot reasonably be foreseen or pre- ownership (user) rights as specified vented (such as civil disturbance,

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armed conflict or act of foreign the Financing Documents. enemy, wars, blockades, insurrec- tions, uprisings, sabotage, embargo, revolution, or riot, action or inaction • Operational Port Infrastructure. of public officials, expropriation, Infrastructure essential to port opera- nationalization or confiscation of tions, to include any or all of the fol- facilities, earthquakes, mudslides, lowing items: lightning, typhoon, fires, storms, floods, epidemics or plagues, acts of — inner port channels, turning and God and other natural disasters); port basins;

• Good Industry Practice. As applica- — revetments and slopes; ble to the Operator, its contractors, — roads, tunnels, bridges, locks in sub-contractors, operators, sub-con- the port area; cessionaires, sub-lessees and all other third party agents of the Operator, — quaywalls, jetties and finger piers; practices, methods, techniques and standards, as changed from time to — aids to navigation, buoys and time, that are generally accepted for beacons; use in international port construction, development, management, — hydro/meteorological systems; operations and maintenance taking — specific mooring buoys; into account conditions in [country]; — Vessel Traffic Management • Grounds. The grounds given out in System (VTMS); lease to the Operator under this Agreement; — docks;

• Joint Development Agreement. The — port land (excluding superstruc Agreement dated [date] between the ture, terminal road system and Sponsors and, inter alia, allocating paving); project responsibilities between the Sponsors as per Annex [number]. — access roads to general road infrastructure; and • Lead Sponsor. [Name] having a major Equity Share as per the Joint — rail connection to general rail Development Agreement. infrastructure, marshalling yards.

• Lenders. Local/Foreign finance insti- • Port Equipment. Equipment (non- tution(s), corporations, companies or fixed assets) essential to the opera- banks providing secured and unse- tion of the port, to include any or all cured credit facilities to the Operator of the following items: including lease and hire/purchase facilities to the Operator pursuant to — tugs;

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— line handling vessels; port];

— specialized vessels for depth sur • Quay Wall. A vertical or almost ver- vey and fire fighting; tical shore structure, including related support structures. — dredging vessels and equipment; This list may be augmented with other — ship/shore handling equipment items or the definitions may be expand- (top cranes, gantry cranes, grain ed, depending on the specific objectives elevators, etc.); and of the concession and considerations of — cargo handling equipment (apron the national concession law. and terminal), such as tran- The Operator stainers, top lifts, trailers, etc. Parties under a full concession agree- • Project. The development, financ- ment usually consist of a Port Authority ing, design, construction, operation and maintenance of the site in accor- and a sole sponsor or a consortium of dance to the provisions of services to sponsors (often called a Special Vehicle the users; Company or Special Purpose Company). The consortium may not necessarily be • Regulatory Authority. Any authority identical to the Operator but may (referred to in Article [number]) con- include the operator as a consortium stituted by law in [country], member.

• Site. The wharves, buildings, and The amount of share capital provided other infrastructure and superstruc- for a new venture provides one indica- ture leased/given in concession to tion about the consortium’s confidence the Operator under this Agreement; about the port’s prospects and future development. In developing countries, • Sponsors. The Consortium selected the International Finance Corporation [through a process of competitive may be a source of share capital for the bidding in [month], [year]], led by venture. Whether the Port Authority the Lead Sponsor; itself may take shares is debatable, but • Terminal. The terminal facility pro- the Port Authority preferably should not posed to be developed in accordance be a share holder in order not to com- with the terms of this concession promise its position with respect to agreement by the Operator; other port users, thereby creating conflicts of interest with its role as a land- • Transport Infrastructure Linkages. lord port manager and regulator. Based The road/rail/water infrastructure on the estimated income expected dur- linkages agreed to in the Approved ing the concession period and the infra- DPR, identified as material transport structure and superstructure to be con- infrastructure required for the devel- structed during the concession period, opment /operations of the [terminal, the consortium should be expected to

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leverage its investment with borrowed issue. It mainly depends on the respec- money from various sources, usually tive amounts of investment the Port from a syndicate of commercial banks or Authority and the concessionaire have through the issuance of bonds or other made or will make. In a Landlord Port, capital markets instrument under an standard lease contracts are usually con- indenture. cluded for a period of 30 years, with options to renew. Investments of lessors Finally, the consortium may conclude a in superstructure and equipment often management contract with a profession- exceed those of a Port Authority by a al operating company. Both the financ- large margin; whether this is the case or ing arrangements and the management not, both parties have an interest in a contract form part of the concession doc- mutually beneficial long-term relation- uments. (See Box 14) ship. This is especially true when concluding a full concession agreement Box 14 together with a BOT arrangement. Shorter term arrangements (10 years or less) are suitable for Tool Ports, but in Reference Clause on Nomination of general do not provide much security or Operator of a Container Terminal stability for the Port Authority and offer no major incentives to the concession- This INDENTURE made and entered into at (place) aire to improve performance or to intro- this (number) day of (month) (year), by and between The Port Authority of [name] a body corporate (a duce innovative operations. public entity), incorporated under the (name) Act No [number] of [date] and having its Head Office at Concession documents must also indi- [name].street, [city], in [country], (hereinafter called cate precisely when the concession peri- and referred to as “The Authority,” which term or expression where the context so requires or admits, od actually starts, which can be a com- mean and include the said Port Authority and its plicated issue. Some of the provisions successors or assignees) on the one hand, and the come into force on signature, such as (name) Container Terminal Ltd, duly incorporated in [country] under the Companies Act of [date] and warranties, confidentiality provisions having its registered office at [name] street, no.[num- and clauses relating to applicable law ber], [city] in [country] (hereinafter referred to as ‘the and dispute resolution. In the event of Operator’), which term or expression shall where the transfer of assets or construction of context so requires or admits, mean and include the said Container Terminal Ltd. and its successors and infrastructure under a BOT arrange- assignees), on the other hand, ment, relevant conditions come into force upon satisfaction of waiver of pre- Article… The Authority hereby appoints the Operator to pro- existing conditions. Conditions prece- vide cargo handling (or container) services at the dent deal largely with delivery and port area(s) known as (name of area), under the proper execution of certain documents terms and conditions specified in this Agreement. required to give effect to or support obligations under the concession agreement. Term of the Agreement The effectiveness of a full concession The term of the agreement is a strategic agreement is conditioned upon the fulfillment of specified conditions prece-

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dent and evidence that no circumstances third party including conditions exist that may result in the early termi- under which such transfer can be nation of the agreed terms. (See Box 15) effected (the right to transfer should be sufficiently flexible to encourage Box 15 the financing of port improvements);

Reference Clause on • The right to own all newly construct- Term of Concession ed buildings and superstructure improvements on the premises dur- This Concession Agreement shall commence on the ing the lease period, with compensa- [day] of [month] of the year Two Thousand and tion by the Port Authority (Lessor) [year] and shall end, in whole or in part, on [day] of [month] of the year Two Thousand and [year]. after termination of the agreement, The Operator has the option to extend the duration or, in the case of transfer to a third of this Concession Agreement by a period of maxi- party, sale of such assets according to mum [number] years, immediately following the the terms of the finance agreements present period, taking into consideration the provisions given in Article [number]. Upon pain of laps- (in some jurisdictions it may be nec- ing of this right the Operator shall notify the essary to require such sales to com- Authority in writing at least two years before the ply with local procedures or applica- extension might commence, that he wishes to avail himself of his right. ble bulk transfer notice requirements).

General Rights and Obligations of the Full concession agreements (including Operator BOT arrangements) and lease agreements usually stipulate that the fixed The Operator generally acquires lease- assets revert to the Port Authority at the hold rights and obligations when he end of the lease. Transfer may be effect- assumes control of an existing facility ed with or without compensation, under a concession agreement. The con- depending mainly on the duration of the cession agreement generally limits use contract and the investment value of the of the leased premises exclusively for fixed assets. It is not unusual for a Port port purposes and for handling certain Authority to pay the concessionaire or cargoes. Within these limits an operator lessee the depreciated value of the assets is free to develop the business. Detailed at the end of the concession period. restrictions regarding cargoes being handled on the terminal should be avoided, Finally, a concession agreement may with the exception of dangerous and contain an exclusivity clause designed to polluting cargoes. prevent the concessionaire/operator, and any of their subsidiaries, from com- There are many other critical subjects to peting with other terminal operators in be included in a concession agreement. relation to the particular traffic for Two issues of main importance are: which the concession was granted within defined geographical areas and for • The right of the concessionaire to stated time periods, as the market situa- transfer the leasehold rights to a tion and the scope of the investments

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may reasonably require. In any case, General Rights and Obligations of The this time period must remain short Port Authority enough compared to the length of the concession agreement, and not exceed a During the concession period the Port few years. Authority often assumes dual roles. On the one hand, the Port Authority serves Generally, port infrastructure construct- the public interest as a regulator moni- ed by a concessionaire through a BOT toring performance under the conces- arrangement remains the property of the sion agreement. On the other hand, the Port Authority. With respect to movable Port Authority may possess a stake in assets placed on the concession area by the port enterprise as a participant in a the concessionaire, ownership rights public-private relationship with a pri- over these assets generally remain with vate sector port user. There is an increas- the concessionaire (with the right to ing trend for Port Authorities to become pledge these assets as collateral to finan- commercial actors, interacting with pri- ciers) throughout the concession period vate terminal operators as economic and may, depending on the concession partners, rather than acting as regula- agreement’s terms, be transferred to the tors. This trend is born of necessity – the Port Authority when the concession ter- Port Authorities and terminal operators minates. Some legal systems allow a need each other. Therefore, it is a major concessionaire/lessee to own buildings, challenge to find the proper balance installations and other immovable prop- between the regulatory relationship and erty located on Port Authority owned the commercial interests of both parties. land (e.g., in The Netherlands). In this context, rights and obligations of Therefore, operators may use these the Port Authority have been modeled assets as collateral for bank or share- within the framework of a Landlord Port model. holder financing. In countries where the port area constitutes part of the Investments and capacity calculations Maritime Domain, private ownership of are primarily based on traffic and immovable property will be considered throughput forecasts. In the case of a fixtures that cannot be owned independ- BOT arrangement requiring significant ently from the Maritime Domain (e.g., in outlays by a concessionaire, the Port Croatia). In such cases, user rights (in Authority (or the national government) some instances including the right to might obligate itself not to concession, mortgage – but not own outright – the promote or commence another compet- asset) may be allowed under the conces- ing terminal (or a terminal aggregating sion. Whichever is the case, the Port more than a certain capacity) in a nearby Authority should include in the conces- port area. If, unexpectedly, new capacity sion detailed provisions pertaining to were to be created, the feasibility of a ownership or user rights over those project might well be in jeopardy. There assets that are erected by the concession- is often, especially in smaller ports, aire in the concession area. (See Box 16) room only for one or two terminals handling a specific commodity. If the

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Port Authority is too preoccupied with Transfer of Rights, Obligations and intra-port competition, terminal opera- Assets tors might end up in cut-throat competition, resulting in the bankruptcy of some When an operator acquires an existing of them at a time when the govern- (former public) port facility, rights and ment's goal is to encourage sound pri- obligations of the public sector owner vate-sector participation in the port sec- transfer, along with the use (but not tor. (See Box 17) ownership) of the assets, to the private Box 16

Reference Clauses on General Rights and Obligations of the Operator

Subject to other provisions of this Agreement and its liability under any Law, and without in any way limiting its ability, the Operator hereby undertakes and binds itself to the following at the Concession Area:

•To provide, inter alia, effective and efficient container (cargo handling) services according to the performance parameters as described in Annex [number];

•To ensure that facilities leased by the Authority are operated with due care and skill and in accordance with the terms of this Agreement;

•To repair and make good to the satisfaction of the Authority all damages and breakages to infrastructure and superstructure made by the Operator or by third parties acting under the responsibility of the Operator, fair wear and tear excepted;

•To ensure that the sites are kept clean, and that the environment is fully protected;

•To draw up rules for safe systems of work and operational procedures to ensure health, safety and welfare of all workforce and terminal users in compliance with the applicable laws and regulations, international practices and the Authority’s guidelines;

•To implement an effective safety and security system and to comply with the guidelines of all competent Authorities; and

•To ensure that any safety and security remedial action requested by any competent Authority is acted upon immediately.

The Operator shall apprise the Authority of the current work schedule, the previous day’s vessel operations and the following day’s vessel planning and work schedule.

Any damage to the site’s environment shall be assessed and restoration costs billed to the Operator, who shall bear such costs.

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Box 17

Reference Clauses on General Rights and Obligations of the Port Authority

Subject to other provisions in this Agreement, the Authority shall exercise regulatory functions in respect of the conduct of port operations as detailed in the following sub-sections:

•allocate berths at the request of the Operator, in accordance with established port policies, in order to satisfy the Operator’s work program in the best overall interest;

• chair Port Operations Meetings with one or more representatives of the Operator and of other port users;

• set productivity targets and monitor the Operator’s performance against set parameters (as per Annex [number]).

The Authority hereby undertakes and binds itself to:

•provide and maintain the necessary basic infrastructure such as maritime approaches, canals, turning circles, breakwaters, aids to navigation, access roads, etc.;

•provide marine services including vessel traffic management, pilotage, towage, berthing, unberthing and shifting of vessels;

• ensure safe, orderly and timely movement of vehicles and pedestrian traffic along the access roads;

• maintain the security of all land and sea entrances to the port area (those existing presently and in the future);

•provide and maintain all perimeter fencing around the port area;

•provide any services not listed herein and on which both parties will agree by this Agreement or by any other subsequent agreement.

When providing services listed above, the Authority, in line with the operational plans and work schedule of the Operator, will ensure that all such services are provided in a non-discriminatory way and in accordance with the Operator’s needs to enable him to meet the performance targets and other objectives to be achieved.

sector operator. When a new facility is Rights constructed under a BOT arrangement, the new operator commissions the facili- •To succeed to and to carry on the ty after successful commissioning tests business of the port facility and sup- have been conducted by an independent porting services of the Port expert (usually a test certifier, who Authority, as established under the issues a Commissioning Certificate). Port Law; (See Box 18) •To succeed to the ownership, rent or When taking over an existing facility, lease of certain properties, movable the following rights and obligations are and immovable, located on the ter- usually included in the concession minal in the port or used by the port agreement: facility and supporting services; and,

•To succeed to certain rights, powers,

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Box 18 porting services;

Reference Clauses on Newly Built •To succeed to contracts and agree- Assets in the Concession Area ments entered into for the purposes (BOT arrangement) of, and in relation to, the business of the terminal and supporting services; •Operational infrastructure constructed by the usually, these contracts are specified Concessionaire/Operator in the Concession area, in a schedule annexed to the conces- in furtherance of its business, shall be and shall sion agreement; and remain the property of the Port Authority, without any claim for or reimbursement from the Port •To succeed to all actions and pro- Authority/Lessor for the cost of value thereof. ceedings instituted by or against or in relation to the terminal (it is not •Port superstructure and movable assets construct- uncommon for the operator and Port ed and/or installed by the Authority to negotiate an indemnity Concessionaire/Operator, in furtherance of its for liability incurred as a result of business, shall remain owned by the certain proceedings). Concessionaire/Operator. At the end of the Concession period the aforementioned assets The transfer of assets to the new opera- shall either be transferred to the Port Authority tor under a concession agreement after payment to the Concessionaire of the written requires thorough inspection and to down value of those assets, or be demolished or determine what repairs or backlog removed from the Concession Area. maintenance, if any, is expected to be carried out by the Port Authority prior to the transfer. Existing assets forming privileges and interests of the Port part of the operator’s leasehold and Authority pertaining to cargo han- their attendant condition and quality dling/container operations and sup- will be reflected in the concession fee. porting services on the terminal. The highest concession fee (relative to Obligations value of assets transferred) is usually accorded in jurisdictions allowing for •To succeed to certain liabilities of the the ownership of superstructures to be Port Authority pertaining to cargo transferred to the operator. handling/container operations and supporting services, carried out at When building terminal facilities under the terminal; a BOT arrangement, the operator has to design and construct the terminal •To receive and maintain all books, including quay walls and other infra- accounts and documents relating or structure works. The design has to be pertaining to the Terminal and sup- carried out in accordance with function- porting services; al requirements and design solutions set out in the approved DPR (Detailed •To offer employment to officers and Project Report) as well as under the con- employees of the Terminal and sup- struction program included in the agree-

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Box 19

The Buenos Aires Case

In 1993 bid documents were issued by the Argentine Government offering concessions for six terminals in Buenos Aires (Puerto Nuevo).The bid was for six conventional finger piers of which two piers (No. 1 and 2) could be bid as one.This resulted in five operating concessionaires of which one had to close down within 13 months after starting operations. From the remaining four operators, one specialized in general cargo and bulk, three in container handling.The story of Buenos Aires was told in September 1998 by Trevor H. Bryans of P&O Ports during a World Port Privatization Conference in London.

“Unbeknown to the Puerto Nuevo bidders at the time of submitting the bid, another concession was to be granted for container operations. A fourth container terminal, called Exolgán, was developed at Dock Sud, only 8 km from Puerto Nuevo.This area falls under the Buenos Aires State Province jurisdiction, and not under the Federal Government.The position then was that there were four container terminals in the Port of Buenos Aires, to handle 500.000 containers,further reducing the size of the cake, and casting considerable doubt on the achievability of the commitments made in winning the concessions. The issue of competition, and how it is addressed in government policy, is an issue, which is fundamental to the success of privatization. Competition becomes an obsession with Port Authorities planning for privatization. Ports with insufficient volume to support one efficient operator, look to bid two or more concessions.

The Port of Buenos Aires is a perfect example of this obsession with competition, which has led to over-capitalization, five concessions have been let, and there is only sufficient volume for two, or at the most, three efficient container terminals. As mentioned previously, the operator who won the concession of terminal 6 has gone bankrupt, mainly as a consequence of lowering tariffs to sub-economic rates to retain business, and since the early part of ’95 a savage price warde- veloped, which has seen average-per-box revenues plummet from US$ 400.- pre-privatization to less than US$ 200.- today and they are still falling.The current rate-of-return to terminal operators in Buenos Aires is beneath average long-term cost of the provision of the services by segmenting the market into four operators. Each terminal incurs considerably higher costs than the combined average cost of one large operator.The clients have been denied access to services provided in the most effective manner possible.

Moreover, the three terminals operating in Puerto Nuevo suffer unfair competition by the operator Exolgán at Dock Sud, operating at the Provincial Administration. It is estimated that the commercial advantage to Exolgán is approximately US$ 40.- per box.

The commercial advantage to Exolgán arises from the following

•The ‘Tasas a la Carga’,payable by importers/exporters to the terminal, which is then passed on to the Federal Government, does not apply at Exolgán.The ‘Tasas a la Carga’ is US$ 3.- per ton on import cargo, and US$ 1.- on export cargo. It is collected by Exolgán, but not passed onto the Province.

•Under the terms of the bid in Puerto Nuevo, the Concessionaires had to absorb a proportion of the waterfront and AGP labour. In the case of TRP,this amounted to almost 900 people, although the terminal only required 430. Reducing this labour to the required number cost in excess of US$ 10M. Exolgán was not required to absorb any of the redundant or surplus labour, although that labour was originally employed at Dock Sud.

•Volume commitments were made by the Puerto Nuevo terminals as part of the bid. Shortfalls in these volume commitments must be paid for by the operators. No similar commitments were required from the operator at Exolgán.

•The rental fee payable to the Province by Exolgán is payable for the quay area only; the remainder of the land is freehold.

•Stringent performance guarantees and bonds had to be made by the operators in Puerto Nuevo, and stipulated insurance costs covered.This was not the case at Exolgán.”

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ment. Major aspects of the construction over-regulate performance by imposing process will have been identified for very detailed and strict parameters. completion by stated times and, if these This tendency appears to be more of a milestones are not met, the Port problem in the case of new terminals or Authority usually has the right to assess terminals with a low level of current penalties or terminate the concession. In throughput. Detailed parameters require practice, technical problems should be extensive control and limit an operator’s expected to arise. Although the opera- flexibility. Also, the Port Authority must tor may not alter the construction pro- devote resources to their administration. gram without approval of the Authority, Performance parameters that are most reasonable requests for changes to the likely to succeed are those set at a level program are usually approved. The Port that a Port Authority believes will result Authority customarily reserves the right in agreed concession fee being paid. to appoint a construction observer, usu- When required levels are exceeded, a ally an engineer. Commission/transfer positive financial incentive should be of the new assets is concluded on the given to the operator, because extra traf- basis of a commissioning certificate fic and throughput results in extra rev- issued by an independent test certifier, enue for the Port Authority. according to the relevant provisions of Performance parameters have produced the concession agreement. (See Box 20) the best results when they were estab- Performance Parameters lished with the idea of not controlling the operator but creating a win-win situ- Concession agreements often include ation for both parties. performance parameters to measure the success of the operator in managing the There are no standard performance cri- port or terminal. A Port Authority may teria for handling various commodities. want to highlight performance indica- Situations differ widely from country to tors and incorporate certain ones into country and from terminal to terminal. the concession. These parameters can Much depends on labor conditions, the relate to: attitudes of labor unions, and factors such as size and age of vessels, consign- • Realization of a agreed (minimum) ment size and timely availability of number of ship calls; information. Therefore, performance criteria ordinarily reflect local conditions • An agreed (minimum) quantity of and take into account the reality of all cargo passing through the terminal; relevant local factors influencing a port.

•Efficient utilization of the terminal; A vast majority of concession agree- and ments relate to container terminals. In • Service quality. this field many items are standardized, resulting in the development of interna- Generally, from the Port Authority per- tionally accepted, detailed performance spective there may be a tendency to criteria.

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Box 20

Reference Clauses on Transfer of Assets

•The present Agreement relates to the [name] Terminal at [name] Port with associated buildings and stacking area, as more fully described in Annex [number] to this Agreement, which shall form an integral part of this Agreement, and which may be modified from time to time by mutual agreement between the Authority and the Operator.

•A list of facilities, buildings, equipment and others together with a detailed inventory of the contents thereof leased /transferred to the Operator is shown in Annex [number].

•A joint survey of the facilities, buildings, equipment and contents thereof shall be effected before the time of take over, with the objective that the site should be delivered to the Operator in good working condition.

•Before commissioning, the Operator may require major improvements and modifications to be effected on infrastructure, superstructure or facilities, concessioned/leased by the Authority to the Operator, which he deems to be in an insufficient technical condition.The Operator shall submit such requests to the Authority for consideration. The Authority is obliged either to carry out the requested improvements and modifications at its own cost or take the insufficient technical condition of infrastructure, superstructure or facilities into account when negotiating the Concession Fee.

•All major modifications and improvements, as above, to infrastructure and facilities concessioned/leased to the Operator under this Agreement, which the Operator deems to be necessary to improve its services shall be subject to written approval of the Authority and the costs thereof shall either be borne by the Operator or be reflected through a re-adjustment of the Concession Fee.

• In cases where repairs or other works may have to be performed by the Authority, prior to the start of operations, the Authority shall be responsible to meet the costs of repairs or other works, unless these are due to the negligence of the Operator.

The Design of Productivity Targets. workforce have an opportunity to struc- Productivity targets are usually ture operations, develop commercial designed in a phased manner, taking policies and engage in training various into consideration the emerging prob- categories of personnel. lems that a container terminal will face during the first years of its operation. Phase 2 specifies the phase during For the purpose of the concession/lease which the terminal is expected to work agreement two phases are usually at peak efficiency with professional defined. management and a well-trained workforce in place. Phase 1 constitutes the start-up period, from the date operations commence to a The following types of productivity tar- later point one to two years later. During gets can be included in the concession this time the new management and the agreement’s performance provisions.

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Crane Productivity. Crane productivity and replaced by the quayside gantry measures the number of equivalent con- cranes (or ship mounted cranes) – tainer movements per crane working two moves for every cover removed. hour. It is calculated by dividing the number of equivalent container move- Ship Productivity. Ship productivity is ments handled by a crane by the num- the output achieved per ship working ber of hours the crane operated. Crane hour and is used to measure the efficien- productivity is usually expressed as: cy of ship operations. It is the most important indicator to ship operators •Equivalent container moves per and a valuable means for measuring gross crane working hour; year-round terminal performance. It is recorded and expressed in four cate- • Equivalent container moves per net gories: crane working hour (deducting all non-operational and idle time experi- •Equivalent container moves per ship- enced by each crane). hour in port (calculated by dividing the total equivalent container moves Equivalent container moves is the sum by the time spent in port, measured of the following: in hours);

• each container discharged; • Equivalent container moves per ship • each container loaded; hour at berth (calculated by dividing the total equivalent container moves • each container shifted to gain access by the time the vessel spent along- to another container - counted as one side the berth, measured in hours); move if the container is shifted within the vessel, but as two moves when • Equivalent container moves per it is shifted via the quay; gross working hour (calculated by dividing the total equivalent contain- • each container moved to another er moves by the time the vessel is position on the request of the ship worked, measured from the start of operator (a restow) – counted as one the work to the termination of the move if it is restowed directly to work); and another location in the vessel and as two moves when the restow involves • Equivalent container moves per net discharging to the quay and later re- ship working hour (calculated by loading to a new position on board dividing the total equivalent contain- the vessel; er moves by the gross working time minus the non-operational time and • each container lifted in error and the idle time). returned to the ship – counted twice; and Non-operational time is the period when the berth is not scheduled to be • each hatch cover lifted to the quay worked (e.g., meal breaks).

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Idle time is the period when work has and the Ports Authority to monitor labor stopped for unexpected and unsched- productivity and, indirectly, terminal uled reasons, (e.g., equipment break- operating costs. Labor productivity indi- down). cators are based on the total number of hours worked by certain categories of Quay Productivity. Quay productivity employees in the terminal. measures the throughput in equivalent container moves per unit of time per Utilization Measures. This category of meter of quay length. This criterion is indicators measures the intensity of the included to encourage the operator to use of terminal resources by the opera- successfully promote and market the tor. It includes two important indicators, terminal facilities and to increase traffic. the berth working index and the yard The targets maybe different for each utilization index. The berth working applicable phase of the project. index compares the total time vessels were worked at the quay with the total Terminal Productivity. Terminal pro- time that such vessels were berthed. ductivity expresses activity in terms of The yard utilization index compares the the number of containers handled per number of storage slots occupied to the square meter of terminal area per time total number of available slots, and is unit. It is calculated by dividing termi- typically calculated daily. nal traffic, measured in TEUs, by the total terminal area in square meters. Performance parameters are best includ- The targets may be different for each ed in an annex to the concession agree- applicable phase of a project. ment, with a section in the agreement referring to the detailed annex. (See Box Dwell Time. Dwell time is a measure of 21) the time spent by containers in the terminal. It is a major indicator of the effi- Transfer of Employees cient use of the terminal area. It measures the period from the time a contain- When concluding a concession agree- er is lifted off the ship to the time it ment for an existing terminal, is it com- departs the container yard. An appro- mon practice to engage all or part of the priate indicator of quality of service is employees already working in the termi- also the truck turnaround time from nal or to extend an offer to join the new entry to exit in the terminal area when venture. This area is highly sensitive delivering or picking up a box, with 15- and should be handled with great care 20 minutes being the common efficiency even before the concession is awarded. benchmark. Module 7 deals with labor issues in greater detail. Labor Productivity. Labor productivity figures relate traffic and terminal Often, as a result of years of neglect, throughput to the total number of peo- unfavorable working conditions and ple employed by the terminal. This indi- outdated equipment, workers lack moti- cator is included to enable the operator vation to perform at an acceptable level.

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Box 21 among labor, the new operator, and the Government. (See Box 22) Reference Clause on Productivity Targets Box 22 The operator binds itself to: Reference Clauses on Selection and •Use its best efforts to reach or exceed the mini- Transfer of Personnel mum productivity targets specified in Annex [number], which is an integral part of this •The operator shall engage professional manage- Agreement and which may be modified from time ment personnel (including top management) for tot time by agreement between the parties; the efficient and effective operation of the Terminal Area.The management personnel shall be selected •Participate in a Monitoring Committee, to be joint- from amongst persons presently in the service of ly established by the Authority and the Operator; [name of present terminal]. In the event that the operator is unable to select sufficient management •Provide the Authority with monthly reports on personnel from amongst the [terminal’s] staff, the performance and productivity in a format to be operator is allowed to appoint suitable manage- agreed between the Authority and the Operator, ment personnel selected from outside the [termi- and provide the Authority with any special report nal’s] organization.When for certain functions no that, in exceptional circumstances, the Authority suitable candidates can be found in [the relevant may reasonably request. country], the Authority will allow the operator to select expatriate personnel. (Sometimes the provi- In the event that the Operator fails to meet the sion of expatriate staff is an obligation – this is par- performance targets as set out in Annex [number] ticularly the case when a transfer of know-how is a (one) year after commencement of operations, the major objective of the concession agreement). Authority may levy a penalty on the Operator at a rate of US$ [amount]. •The Port Authority shall use all reasonable endeavors, upon request of the operator, to obtain work permits, long-term non-immigrant visas and tax Often, they were members of unions clearance certificates for all expatriate personnel that fought aggressively for the preser- appointed by the operator. vation of their jobs, sometimes resisting •The operator shall select its labor force from any change that they feared could have amongst persons presently employed by the (terminal).These persons will be selected by the opera- endangered the continued employment tor based on their skills and suitability in the dis- of the workforce. New operators taking charge of their duties. Selected persons will have over an existing terminal must therefore the option to enter into fixed service of the opera- anticipate a start-up period for motiva- tor. tion of new workers as well as for re- •Notwithstanding the foregoing provisions, in the training. Otherwise, they may face the event any person appointed from among the [terminal’s] personnel are found to be incompetent, inefficiencies of an underemployed unsuitable or unfit in discharging their duties with- workforce. The reference clauses should in a period of one year, the operator shall be enti- be considered only as an indication of tled to terminate the services of that person, sub- how to approach the issue. Whether ject to the provisions of any employment contract. existing employees should transfer into •The terms and conditions to be drawn up by the a new operator’s service on terms and operator shall take into account the salaries and terms and conditions of service, including any conditions no less favorable than those accrued rights to leave, enjoyed by the persons enjoyed by them immediately prior to transferred to the service of the operator. their transfer is a matter of negotiations

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Force Majeure Box 24

An operator cannot be held responsible Reference Clauses on Liability for fully achieving performance goals when unforeseen and uncontrollable •The Operator shall be deemed to be in charge of goods deposited in its custody as from the events intervene (Force Majeure). time that: However, such events should not automatically excuse the concessionaire from - it has taken the goods from the shipper or any person acting on his behalf up to the time the its financial obligations payable under a goods are shipped or otherwise disposed of; concession agreement. The operator should be encouraged to obtain insur- - the goods are discharged from ships up to the ance to cover the risks of such events as time of delivery to the consignee or any person acting on his behalf or until final much as possible. (See Box 23) disposal; and

Box 23 - transhipment containers/goods are received up to the time they are re-shipped. Reference Clauses on Force Majeure •The Operator shall indemnify the Authority in •Upon the occurrence of a Force Majeure event, respect to any liability the Authority may incur the party so affected is relieved of performance for loss and/or damage to goods in custody of under this Agreement for the duration of the the Operator. event. Notwithstanding this, the occurrence of a Force Majeure event shall not excuse the Operator from making payments due hereun- cession, with or without a BOT arrange- der in a timely manner. ment, lease conditions form part of the overall concession. The reference clauses •Parties agree to use all reasonable endeavors to mitigate the effects of any Force Majeure event. contained in Box 25 and Box 26 can therefore be used under both types of contracts.

Liability for Loss and Damage of Goods The section on lease arrangements presents a number of strategic issues for con- The concession or lease agreement sideration. The most important of which should hold the operator liable for are: goods deposited in its custody during port operations. The operator should Ownership of assets. Generally, a new indemnify the Port Authority against operator will invest in superstructure liability for goods at the terminal. (See and equipment. Under a BOT arrange- Box 24) ment, operational infrastructure such as quay walls also forms part of the invest- Lease of Facilities ment. If the relevant legal system allows private ownership of such assets – At many ports (e.g., Antwerp, which is not always the case – their Rotterdam and Hamburg) the operator transferability becomes a critical issue. If may be best able to perform under a private ownership is not allowed, an straightforward lease contract. In a con- agreement should be reached on how to

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Box 25 Maintenance. Concession terms applicable to maintenance of assets, especial- Reference Clauses on ly infrastructure, is often considered Lease of Facilities very carefully by operators and their investors. If the assets revert to the Port •The lease refers to two allotments of land Authority at the end of the lease period, marked Lot [number] and Lot [number], demar- maintenance standards should be set by cated in red and depicted in Plan No: [number]. the Port Authority to avoid deterioration dated [date], made by the Chief Hydrographic during the final part of the period. Surveyor and belonging to the Authority, situat- Maintenance of operational infrastruc- ed at [location] within the Municipal limits of ture is usually the responsibility of the [city name] and bounded on the North by Port Authority. Such infrastructure is a [area], on the East by [area], on the South by strategic asset and should not be [area] and on the West by [area], containing in allowed to deteriorate. That risk exists, extent [number] hectares, [number] acres. however, especially if an operator is in financial difficulty, since maintenance •The quay walls and the banks below the often becomes the first victim of an ground level (yet not underground), as well as, operator trying to cut costs. in the case of the banks, the body of water above it, are not included in the right of lease Level of control by the Port Authority. but remain in the ownership of the Authority. Even if legal title over assets remains with the Port Authority, full use and •The Operator is entitled to sub-let the buildings easy adaptability of the assets should be and the ground in whole or in part to a third guaranteed. While the Port Authority party, or to give these in use in any other man- should exercise some form of control, ner, only after having obtained prior conditional such control should be based on clear or unconditional permission from the Authority. standards and be flexible and permit the operator to quickly respond to market compensate, at the end of the period, the requirements. Prompt modification and operator for investments made. If it is extension of the site and the superstruc- legally impossible to compensate the ture may be possible based on a previ- operator or to effect the transfer of assets ously agreed procedures. Moreover, con- to a third party, the duration of the trol standards could be uniform for the agreement remains the only vehicle entire port area to create a level playing available for creating a bankable field for all port operators. arrangement. Within the framework of a Sub-letting. To allow flexible port balanced public-private partnership, the development, sub-letting of ground and Port Authority may allow the operator assets should be allowed by the Port to own superstructure on the site as well Authority under specified conditions. as grant the right to transfer such assets to third parties under certain previously The specific content of any lease is very agreed conditions, regardless of the dependent on the site conditions and inalienability of other port property. local factors. The lease usually presents

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Box 26

Reference Clauses on Site Conditions

The following conditions are applicable:

•The site is determined to be [number] square meters.

•The site is unencumbered by other limiting rights or claims, nor by other qualitative obligations and/or perpetual clauses other than those mentioned in this Agreement.

•The site is accepted by the Operator in the state in which it is found on the date the lease commences.

•Cables, pipes and pipe-lines of third parties, which are situated on the ground are not included in the lease.

•The Authority is not liable for damages as a result of defects in cables, pipes, pipe-lines, etc.

•The Operator is liable for damages, which have been caused to cables, pipes, pipe-lines, etc., as a result of any use of the ground.

•The Operator shall at all times allow access for the benefit of the owners to the cables, pipes, pipe-lines, etc. in the leased property for maintenance and repair work.

•The site includes quay walls and banks with foundations and piles, constructed by the Authority.The Authority is not liable for the present suitability of the quay wall construction.

•The Authority is not liable for damages of whatever nature, which might arise for the Operator from the condition of the leased property, especially not for damages caused by basic structures, pieces of stone, foundation remnants, poles, pipes, cables, anchors, sunken vessels or any object whatsoever, which may be present on or in the leased property or in the surrounding area, and/or works and/or materials or substances on or in the leased property or in the surrounding area.

The ground is leased with a bottom level alongside the quay wall being part of the main yard of [number] meters below [reference] level and alongside the quay wall of the North pier of [number] meters below [reference] level.The Authority will ensure that the water depth along the quay walls will remain at the agreed level. In the event that the water depth is less than the agreed depth, the Authority will not be liable for damages as a result of this situation.The Operator cannot invoke the right to re-dredging as long as the bottom has not risen to [number] below [reference] level at a certain location along quay wall(s).The Authority is obliged to carry out re-dredging within a reasonable period (but not longer that three weeks) after the Lessee has submitted a request to that purpose. If the Authority

in detail the responsibilities and liabili- Activities Permitted by the Port ties allocated to each party. When an Authority existing site is leased or concessioned, conditions should be enumerated clearly Many concession agreements contain a list of activities that are permitted to be to give lenders certainty of outcomes performed at the site. These activities under particular "what-if" scenarios. should be construed as broadly as possible so the operator has maximum flexibility to develop the business and generate revenue. (See Box 27)

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Box 27

Reference Clauses on Permitted Activities

Without a written consent from the Authority, which refers to this provision, the site may only be used for/as:

• loading and discharging of (general cargo, bulk/liquid cargo, containers);

•transport and storing of (general cargo, bulk/liquid cargo, containers);

• handling of other cargoes, only if necessary and on a limited basis;

• stuffing and stripping;

•controlling and guarding of (general cargo, bulk/liquid cargo, containers);

•operating equipment necessary for the above;

•repair and maintenance of containers;

•repair and maintenance of equipment;

•repair and maintenance of buildings;

•providing accommodation for personnel and administration;

•providing services to vessels;

•providing services to customs and other government agencies;

•providing services and accommodation to ancillary services such as, pilots, agents, shiphandlers, etc.; and/or

• all other activities necessary to conduct efficient cargo handling operations.

The Operator is obliged to continuously exploit the site during the duration of the Concession Agreement. A strip of one meter wide alongside the quay wall shall not be planted or built on, shall not contain roots or foundations and shall only contain cables, pipes, roads, rails.

The Authority may reduce the maximum permitted load(s) if, in its opinion, the condition of the quay wall provides a reason for doing so.

Permitted use shall also be taken to include the construction of the necessary buildings and/or installations for the benefit of the business of the Operator, with the exception of (service) home(s).The number, nature and location of these constructions and/or installations shall be subject to the approval of the Authority.

Liability for Damages ing or unmooring of vessels or during cargo handling operations. In a The respective liabilities associated with Landlord Port, the Port Authority is occupancy and use of the site must be responsible for maintenance of the quay clearly presented in leases and conces- wall. The responsibility for damage is sions. Generally, the operator pays for therefore limited for a mutually agreed all damage caused to the site by moor- period after a vessel arrives at the quay

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wall (or pier). Damage to the Port Regulations in the by-laws have a public Authority’s property by a vessel can character and bind all operators in the usually be recouped from a marine port area. However, a Port Authority insurance company. The operator may may decide to issue specific regulations be required to pay for damage even if in addition to those which can be found acting pursuant to orders or instructions in the by-laws. In that case, the operator of officers (such as pilots) of the Port should have an opportunity to appeal Authority. (See Box 28) the application of such regulations, especially if their applications will result Box 28 in significant economic harm to the operator. Reference Clauses on Damages Provisions of the concession agreements •The operator shall be liable to pay for all dam- may further provide the operator with ages that are detected in the properties of the the opportunity to request an expert Port Authority during the time that the berth is opinion, binding both parties. Pending used by a vessel or during the three months the decision of the experts, the contested thereafter.The operator shall only be released regulation of the Port Authority would from that obligation if and to the extent that he be suspended. The general rules for proves that this damage can be contributed to a arbitration of disputes contained in the cause other than the one referred to. concession agreement may also apply to this section. (See Box 29 and Box 30) •The operator shall also be liable to pay for all damages which are detected at a later stage, Box 29 which may have been caused to any Port Authority property as a result of such use, with- Reference Clauses on General out it being able to invoke that he did not act Regulations of the Authority contrary to any order and/or instruction given by officers authorized by the Port Authority to When using the site the Operator shall observe all do so. regulations given by the Authority and/or any other •If, in the opinion of the Port Authority, as a result competent Government entity: of any use of the site, including the quay wall, •For promoting safety in general; damage is caused to the site, the bank protection or port works and/or the sites, bank protec- •To avoid and combat fire in particular; tions or port works in the vicinity of the leased property, the operator shall pay the repair costs •To avoid danger, damages, injury or nuisance; of such damage. and

•To avoid pollution of or damage to the environ- Regulations by the Authority ment and excess taxation of the soil.

In most ports, safety and security regulations are found in port by-laws.

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Box 30 Access to the Site

Reference Clauses on Specific Clauses should be included in the con- Regulations of the Authority. cession agreement to fence off the site, while still allowing sufficient, unimped- •Should the Operator object to the regulations ed access to the site to enable the Port given by the Authority in respect of the use of Authority to perform inspections. (See the concessioned/leased property as referred to Box 31) in the previous paragraph, and which are not given by virtue of any power or obligation con- Box 31 tained in a government regulation or port by- law, then the decision of three experts shall be Reference Clauses on Access to binding in respect of the question whether, or to the Site what extent, those regulations are necessary and

reasonable.The provisions on Arbitration men- •Free access to the site and the buildings on the tioned in the Section [number] are equally appli- site shall have to be granted at all times to the cable. officers and employees of the Authority, includ-

•The Operator may invoke the decision by ing police officers, and/or other persons who are experts within six weeks after the day of dis- authorized by the Authority, who may have patch of the letter with which the Authority noti- been or may be appointed for the supervision fied the Operator of the regulations referred to of the compliance with regulations and the above. lease conditions, or for carrying out repairs.The Authority’s representatives shall have access to •Pending the decision of the experts, the imple- any of the facilities and premises to inspect and mentation of the regulation given by the examine their condition, provided that, unless in Authority in respect of the use of the conces- cases of emergency or when circumstances so sioned/leased property shall be suspended with- justify, the Operator will be informed of such out releasing the Operator from the financial or other consequences arising out of the non-com- inspection and that such inspection, whenever pliance with the regulation. possible, shall not disturb the Operator’s operations. •The costs of the aforesaid experts shall be for the account of the party who is held to be in the •Free mooring opportunity must be allowed wrong, while, if the parties are both held to be in along leased quays, berths and other mooring the wrong on one or more points, these costs places for service and dredging vessels used by shall be divided by the experts in a fair and rea- Port Authority employees or persons authorized sonable manner. by the Authority in the execution of their duties. Mooring of such vessels should not unduly dis- •The experts shall be notified of the provisions of turb cargo operations. this agreement to the extent that having them is important for the conduct of their work. By accepting his appointment an expert subjects himself to the aforesaid conditions.

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Miscellaneous Conditions obtains the right to reconstruct the site, to erect buildings and introduce new The concession agreement may contain equipment. When the site is constructed provisions to cover a number of miscel- or re-constructed under a BOT arrange- laneous conditions and activities in the ment, the operator also has the right to port including environmental condi- build new quay walls, to dredge chan- tions, construction and maintenance of a nels and create new port land. In under- fence around the site, advertisements, taking these activities, the operator and dumping of liquids in port waters. assumes some duties previously under- (See Box 32) taken by the Port Authority.

Box 32 Every concession agreement contains lease conditions when ownership of the Clauses on Miscellaneous Conditions site formally remains with the Port Authority. When ownership is tempo- •If, when carrying on businesses or when build- rary or definitively transferred to the ing, expanding or changing constructions and/or installations, an environmental license operator (under BOOT or BOO arrange- or another license is required, not only this ments), the concession agreement may (these) license(s), but also a separate permis- include a variety of clauses pertaining to sion from the Authority shall be required by virtue of this article. the use of the site, although such clauses may solely be based on a public license, •The Operator shall have to fence off the site to a port by-law or other enabling authori- the satisfaction of the Authority and keep it ty. fenced off from the public road and from the adjoining land at all times. BOT arrangements in a concession •The partitions, buildings, mooring sites and/or agreement are spelled out in detailed installations may only bear advertising, leg- provisions covering construction, quali- ends, announcements, signs and the like relating to the business of the Operator, and also ty control, time schedules, milestones those which are prescribed by or on behalf of and similar issues. One important provi- the Government. All other advertising and the sion deals with the granting of exclusivi- like, including that which is put up against the ty rights, guaranteeing that the Port will of the Operator, shall be removed immediately by the Operator. Authority does not promote or permit any other competing facility in the con- •With the exception or rainwater, dumping of cessionaire’s port area for a certain time solid substances and liquids into the port is not allowed unless the Authority has given permis- period (sometimes incorporated into a sion in writing to do so.This permission may sponsors direct agreement). This issue include conditions. ise dealt with in a separate section. (See Box 33)

Construction and Maintenance Aspects BOT Arrangement

An operator managing a site under a BOT (Built, Operate, Transfer) and the concession or lease agreement usually BTO (Built, Transfer, Operate) arrangements are frequently integral parts of

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Box 33

Reference Clauses on Construction and Maintenance (Landlord Port Situation)

•The maintenance of the site at its present level shall be carried out by and for the account of the operator.

•The maintenance, the repair and the renovation of the foundations and piles of the quay wall, the electricity channel with brush contact groove and the connection pits for light, water and telephone supply and appurtenances thereto, and also of the visible concrete works of the quay wall, shall be carried out by and for the account of the Port Authority.

•The operator is obliged to maintain the buildings, installations, fences, roadways, mooring sites on the site in a proper manner and, if necessary, to renew them in due time. Buildings that are run-down and no longer used for business operations shall be demolished. All this shall be done to the satisfaction of the Port Authority.

•All costs for the construction and maintenance of roads, sewers, electricity lines, gas and water pipes and lighting on the site are for the account of the operator.

•If objects, liquids or materials are present in the water or in or on the bottom in the port in the vicinity of the site, which, in the opinion of the Authority, do not belong there and have originated from the site or from vessels moored alongside a quay wall owned by the operator, the operator shall pay the Port Authority the costs which arise from the removal thereof, unless the operator proves that the objects, liquids or materials originate from another source.

•The operator shall indemnify the Port Authority for all claims of third parties in respect of damages which arise from the presence of the said objects, liquids or materials, to the extent that they do not originate from a source other than is referred to above.This indemnification does not apply to objects, liquids or materials that originate from vessels moored alongside a quay wall owned by the operator, which are owned by, or carrying out services on behalf of, the Authority.

•The operator shall further be obliged to take such measures as shall be necessary in the opinion of the Port Authority to enable dredging and placing and removing any mooring posts and the like in the vicinity of the leased property, which entails, among other things, the fact that the operator shall allow means of anchoring, mooring and dredging vessels to be installed, used and maintained by or on behalf of the Port Authority in the shore strip of the site, this at places which shall be indicated by or on behalf of the Port Authority.

•For that purpose the operator shall, at his own expense, carry out such work to its fences, buildings, mooring sites, installations and the like as shall be deemed necessary in joint consultation with the Port Authority in order to avoid damages which could arise from the work or provisions which are to be carried out by or on behalf of the Port Authority. If, as a result of work or provisions carried out by the Port Authority, damage is inflicted to fences, buildings, mooring sites, installations and the like of the operator, such damage shall still be for the account of the operator, unless the Port Authority can be held responsible for gross fault or negligence.

•Without prejudice to other provisions in this agreement, the operator shall contribute to the costs, to be borne by the Port Authority, of cleaning the surface water in the harbors and above the sloping embankments in proportion to the area of the sites bordering the harbor, and the length of the waterfront.

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concession agreements. The difference • The right to construct new port infra- between these models is the time at structure and superstructure; which the operator transfers the newly constructed assets to the Port Authority. • The right to use of the subject assets; BTOs are employed when relevant legis- and lation does not allow for the private • The right to exploit the site during ownership of port assets. Transfer is the tenure of the concession. (See conducted immediately upon the com- Box 34) pletion of construction and the operator receives the equivalent of a management Investments Under a BOOT Scheme contract. Sometimes an operator is allowed to The distinguishing feature of the BOT own the site on which improvements are arrangement is the legal form of user to be constructed until the end of the rights. The concession agreement always concession period under a BOOT sets out clauses that clearly define such arrangement. Usually, the concession rights. The concession entitles the opera- agreement specifies the value of the tor to a right to use and exploit port assets under a predefined formula infrastructure and, in the case of an (including an agreed depreciation table). existing terminal, also to use the super- At the time of transfer to the Port structure and available port equipment. Authority at the end of the concession period, the Port Authority pays the Most concessions have a term of 30 operator in accordance with the residual years or less. Extension of the conces- value, calculated on the basis of the sion can usually be re-negotiated at any established formula. time during its lifetime in case the oper- Functional and Technical Design Under a ator plans a major investment in the BOT Arrangement port’s infrastructure in return for an adjusted tariff rate reflecting changes Generally, a Port Authority presents that may have been introduced pursuant functional specifications for the facility to the extension. In case no agreement to be constructed under a BOT arrange- for extension is reached by the end of ment. When the Authority specifies the 30-year term, the concession ends detailed construction works, it becomes and the right to use and exploit of the vulnerable to delays, construction errors port’s infrastructure and other assets and, perhaps, the application of wrong reverts to the Port Authority (or another technology or processes relative to Government agency), preferably under a expected port functions. Many ports fixed price formula. simply lack the required expertise to prepare detailed technical specifications The scope of the concession agreement for modern port construction works. appears in its Preamble. The Preamble typically consists of three main ele- Since new facilities are to be transferred ments: to the Port Authority in due time, it is

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Box 34

Reference Clauses on Scope of a Concession Agreement (including a BOT arrangement)

WHEREAS Art. [number] of the Ports Act of [date] gives the Port Authority of [name] the exclusive right to develop, construct and maintain basic and operational infrastructure in its port area; WHEREAS it is the policy of the Government/Port Authority to have the new terminal be constructed an operated by a commercial operator (or: have the existing terminal known as [name] be re-constructed and operated by a commercial operator) under a [BOT, BOOT, BTO] arrangement; WHEREAS the Authority has invited bids in [month], [year] for the Project, and through a process of competitive bidding selected in [month], [year] the Consortium of [name] as Sponsors, hereinafter referred to as the ‘Operator’,led by [name], a company whose registered office is at [location], (the ‘Lead Sponsor’), as identified in the Joint Development Agreement for developing the terminal/port of [name]; WHEREAS, subject to the provisions of this Agreement, the Sponsors and its designated Operator shall have the right and the obligation to finance, design, construct, equip, test, commission, operate and maintain the terminal/port known as [name]; WHEREAS the Authority awarded a Letter of Intent (‘LOI’) dated [date], [year] to the Sponsors to finance, design, construct, equip, test, commission, operate and maintain the terminal/port [name] on [BOT, BOOT, BTO, etc] basis, (and has agreed to grant a license to the Sponsors under the [name] Act, No. [number], dated [date], for financing, designing, constructing, equipping, testing, commissioning, operating and maintaining the terminal/port [name]). (optional) WHEREAS the Authority has been reimbursed by the Sponsors for the cost associated with site specific technical studies which were undertaken by the Authority [at the time of approval of the Detailed Project Report] [at the time of International Competitive Bidding]. WHEREAS the Sponsors have executed a Joint Development Agreement dated [date], [year] allocating project responsibilities among Sponsors, pursuant to which the Sponsors promoted the Operator to finance, design, construct, equip, test, commission, operate and maintain the terminal/port [name] on [BOT, BOOT, BTO, etc] basis and transfer the Site and the assets thereon to the Authority on termination of the Concession Agreement; WHEREAS a Detailed Project Report (‘DPR’) has been prepared and submitted, by the Operator, in accordance with the terms of the LOI, to the Authority on [date], [year], and has been approved by the Authority.The DPR with such modifications shall be referred to as the Approved DPR (annexed hereto as Annex [number]), and shall be treated as a part of this Agreement; WHEREAS the Concession Area required for the development of the terminal/port [name] and the minimum area of land required to be leased to the Operator for the commencement of the construction have been identified in the Approved DPR.The Operator has agreed to construct the Contracted Assets on the Site in accordance with Annex [number] of the approved DPR; WHEREAS on the signing of the LOI, the Operator provided a Development Guarantee in favor of the Authority for US$ [amount], which unless otherwise agreed, to shall remain in force and effect until the Zero Date; WHEREAS at the signing of the LOI, the Sponsors provided a Development Guarantee in favor of the Authority for US$ [amount], which unless otherwise agreed, to shall remain in force and effect until the Zero Date; WHEREAS the parties hereto have agreed to render all necessary co-operation and assistance and take appropriate action for giving effect to the terms of this Concession Agreement; WHEREAS the Operator, being duly licensed to operate in the port, has applied for appointment to start container/general cargo/bulk services at the above mentioned terminal on the Date of Commencement of Operations; WHEREAS the Authority is satisfied that the Operator is qualified in this field; WHEREAS the Authority grants the Operator the right of usufruct over operational infrastructure, superstructure and other assets by way of this Concession for the period of (30) years.

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useful to engage a technical consultant Box 35 who represents the Port Authority and reports on the progress of the work. The Reference Clauses on BOOT Scheme technical consultant can also observe the way in which the project is being con- •Any port infrastructure and superstructure constructed to meet the functional specifica- structed by the Operator within the Concession Area will be property of the Operator during tions and the requirement to use best the lifetime of the Concession. However, all practices for design, materials and related investments will become part of the workmanship. The consultant may also assets to be returned to the Authority at the assist in evaluating alternative technical end of the Concession Period. At the time of solutions and advise on the best techni- transfer the Authority shall pay the Operator a cal and cost-effective solutions. remuneration according to a predefined formula (to be included in an Annex to the Acrucial point in the design phase is Agreement). obtaining agreement on a timetable for completion of the detailed technical •The Operator shall be completely free in its design. The design should include an investment decisions (but he will have to sub- interface element to integrate the termi- mit his plans and obtain all necessary authori- zations). nal into an existing port area. The interface element takes into consideration •Investments in expansion of port infrastructure paving levels, drainage, fencing, design within the Concession Area during the lifetime and routing of underground facilities, of the Concession will allow a mutually agreed reconstruction of existing infrastructure reduction from the Concession Fee to be paid within the concession area and access to the Authority. through neighboring port areas and terminals. resolved in good faith consultation with the operator and its construction firm. Finally, the operator is obliged to pro- The Port Authority should be ready to vide the Port Authority with sufficient demonstrate flexibility without compro- detailed benchmark data to allow for mising the requirement that work be evaluating and monitoring the develop- performed at a predetermined level of ment of the concession area as part of quality. the approved Detailed Project Report. (See Box 35) In some instances, part of the work may have to be redesigned. The effects on Design and Construction Flaws construction time and cost of any redesigned element(s) should be ascer- During every major construction job, tained by the Port Authority, which design and technical problems will should ensure that the overall functional inevitably occur. Some of these issues specifications are adhered to. (See Box can be easily resolved, but others might 36 and Box 37) influence the construction timetable or quality of the work. It is important that design and construction flaws be

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Box 36

Reference Clauses on Infrastructure Design

•The Operator shall design and construct the terminal/port facilities in accordance with the functional design set out in Annex [number] to this Agreement.

•Without affecting the obligations under the preceding provision, the Operator shall comply with the design and construction methods set out in Annex [number] to this Agreement

•The Operator represents, warrants and undertakes that:

- the technical design solution satisfies the functional design; and

- each item of the facilities (quay wall, terminal area, superstructure and otherassets) will be fit for its respective pur poses.

•The Operator shall complete the detailed technical design of the facilities so as to comply with the Construction Program as set out in the time table for design completion (Annex [number]).

•The Operator shall submit to the Authority all interface design data, including all calculations, designs, design information, specifications, plans, programs, computer software, drawings, graphs, sketches, models and samples.

•If in the opinion of the Authority any interface design data does not comply with the requirements of the Agreement, it shall be entitled to require the Operator to amend the relevant interface design data so as to comply with these requirements.

•The Authority shall be entitled to monitor the development and other aspects of the technical design and the Operator shall provide it with all relevant data promptly.The Operator shall not be obliged to adhere to possible comments of the Authority but shall give due consideration to such comments made by or on behalf of the Authority. Any comment or approval of the Authority shall not be construed as transfer of responsibility for compliance with the Functional Design from the Operator Company to the Authority.

Box 37

Reference Clauses on Technical Design and Construction Problems

•If the Operator and/or the construction firm responsible for carrying out the work become aware of any failure to comply with the Functional Design and/or other provisions concerning design and construction of the facilities, they shall:

- immediately notify the Authority of the situation and provide details of the problem;

- as soon as possible provide the Authority with a written statement giving a full statement for the reasons of the problem:

- describing in full the measures taken or to be taken to cure the problem and/or to mitigate the consequences; and

- assessing the effect(s) of the problem on the construction program.

• In case the Operator is not able to comply with the Functional Design and/or the provisions concerning the technical design and construction of the facilities, a full statement of the proposed changes including cost estimates and effects on the construction program shall be submitted to the Authority.

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Building Conditions Box 38

The construction company carrying out Reference Clauses on Site Conditions the work on behalf of the operator should be required in most cases to The Operator shall be deemed to have thoroughly inspected inspect the building site and the adja- the Concession Area and its surroundings, and have satisfied itself as to: cent water area thoroughly before starting construction. Any obstacles in the •The nature and extent of the conditions of or affecting sub-soil affecting the construction the Concession Area, including climatic, hydrological, eco- logical, environmental, geo-technical, seismic and archeo- should be reported and taken into con- logical conditions; sideration when executing the technical designs and for obtaining permits. It is •The adequacy of the rights of access and egress to and customary for the Port Authority to from the Concession Area; agree to provide its co-operation in •The possibility of interference by persons of any descrip- obtaining construction permits and tion whatsoever (other than the Authority) with access to obtaining approvals from governmental or use of or rights concerning the Concession Area and its surroundings, including adjacent land owners; and authorities, including environmental oversight authorities. •The precautions, times and work methods necessary to prevent any nuisance or interference, whether public or Construction private, being caused by persons whose interests may be affected by the performance of the Operator’s/Vehicle Company’s obligations under this Agreement. Construction is based on a construction program that outlines completion dates Box 39 for the various construction phases (milestones) as part of the approved DPR. This DPR is almost always incor- Reference Clauses on Construction porated into the concession agreement. Throughout the period from the effective date of this The Port Authority ordinarily requires Agreement until the actual commissioning date for the last of that it be notified promptly of every the planned facilities, the Operator shall keep the Authority delay that occurs at the construction site, fully informed about the progress of the works. In that regard, the operator shall: as well as the resulting contingency plan devised to remedy the delay. (See Box •Provide the Authority with monthly progress reports, in 38 and 39) such form and containing such information as the Authority may reasonably require from time to time; Zero Date •Hold regular progress meetings to review performance of the work and discuss any coordination issues; and The so-called Zero Date is an important event that marks the start of construc- •Fully co-operate with the Authority’s observer, who shall be entitled to be present at any time during the per- tion work. By this date all conditions formance of the work and to have reasonable access to precedent are fulfilled by both the Port all parts of the concession area and to all records and Authority and the operator. Generally, materials of the Operator concerning the work including the Port Authority fulfills all conditions attendance at the progress meetings of the work.The observer shall be entitled to disclose all such information necessary for the operator to commence to the Authority and its advisers. work, while the operator concludes all

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financial arrangements and engages a Box 41 construction firm to begin construction. (See Box 40) Reference Clauses on Drop Dead Date Box 40 • In the event Zero Date is not achieved within Reference Clauses on Zero Date [number] months from the Effective Date, this Agreement shall stand terminated and the par- •The Zero Date shall mean the date on which all ties to the Agreement shall have no liability of the conditions precedent set out in Article any nature whatsoever, subject to clause (b) [number] have been satisfied and the following and (c) below. conditions have been fulfilled: •If Zero Date is not achieved on account of fail- - The environmental permit of the Ministry of ure to achieve Financial Closing, the [name] has been received; Development Guarantee may be invoked by the Authority; - The following milestones necessary for the commencement of construction stated in the • In the event the Authority has not fulfilled the approved DPR are complete: [milestones to be covenant set forth in Article [number] within a identified]; and: period of (number) months after completion of inspection of facilities as per Article [number], - Financial Closing has been achieved. the Operator shall be entitled to terminate this Agreement in accordance with Article [num- •The Zero Date shall be achieved within [num ber] and the Development Guarantee shall ber] months from the Effective Date (namely, stand discharged and shall be returned to the signing of this Agreement). Operator.

plan. In case a delay is caused by action Drop Dead Date (or inaction) of the Authority itself, the operator is usually entitled to claim li- During the preparation phase, events quidated damages. There might also may occur that result in delays or even occur an event of Force Majeure, causing cancellation of a project. The Port delays in the construction process. Such Authority as well as the operator may possibilities are acknowledged in the include provisions for termination of the concession agreement and procedures concession agreement once it becomes included to change the milestone dates clear that the project will fail. Therefore, and compensation paid by the operator a so-called Drop Dead Date is included when an Extension Event occurs. (See in the agreement. In drafting such a Box 42) clause, it is important to specify if any performance guarantees will be drawn Completion Tests and Take-Over or canceled as a result of the Drop Dead Date. (See Box 41) BOT schemes are mainly employed for the construction of new port infrastruc- Extension Events ture and superstructure. When newly built facilities are completed, completion In practice, construction of a major work tests are carried out and a takeover cer- rarely proceeds according to the original tificate issued by a competent expert or

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Box 42 ational, safety, reliability, interoperability and endurance tests. (See Box 43) Reference Clauses on Box 43 Extension Events

• In the event that the Operator fails to: Reference Clause on Take-over Tests

- complete construction (or cause construction An actual commissioning date shall occur when the to be completed) within the scheduled con ‘Test Certifier’ issues a certificate that completion struction period; or tests for civil works and installations (if any) have been successfully carried out. - achieve any intermediary milestones as may have been agreed to between the parties, sub ject in both cases to agreed extension. Hand-Back and Transfer of Facilities

•The Operator shall pay the Authority liquidated damages of US$ [amount] for each day of delay Under a BOT arrangement, the facilities up to a maximum period of six months.The are transferred to the Port Authority at amount of such liquidated damages will be the end of the concession period, usually linked to the Royalty Fee payable by the Operator to the Authority based on an annual with (under a BOOT arrangement) or cargo projection in the Approved DPR, and without (under a common BOT arrange- shall, if so required, be realized by invoking the ment) compensation. Construction Guarantee. The hand-back is concluded after a joint authority on the Port Authority's behalf. inspection and assessment of any reno- While verification of the civil works is vation works (if applicable). Hand-back required throughout the production requirements and procedures depend on process, it will not be possible to verify local practices. The most sensitive issue solely at the conclusion whether all is in the level of compensation to be work was completed in a professional paid by the Port Authority. (See Box 44) manner and proper materials were used Box 44 during the process. The Port Authority should use its expert to inspect all work Reference Clauses on at completion and to prepare a punch- Hand-back of Facilities list of deficiencies. The construction company then has a certain period to • On the day the Concession Period expires the rectify all deficiencies. The final take- Authority and the Operator shall conduct a final joint inspection. over is based on a test certificate issued by the certifier. After this, there still is a •Within 14 days after the completion of this defect liability period during which the inspection, the Authority shall either issue a Hand-back Certificate to the Operator or notify operator has the obligation to repair all him of the decision not to issue one and state deficiencies. the reasons for this decision.

Take-over of mechanical and electrical installations are more complicated and require a variety of tests including oper-

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Lenders Security Such limitations present a significant stumbling block for attracting private The success of BOT arrangements is capital to port development. highly dependent on the ability of the operator to attract financing for the con- The restriction under the legislation pre- struction work. This issue is reviewed in sented in Box 45 may impede investors greater detail under Module 3 and and lenders because of a lack of defini- Module 5. In many cases lenders have tion of property rights. recourse only to certain assets or income The situation on St. Maarten is very dif- streams to secure repayment of their ferent from that noted in Box 46. Care loans. Sometimes there are legal consid- has been taken to maximize the lender’s erations that should be addressed, espe- security there. cially with respect to the creation and enforcement of security interests in the In a concession contract with BOT host country that limit or even prohibit arrangements it is generally necessary to the granting of a lien over port assets. establish explicitly the lender’s rights Box 45

A Case of Legal Limitations Adversely Affecting a Port Concession The main elements of recent ports legislation in one European country include the following:

•Ports are part of the maritime domain as mentioned in art. 49 of the Maritime Code (MC) of the country. According to the same law a main characteristic of the maritime domain is that within this domain there are no property or proprietary rights whatsoever (art. 51 MC). In the Law the definition of a port is as follows (art. 5 MC):

- A port is a water area and with water directly connected land area with built-up and non built-up wharf struc tures, breakwaters, equipment, installations and other facilities intended/designed for berthing, mooring and sheltering seagoing ships, loading and discharge of materials, embarkation and disembarkation of materials and passengers, warehousing and other cargo handling operations, production, refinement and processing of goods, and other economic activities in connection therewith, concerning matters of business, traffic or technology.

•Since no property rights exist within the maritime domain and subsequently within the port areas, all economic exploitation has to be based on a system of concessions (art. 51 MC) granted to companies.The Maritime Code contains detailed rules with respect to such concessions (art. 59 - 72). It should be mentioned that this system is not only applicable to port operations such as stevedoring activities, but also to industrial activities in the port areas (refineries, chemical plants, etc.).

•The national Port Management System is fully enumerated in the Seaports Law, 1995 (SL).The law sets out further rules for issuing concessions. Concessions for a longer period shall be granted by the Cabinet of Ministers, while concessions for a period of longer than 33 years can be granted by the Parliament. Concessions with a duration of not longer than 10 years can be granted by a Port Authority. All concessions must be publicly tendered.The so- called former socially owned enterprises acting both as port authorities and port operators in the previous period, have the right to be issued a priority concession with a duration of 12 years (art. 63 SL).There is no freedom to set tariffs. Port construction is primarily a task of the Parliament. Moreover the law lays down a very detailed planning system The above outlined port management system had a disastrous effect on the development of the country’s ports. Main competence problems arose between the new Port Authorities and the former socially owned enterprises. Port through-put of the country’s main port fell from some 7 million tons p/a to a mere 2 million tons. No major investors were willing to risk their money under the above institutional conditions. Presently, proposals are being developed to make the Seaports Law more market oriented in order to attract foreign investors.

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Box 46 The Case of St. Maarten

The island’s bay has sufficient depth to accommodate cruise ships, which visit the island in vast numbers.Tourism (and especially cruise tourism) constitutes a major source of income for the island. Economic benefits are estimated at US$ 200 million per year. Some one million cruise tourists visit the island annually.

In September 1995 the island was hit by hurricanes that seriously damaged the port’s facilities.This resulted in cruise ships having to anchor in the bay and transporting their passenger ashore with small tenders.This solution was only accepted by the Cruise Lines on a temporary basis. In 1997, the government concluded an agreement with the Lines charging US$ 5 per passenger to (partially) finance a new Cruise Terminal. Plans were made to expand the Terminal and dredge the bay up to a depth of 10 meters.

Reconstruction of the Cruise Terminal became part of a corporatization scheme. A St. Maarten Cruise Terminal N.V. (joint stock company) was established as a subsidiary of the St. Maarten Holding Company N.V., jointly owned by the Government of St. Maarten and the Dutch Government via the Participation Company for the Netherlands Antilles NV. (NPMNA).

The main features of the Concession Agreement between the Island Government and the St. Maarten Cruise Terminal N.V. are:

• Limited Construction Risk. A turn-key contract has been concluded with an experienced construction firm (Ballast Nedam Caribbean NV). Its Dutch parent company (one of the largest of Holland) acted as main sponsor and provided a subordinated stand-by facility during the construction period. It also acted as a guarantor of the obligations of the construction firm under a fixed price construction contract.

•No political risk. Elimination of political risks was achieved through extended political risk cover of the Netherlands Credit Company (95%, covering inter alia breach of contract by the St. Maarten Government as well as Force Majeure events).

•No hurricane risk. This risk is covered under a commercial insurance policy of NCM.

•Proven cashflow. Financing is based upon an already existing cashflow and a no-growth scenario. After completion, the debt service reserve and the maintenance reserve accounts will be funded up front, guaranteed by the St. Maarten Government and covered by NCM. Direct payment from the Cruise Lines is effected through an offshore escrow account of the St. Maarten Cruise Terminal N.V. Payment is approved only by the agent bank pursuant to a cash-flow waterfall. There also is significant involvement by the Dutch Government, providing equity, a subordinated loan as well as appoint- ing a board member.

The Concession Agreement has a Build, Own, Operate (BOO) character. Under the above conditions, a senior loan was arranged by Dutch ING Bank with participation of Commerzbank and Bayerische Landesbank.

with respect to the affected assets. While Box 47 providing for this right entirely in the concession agreement is difficult Reference Clause on because of the variety of financial struc- Lender’s Security Provisions ture options available to operators, a For the sole purpose of financing the implementation of the Port Authority could elect to enter into a project and the fulfillment of his obligations under the "Lender’s Direct Agreement" with the Concession Agreement, the Operator may assign, by way of security, the benefit of, or his interest in, this Agreement, lenders to facilitate financing the BOT according to the requirements of any of the financing docu- package. (See Box 47) ments, and create other forms of security over any property or rights forming part of his interests in the project in favor Change in Law of any lender, provided that the payment of rents and royalties to the Authority shall have priority over any such security and that before any such security takes effect, the holder Operators under a BOT arrangement of the security must have entered into a ‘Lender’s Direct run a considerable risk of applicable leg- Agreement’ with the Authority.

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islation changing during the concession such changes. (See Box 48) period. Such change may affect operat- Freedom to Set Tariffs ing profits and alter or negate the original exploitation conditions. Therefore, it To respond to market competition, the should be expected that detailed provi- operator should have the freedom to set sions in the concession agreement will his own prices. The operator should be be negotiated to minimize the effects of expected to negotiate periodically with Box 48

Reference Clauses on Law Changes

•Change in law shall mean the occurrence of any of the following events after the effective date of the agreement:

- the enactment of any new applicable law;

- the modification, repeal or re-enactment (other than re-enactment that merely consolidates or codifies existing applicable law) of any existing applicable law;

- the commencement of any applicable law which had not at the Effective Date yet entered into effect, except to the extent such applicable law was enacted prior to the Effective Date with a commencement date after the Effective Date and such applicable law takes effect on that commencement date without material amendment;

- a change in the interpretation or application of any applicable law by a judicial or other authority (including a court, tribunal or any other regulatory authority) having the authority to interpret or apply such applicable law or any interpretation of any applicable law by such authority which is contrary to the existing generally accepted interpretation thereof;

- the revocation or cancellation (other than for cause) of any permit;

- to the extent that such Change in Law has a material adverse effect on the rights and obligations of the Operator under this Agreement and that such event has not been caused due to fault of negligence of the Operator.

•Notwithstanding anything contained in the clause above, Change in Law shall not include any change in tax laws or change in a law of general applicability but which solely has an economic and financial impact on the Operator.

•The Operator shall, on the occurrence of a Change in Law, give notice of such change to the Authority in accordance with the provisions of this Article as soon as it may be reasonably practicable. The notice served pursuant to this clause shall provide, inter alia, precise details of the Change in Law and the effect thereof on the Operator.

• In the event that a Change in Law renders impossible the exercise by the Operator of any of its material rights or performance by the Operator of any of its material rights and obligations – unless such obligation is waived by a person having the power to do so under this Agreement, the Operator may serve a notice for termination of this Agreement (Termination Notice). Provided that, prior to service of the Termination Notice, the parties shall consult in good faith for a period of 180 days to mitigate the material adverse impact of the Change in Law. In the event that parties are unable to agree to changes in the Agreement to mitigate the impact of the Change in Law during the 180 day period, either party may refer the matter to dispute resolution, in such case the Termination Notice shall stand suspended until such matter has been resolved in accordance with Article [number].

•The parties hereby acknowledge and agree that the Operator shall be entitled to serve a Termination Notice on the Authority, provided that the Change in Law results in its physical and legal impossibility of performance of the Operator’s obligations or exercise of its rights under this Agreement.The parties shall bear the respective impact of any economic consequences of the Change in Law.

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its customers and may provide quantum Box 49 rebates in return for increased throughput. Only in a situation when the opera- Reference Clause on Price tor is in a monopoly position might Discrimination there be a reason for interference in tariff setting by the Government. To avoid •The operator agrees that the charges for his services rendered in connection with his opera- conflicts of interest with the Port tions on the concessioned premises shall be Authority, an independent Port competitive within the port and with other Regulator usually is given authority to competing ports having such facilities and oversee tariff regulation (see Module 6 services.The operator shall, however, at all times have the right to increase or decrease for a full discussion on economic regula- such charges and modify the relevant rules and tion). The mere fact that competing regulations, in accordance with sound business ports in the country offer lower tariffs practices.

may not be a reason for regulation of • In the event the Port Authority (or Port tariffs. When it can be proven that com- Regulator, if applicable) receives a complaint or peting ports offer lower prices as a complaints of discrimination on the part of the result of distorting government subsi- operator of the concessioned premises and the Port Authority (Port Regulator) concludes after dies, the competent authorities should thorough investigation that there are reason- take measures to eliminate such subsi- able grounds to believe that discrimination has dies, such as through a complaint to a been practized by the operator, then the opera- competition authority. Thus, regulation tor, upon written notice to him by the Port Authority (Port Regulator) shall cease and of prices should only be reverted to in desist from such practices. case of abuse of a monopolistic position by an operator (as in predatory pricing). (See Box 49) position of the port overall (i.e., what the market can bear) and other consider- Concession Fee ations such as the creation of a fund for excess port workers. (See Box 50) There is no generally accepted standard Physical Security for a concession fee. This fee usually is determined as the sum of (1) a fixed fee for the use of the areas under adminis- A concession agreement usually con- tration of the Authority, and (2) a vari- tains clauses pertaining to security in able fee in the form of a through-put the port area. Generally, these issues fall royalty for the right to perform cargo under a Port Authority's jurisdiction, handling services. The fee amount is a although a terminal operator also bears function of local circumstances. The part of the responsibility. (See Box 51) fixed portion should represent the infra- Access structure costs (and superstructure costs, if applicable) of the terminal, including A Port Authority usually takes responsi- financing costs. The structure and level bility for all common areas, including of the concession fee is a primary ele- road connections and pedestrian areas. ment for analysis by project lenders. The An operator will seek to hold the Port variable fee is a function of the market

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Box 50

Reference Clauses on Concession Fee

•The concession fee exists of two elements:

- a Lease Rent, related to the amount of square meters of port area leased by the Operator; and

- a Throughput Royalty, related to the amount of cargo/number of containers handled on the concession area by the operator.

•A fixed sum of US$ [amount] per annum shall be paid by the operator as the lease rent.This rent shall be paid in advance in four equal installments on January 1, April 1, July 1, and October 1 into account number [number] with [name] Bank in [place] in the name of [name] Port Authority. If the period for which the right to lease is granted does not commence on one of these dates, then the Lease funds incurred over the period between the commencement and the beginning of the next quarter will be paid on the first upcoming date mentioned above.

•The amount owed to the Authority in accordance with the right to lease shall be paid in full and without any discount or debt compensation, regardless of nature.

•The Lease Rent shall be adjusted as from January 1 of the year Two Thousand and [year], and thereafter each time that a period of five years elapses.

•All adjustments shall be calculated by multiplying the rent sum, which applied most recently by a fraction of which:

- the numerator is formed by the price index figure as given by [name of agency], which is published in the seventh calendar month preceding the time of adjustment; and

- the denominator of which is formed by the same price index figure, which applied in the same month a year earlier.

•Should the details referred to in the previous paragraph cease to be available, then the Authority is entitled to calculate the Lease rent adjustment on the basis of any other similar index or methodology.This adjustment requires mutual agreement. If such agreement cannot be reached, then this shall be determined in the manner given in Section 26 on the basis of the advice of three experts.

•The operator will pay to the Port Authority an annual Throughput Royalty in the amount of US$ [amount] per ton cargo throughput/Twenty Feet Equivalent Unit (TEU) container handled in the concession area, regardless the manner in which it is handled or which mode of transport is used, payable in two installments after every six months (within 30 days after the end of each period).The Throughput Royalty will increase every year in accordance with the price index figure given by [name of agency] (or any other mutually agreed index).

Authority liable for all undue delays in plex customs legislation or port by-laws, road traffic destined for the terminal. warehouses filled with unclaimed cargoes may burden the operator's ability Unclaimed Cargo and Carriers to operate the terminal and meet performance target. Therefore, the operator Often, cargo at the port is not claimed will expect to set clear rules with respect by the rightful owners. In case of com- to such cargoes and who bears removal

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Box 51 Box 52

Reference Clause on Reference Clauses on Unclaimed Security and Safety Cargoes

•The Port Authority shall be responsible for •All containers, packages ands cargo deposited maintaining the security of all land and sea entrances to the Port of [name] and the main- in the terminal and not removed at the expiry tenance of all perimeter fencing around the of a period of (21) days or (42) days in case of port area. transhipment containers, may be disposed of •Without limitation of the Port Authority’s obli- by public auction, in conformity with Section gations under this agreement, the operator [number] of the [name] Act, No. [number] of shall provide additional security within, and on the boundaries of the site, including the [year]. entrances to these areas from within. •As regards unclaimed containers containing •The operator shall be solely responsible for perishable or hazardous goods, the operator keeping, at all times, the concession area in good order and condition and also to ensure shall dispose of such goods according to the that the terminal environment is adequately requirements set down by the relevant author- protected. ities and as per national regulations in force. •Traffic operations, vehicular traffic and all transport activities related to the concession area shall be conducted in accordance with existing laws and/or internal regulations. Box 53 •Parking restrictions, as indicated by notices or road markings, should be strictly observed and enforced by the operator.Vehicles shall be Reference Clause on Taxes parked only in locations designated to that The operator shall reimburse the Port Authority for effect. all taxes, dues, concession fees and public levies, under whatever name, including the surcharges, •Final check of cargo and/or containers at the which the Port Authority has to pay because of the gates shall be the responsibility of the opera- leased property or the buildings thereon. tor.

responsibility and costs in conformity Information and Communication with custom’s regulations. (See Box 52) It is essential that a Port Authority be Taxes able to gain access to recent, relevant and direct information on all aspects of National or local taxes with respect to port operations including marine opera- the leased site(s) are usually paid by the tions cargo throughput. The Port operator. At times, to encourage port Authority should be informed promptly development certain promotional rates about all incidents occurring in the port or tax holidays are extended to the oper- area so that it can undertake appropriate measures in response. ator during the initial phases of operation. Such incentives are a function of The agreement includes a requirement national fiscal policy. (See Box 53)

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for the operator to provide such infor- indemnify the Port Authority against a mation. (See Box 54) variety of incidents pertaining to port operations and other events. (See Box Box 54 55)

Reference Clauses on Information Box 55 and Communication Reference Clauses on Insurance and •The Operator shall install and maintain an effi- Indemnity cient information and communication system and shall provide on-line information to the •The operator undertakes to provide the neces- Authority on all aspects of operations necessary sary and relevant insurance covers, in respect of for providing marine services and for monitor- its employees, equipment and vessels being ing. serviced, for injury, damage to the terminal, vessels and/or cargo when they are, at all material •The Authority and the Operator will agree, in times, considered to be under control of the writing, on the type and flow of extra informa- operator. tion, which may be communicated to the Authority on request. •The operator hereby holds the Port Authority free and harmless from any and all liabilities •The Authority and the Operator shall immedi- and claims for damages and suits for or by reason of any death or injury to any person or ately inform each other of any matter, which damages to property of any kind, whether the may affect the operational performance of the person or property of the operator, its subcon- Operator under this Agreement including but tractors, agents or employees, or third persons, not limited to: arising out of negligent or intentional act or omission of the operator in connection with - fire within the terminal or within the this agreement, and the operator shall indemni- Authority’s fy, save, and hold harmless the Port Authority area of responsibility; from all liabilities, charges, expenses (including reasonable attorneys’ fees), and costs on - damages/stoppages caused by severe weather account of claims, suits, losses arising therefrom. conditions; •The Port Authority hereby holds the operator free and harmless from any and all liabilities - industrial disputes with risks of work stop- and claims for damages and suits for or by rea- pages; son of any death or injury to any person or damages to property of any kind, whether the - major damage to facilities, premises and/or person or property of the Port Authority, its equipment and subcontractors, agents or employees, or third persons, arising out of negligent or intentional - pollution of the environment within the act or omission of the Port Authority in connec- Authority’s area of responsibility. tion with this Agreement, and the Authority shall indemnify, save, and hold harmless the operator from all liabilities, charges, expenses (including reasonable attorneys’ fees), and costs on account of claims, suits, losses arising there- Insurance and Indemnity from.

•The operator indemnifies the Port Authority Insurance for employees, equipment against all claims due to non-compliance by the and vessels covering injury and damage operator with the provisions relating to the site, which have been given by the competent pub- within the concession area is typically lic bodies. specified in a concession agreement. Moreover, the operator is expected to

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Termination and Prolongation Box 56

Termination clauses of a concession Reference Clause on agreement are of prime importance for Termination by the Port Authority the relation between the Port Authority and the operator, especially under a The following (unless as a result of a Force Majeure or BOT arrangement. The concession change in law that results in consequences set out in Article [number] or a default of the Port Authority) agreement represents a negotiated bal- shall constitute operator events of default: ance between the interests of the Port Authority (an efficient and economic use •A material breach of a material provision of this of the port land) and the operator (pro- agreement by the operator; vision of cargo-handling services on a profitable basis). Both parties are tied •Repudiation of this agreement by the operator or together in a long-term symbiotic rela- the evidencing of the intention by the operator tionship, where the fortunes of one not to be bound by the terms of this agreement; directly bears upon the results obtained •Appointment of a provisional liquidator providing by the other. That contractual relation, for winding up of the operator, after notice to the therefore, should not be terminated Port Authority and due hearing, unless such without good cause. appointment has been set aside within 45 days; The way termination clauses are con- •The operator is ordered to be wound up by a ceived reflects the power balance court or files a petition for voluntary winding up between the two parties. An operator except for the purpose of amalgamation or recon- with alternative port locations available struction provided that the property, assets and will not easily accept harsh termination undertakings of the operator are transferred to its clauses. On the other hand, a Port successor; Authority should be aware that an operator might fail in the market, and valu- •The operator abandons the construction or opera- able port land may lay unused for years tion of the terminal/port and the facilities for a if the right to terminate the concession is continuous period of 45 days; not clearly defined. Finally, lenders to the operator will be very careful in their •Persistent failure on the part of the operator to analysis of these provisions to make cer- operate and promote activities at the tain their interests are protected. (See terminal/port and provide terminal users with Box 56 and Box 57) services in accordance with good industry practice and in accordance with the provisions of this Option to Continue agreement

Many concession agreements provide an •Failure to pay the concession fee for a consecutive option to extend the term of the conces- period of 6 months; sion. This feature becomes more important in concessions with shorter terms. •Failure to comply with lawful directive given by a One may expect that concession agree- statutory authority connected with ports. ments with a duration of ten years or

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Box 57 extending an agreement under new conditions. Significant time and expertise Reference Clause on may be lost if a new operator has to be Termination by the Operator found and terminal operations have to be restarted under new management. The following (unless as a result of a Force Majeure or Judgments about agreement extensions change in law that results in consequences set out in depend, among other things, on the Article [number] or a Default of the Operator) shall position of the port in the overall market constitute Authority Events of Default: and the alternatives available to the operator. (See Box 58) •Commission of a material breach of a material provision of this agreement by the Port Box 58 Authority; Reference Clauses on Prolongation •Repudiation of this agreement by the Port Authority or the evidencing of the intention by •At least two years before the expiration of the concession, the operator may require the Port the operator not to be bound by the terms of Authority to take a decision concerning the this Agreement; or extension of the period for which the concession is granted, as well as concerning the con- •Dissolution of the Port Authority and occurrence cession fee and the provisions, which shall of any structural changes within the present con- apply for the duration of its renewal or extension.The operator shall approach this in the stitution of the Authority which have a material manner stipulated in the following paragraphs. adverse effect on the rights and obligations of the operator under this Agreement, or the trans- •The operator shall send a written request to the fer of the Port Authority’s undertaking and statu- Port Authority by registered mail.The request shall indicate the number of years for which the tory powers or any material part thereof, unless extension is requested, with a maximum period such dissolution or structural change or transfer of ten years, and the proposed concession fee. is in connection with privatization or other The Port Authority will inform the operator in writing of its decision and the reasons thereof restructuring of all or any substantial part of the within six months after receiving the request. Port Authority, and the Port Authority’s successor is able to perform the Port Authority’s obliga- •The request of the operator shall expire if he tions under this agreement. has not reached agreement with the Port Authority with regard to the extension, the amount of the concession fee and the provisions within three months after receiving a shorter will generate significant invest- response mentioned in the previous sub-sec- ment. When there is an option to contin- tion. In that case the operator has the option ue under balanced conditions, an opera- either to have the concession agreement expire or to revert to arbitration as mentioned in tor might be tempted to take more Section [number]. investment risks. It is therefore in the interest of the Port Authority to include • (optional) In determining the Concession Fee for the duration of the extension, no considera- options to continue the agreement. tion shall be given to the value of the buildings or structures in the Concession Area construct- Generally, the Port Authority, when ed by the operator. there is a mutually beneficial relationship between the parties, may favor

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Termination Due to Non-Compliance Box 59

In the event the operator fails to comply Reference Classes on Termination with its obligations, a Port Authority Due to Non-Compliance will ordinarily have the option to termi- •Without prejudice to the conditions of Sub- nate the agreement. Termination for Section [number], the concession agreement cause is very serious, especially for may be terminated by the Port Authority on financing parties, and should be avoid- the grounds of non-compliance by the operator with one or more obligations under this ed as much as reasonably possible. The agreement.The Port Authority shall send a operator should be given a reasonable notice of termination to the operator by registered mail, indicating the date of termination period to demonstrate compliance with and the reasons thereof.There must be at least the terms of the agreement and cure [number] of months between the day of send- non-compliance events. However, an ing the letter and the termination date. operator may be in financial distress, for •If the operator complies with the terms of this example, and unable to pay the conces- agreement before the termination date, the decision of the Authority to terminate the sion fee. In this case, the Port Authority Concession/lease shall become ineffective and may not directly terminate the agree- shall be deemed not to have been taken. ment, but consider the seriousness and •If the Concession is terminated on the grounds likely duration of the problem. If it is of the provisions given in this Article, the determined to be temporary, the Port Operator shall, as are result of the mere fact of the termination, forfeit a fine amounting to Authority, perhaps in concert with the [number] times the sum of the annual operator's lenders, may come to an Concession Fee owed by virtue of the provi- understanding with the operator (e.g., a sions of Section [number] which applied most recently and all rights of whatever nature to deferred payments scheme) that avoids everything which is built on or placed in the termination of the agreement. (See Box site shall pass over to the Authority, without compensation for damages, and without preju- 59) dice to legal proceedings for compensation of damages. Bankruptcy

The Port Authority will usually insist on Box 60 the right to terminate the agreement in case of bankruptcy or insolvency of the operator. Sometimes, an operator will be Reference Clauses on Bankruptcy provided an opportunity to cure such insolvency petitions within a limited •If the operator is declared bankrupt, applies for a moratorium or loses his status as a legal entity period of time. (See Box 60) during the concession period, the Port Authority may summarily terminate the conces- Expiration of Concession sion agreement.

Upon expiration of the concession peri- • In the event that more than one legal entity acts as operator, each of them shall be separate- od, the facilities built on the site and any ly liable for fulfilling all obligations arising from title that passed to the operator as part this agreement. of a B(O)OT arrangement will be transferred back to the Port Authority. In

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some contracts, the site may have to be similar civil works before leaving the restored to its "original state," which site. When the site is to be handed over could mean that the operator must in its "original condition," all later demolish structures and installations restoration costs should be borne by the that were built on the site during the operator. (See Box 61) concession period. Equipment would be transferred or retained as a matter of Arbitration contractual obligations. It may be compensated at book or market value, or it Many concession agreements include a might be removed from the site by the provision for arbitration. Sometimes, ref- operator for sale or for use elsewhere. erence is made to International Chamber An obligatory free transfer of equipment of Commerce (ICC) arbitration (which is to the Port Authority is not recommend- the preference of most lenders) or to a ed as a preferred option in view of the local arbitration institute. Oftentimes, a maintenance requirements for such specific procedure is presented in the equipment. If an Operator knows that it agreement. Arbitration is often a pre- may have to transfer equipment at the ferred option in case of a conflict end of the concession period, the opera- between parties. The reference clauses in tor may cut back on maintenance as Box 62 are meant for deciding on much as possible to save money toward increases of the concession fee, if parties the end of the period. cannot come to an agreement. This type of arbitration can also be applied to The concession agreement should speci- other conflicts that may arise during the fy the condition of the basic and opera- concession period. tional infrastructure at the time of transfer. The Port Authority should monitor Costs thoroughly the maintenance situation (life cycle maintenance, routine mainte- Costs pertaining to the use of the con- nance and reactive maintenance) of the cessioned site are usually paid by the infrastructure and, if applicable, the operator including the case in which the superstructure throughout the conces- Port Authority holds legal title over the sion period. Any deficiencies found dur- port land. (See Box 63) ing the joint inspection prior to hand- Governing Law back should be made good by the operator. Most often, the governing law of the The Authority should expect to receive concession agreement is the national law all construction documentation for of the country where the terminal is installations, power and water lines, located. Some foreign lenders, however, sewerage systems and any other sys- require that documentation be governed tems that have been constructed under- by English or New York law. Issues ground at the site during the concession relating to governing law, submission to period. The operator should also remove jurisdiction and dispute resolution all remnants of piles, foundations and should be addressed at an early stage of

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Box 61

Reference Clauses on Expiration of Concession

•Not less than three months prior to the date of expiration of this agreement, the Port Authority and the operator shall conduct a joint inspection of the facilities. Such inspection shall be in accordance with the requirements of the hand- back scheme included in Annex [number].

•The operator shall ensure that on the date of expiration of the agreement each element of the facilities complies with the requirements of the hand-back scheme included in Annex [number].

•The operator shall at the expiration of the lease period peacefully and quietly leave, surrender and yield up the site to the Port Authority or to its agents without any claim for compensation in respect to any improvement effected by the operator on the site and shall before leaving, demolish, at the request of the Port Authority, some or all buildings constructed by the operator and remove any equipment, machinery or appliances installed therein, which otherwise will be vested in the Port Authority without compensation. Moreover, other items have to be removed such as stumps of piles, piles, foundations, materials, substances and the like.

•The scope of the hand-back of assets shall include all assets prevailing at the site as at the date of transfer, and shall, inter alia, include:

- all land and buildings

- plant and machinery

- spare parts

- such deeds and documents as may be necessary for effectively transferring rights, title and other interests under this agreement in favor of the Port Authority free of all encumbrances

- the benefits of all rights and interest in all unexpired insurance, guarantees and contractor warrantees, if so desired by the Port Authority

- all documents, manuals, records, etc. as may be required for the efficient operation of the terminal/port.

•The hand-back (and compensation) shall relate only to tangible assets and such intangibles (such as capital dredging) identified for the purpose of the Article in the Approved DPR.

•If there are piles in the site which have been placed there by the operator and/or by other parties, the operator shall submit a full and clearly specified drawing thereof to the authority.The authority shall decide how these piles should be removed and to which depth.The operator shall strictly comply with the instructions, which are given by the Port Authority.The Port Authority is entitled thereby to prescribe that one or more piles are left behind in a good condition, without the operator being able to claim any form of compensation for the piles, which will be left behind.

• In the absence of clearance within three months after the end of the lease period the fences, buildings, mooring sites and installations, and in general everything which is still situated on or in the site, shall revert to the Authority.

•If the site is not handed over in its original condition, after removal of everything which has been built thereon, placed therein or brought thereto by the operator and/or his predecessor(s) and levelled at the proper height, all costs which the Authority will incur in order to restore the site to its original condition shall be refunded by the Operator.

• (optional) The Operator shall at the expiration of the lease period sell back to the Authority the existing quay walls and all other new mooring facilities constructed during the Concession Period. In the event that parties cannot agree on a price, the price will be determined by an Arbitration Commission appointed in the manner given in Section [number].

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Box 62

Reference Clause on Arbitration

• In the event that the parties do not reach agreement on a new concession fee before the new period commences, the fee shall be determined by the parties in the manner given below on the basis of the advice of an Arbitration Commission consisting of three arbitrators.

• In that event, the Port Authority and the operator shall appoint one arbitrator, and the two arbitrators thus appointed shall appoint the third arbitrator; if a party fails to appoint the arbitrator within thirty days of receipt of a request to do so from the other party, or if the two arbitrators fail to agree on the third arbitrator within thirty days of their appointment, the appointment shall be made, upon application of a party, by the [name] Court.The arbitrators shall be notified of the provisions of this agreement, to the extent that these are important for them by the parties who appoint them. By accepting his appointment an expert subjects himself to the aforesaid condition.

•The third arbitrator will act as Chairman of the Arbitration Commission.

•The Arbitration Commission shall, together with a well motivated statement of their considerations and arguments, give its decision as to the extent to which the Concession Fee must be reviewed in relation to the Fee, which was charged during the last year of the concession period.

• In doing so the Commission shall compare:

- the situation and the condition of the area with that of the other port areas, without taking into account the nature of the use or the fact that they are built on;

- the conditions under which concession agreement(s) concluded with other parties in the port area;

- special circumstances under which the concession agreement has been concluded with those of other parties in the port area;

- in the event that within the last two years prior to the end of the concession period, no other sites have been issued in concession within the area of the Port Authority, the Commission shall decide on the adjustment of the concession fee under observance of:

- the situation and the condition of the site;

- the conditions under which the site was concessioned;

- the special circumstances under which the site was concessioned;

- the increase or decrease of the user value of the site concerned as a result of external circumstances; and,

- the increase or decrease of the value of money.

•If all three experts, or two of them, agree on a new concession fee, the Commission shall inform parties in accordance therewith in writing. If all three differ in opinion then the new fee shall be established by the Commission at half of the total of the two estimates, which have the smallest difference between them. If the difference between the lowest and the middle estimate is the same as the difference between the middle and the highest estimate, then the fee shall established by the Commission in accordance with the middle estimate.

•A change in the fee by virtue of the provisions in this article shall, if one of the parties expresses the desire thereto, be laid down in a separate deed.

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Box 63 detailed regulations relating to the conduct of vessels, safety and order in the port area, the protection of the environ- Reference Clause on Costs ment, the use of pilots, documentation of disembarking passengers, loading •Where this agreement determines that costs, and discharging of goods and crisis damages, taxes and other levies by public bod- management. ies and the like are for the account of the operator, the latter shall pay the amount stated by Because port regulations are dependent or on behalf of the Port Authority and shall at on specific local circumstances, develop- the same time state the reason for the payment of generally applicable port regu- ment, immediately upon the first request, with- lations is not feasible. Therefore, in this out awaiting notice in default or court interven- section only a selection of the most tion. important issues is discussed.

•All costs incurred for this agreement and sup- General Elements of Port Regulations plementary agreements shall be for the account of the operator. Port and traffic regulations should cover all principal aspects of operations as the negotiation between the Port described below. Authority and the operator, particularly Vessel Traffic Management. Vessel traf- in the case of a concession involving a fic management focuses on the safe pas- BOT agreement. (See Box 64) sage of vessels through the port area. Box 64 Traffic density in a major port–especially in the case of sea-going and inland vessels using the same port waters–may Reference Clause on Governing Law require an elaborate system of traffic regulation and management. This sys- The Agreement shall be construed and governed by the law of the Republic/Kingdom of [name]. tem comprises four principal elements: • The vessel with all its sophisticated communication and positioning PORT REGULATIONS equipment such as satellite communication and anti-collision radars; Port Operating Regulations • The available port facilities such as Port regulations (port by-laws) are usu- vessel traffic systems and modern ally issued by a Public Port Authority aids to navigation, often with and have a legal basis either in a specific advanced features such as central- law such as a Maritime Code (e.g., as in ized digital radar displays, collision Azerbaijan), a Port Law (e.g., as in prediction and CCTV as well as pilot Singapore) or a Municipal Law (e.g, as boats, patrol boats for traffic control, in Rotterdam). Port by-laws are general- tugs and mooring boats; ly well considered and provide very

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•Clear traffic regulations consistent • Repairs alongside; with International Maritime Organisation (IMO) conventions (if • Fumigation of ships; and applicable) as well as long-estab- •Ships causing danger of hindrance lished communication procedures; (See Box 65) and Generally, the Harbor Master (or Port •Well motivated and trained person- Captain) is responsible for maintaining nel such as pilots, traffic and radar good order in the port area, often in co- operators, patrol boat crews, tug operation with specialized port police, crews and other shore personnel. and, in emergencies, with the regular police, fire brigade and ambulance Provisions regarding these issues are services. found not only in Port Regulations (port by-laws), but also in pilotage laws/regu- Reporting and communication. Part of lations, vessel traffic regulations and reporting and communication with the IMO Conventions. Harbor Master (or Port Captain) is standard and does not need much explana- Pilotage. The sea/harbor pilot is the tion. Expected time of arrival (ETA) at first representative of a port encoun- the port is usually reported at least 24 tered when a seagoing vessel enters port hours prior to arrival and regularly waters. He acts as adviser to the Captain updated. Departure of a ship from berth during the ship’s transit. The efficiency is usually reported to traffic control of the pilot service is of major impor- three hours before unmooring. There tance both for port safety and efficient are special procedures for reporting dan- traffic management. gerous or noxious substances carried by the ship. Border police and customs Order and safety in the port. This part require a host of documents. In the of the port regulations is related to a event that a country is a member of the variety of subjects such as: Port-State Control Agreement, the Port • Berthing requirements; Authority controls ship documentation in order to prevent sub-standard ships • Manning of a vessel when at berth; from using the port. Rules should be made by ports for Captains or Agents to •Shifting of ships; inform the Harbor Master/Captain’s Room in a timely manner about goods • Use of anchors; loaded or discharged at the terminals, •Use of stern or side-thrusters when especially with respect to dangerous and noxious cargoes. Data communication alongside; between ship and port and harbor • Air pollution from vessels; authorities is increasingly done by electronic means via satellite communica- • Substances in the water; tion devices (GPS, Internet). Modern

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ports increasingly accept only messages ed in packaged form, including freight in digital format. containers, bulk packagings, portable tanks, tank containers, road tankers, Transport and handling of dangerous trailers, unit loads, etc., fall under cargoes. The entry and presence of dan- these categories. gerous, hazardous and harmful cargoes in port areas and their attendant han- Generally, port regulations may require dling should be fully controlled to a license for handling specific cargoes. ensure general safety. The passage of The Port Authority may also prohibit ships carrying dangerous cargoes is a loading, handling and discharging of critical responsibility of a VTS. Ships dangerous cargoes in harbors where loading and/or discharging dangerous such activities would be especially dan- cargoes are usually regulated by an gerous to the public. Cleaning of ship expert Dangerous Goods Department. holds still containing residues from dangerous cargoes may need to be separate- Over the last four decades, the ly regulated and controlled. Disposal of International Maritime Organisation oil and chemical wastes should also be (IMO) has been recognized as the princi- strictly controlled and carried out pal forum for all matters affecting the through Port Authority-owned or con- safety of shipping. The transport of dan- trolled installations, in line with the gerous cargoes has been one of IMO’s Marine Pollution Convention (MARPOL main responsibilities since its founding 73/78) on port reception facilities. in 1958. Its rules, requirements, regulations, standards, codes, guidelines and With respect to vessel management, the recommendations have been implement- Port Authority may regulate the naviga- ed by Port Administrations all over the tion and place of anchoring or mooring world and are followed and observed by of vessels carrying dangerous goods. It both Port Authorities and the ports also might regulate the mode of utiliz- industry. Port regulations should be ing, stowing and keeping dangerous consistent with with IMO rules as much cargoes on board vessels and the con- as possible. veyance within the port of any kind of dangerous cargoes with any other kind It is estimated that more than 50% of of goods, articles or substances. packaged goods and bulk cargoes transported by sea can be classified as Finally, a Port Authority should have dangerous, hazardous and/or harmful. full information about type, amounts of Some of the substances transported are dangerous goods in the port area and dangerous or hazardous as a matter of about locations where those goods are safety and are also harmful to the stored or handled. Detailed regulations marine environment; other cargoes are should be issued by the Port Authority hazardous only when carried in bulk, or the competent environmental agency and some may be considered harmful with respect to location and segregation to the marine environment. Between of dangerous cargoes on terminals or 10% and 15% of the cargoes transport- industrial sites. In the event of industri-

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Box 65

Reference Clauses on Port Safety and Environmental Protection Air Pollution

•It is prohibited to allow smoke, vapors, fumes, dust or steam to escape from a vessel, which cause or may cause danger, harm, hazard, damage or hindrance within or outside the port area.

•The Port Authority shall publish the names of substances, that may cause unacceptable stench or hindrance when being loaded into or discharged in bulk from a vessel. It is prohibited to load or discharge such substances unless the Port Authority has issued a license to do so.

Removing Objects and Substances from the Port Water

•When a person by fault or negligence introduces an object into port water, hereby causing danger, hazard, harm or hindrance within or outside the port area, he shall ensure:

- that the Harbor Master is informed without delay;

- that the object or substance is removed from the water immediately, unless this is not practically possible;

•The Port Authority may issue further detailed regulations in order to prevent pollution of port waters.

Execution of Repair Works On Board

•It is prohibited to execute or cause to execute works on board a vessel with respect to renovation, repair or maintenance in the following cases:

- when a ship is berthed in a Petroleum Harbor and the works cause open fire and/or sparks;

- when is ship is carrying dangerous goods or when it concerns a tanker for which no cleaning certificate has been issued;

- if the works are impairing a vessel’s readiness to maneuver;

- it the works cause danger, damage or hindrance.

•The above shall not apply when a ship is berthed at a shipyard licensed to carry out such works.

•The injunction shall only be imposed when it has become apparent that conditions imposed by the Authority have not complied with or, in the opinion of the Authority, no effective measures can be taken to prevent or end the situation of danger, serious damage or serious hindrance to the port area and/or the nearby population.

Fumigation of Vessels

•It is prohibited to use or cause to be used gases on board a vessel for the purpose of disinfecting ship and cargo without a license issued by the Port Authority; and

•A vessel that used gases for disinfecting ship and cargo is prohibited to berth or be alongside a berth unless a declara- tion from a licensed expert has been issued stating that the vessel is gas-free.

Danger, Harm, Damage or Hindrance from Vessels

•The Port Authority may impose an injunction on the vessel to enter port, to berth or to remain alongside a berth if the vessel, in the opinion of the Authority, causes or may cause serious danger, harm, damage or hindrance to the port area an/or the nearby population.

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al/chemical sites located in the port • Air pollution; area, the Port Authority should also be fully informed about possible dangers • Reporting and removing substances and risks with respect to explosions and and objects floating in port waters; damage to the environment. • Repairs aboard ships;

Miscellaneous subjects. Port • Fumugation of ships; and Regulations further comprise a number of miscellaneous subjects, such as: •Ships causing serious danger, damage or hindrance. (See Box 65) • The conduct of inquiries into any case where damage has been caused Reporting to or by a vessel within the port limits or the approaches; The obligation of the master of a vessel to report various events to the Port • Keeping the basins and premises of Authority or to the Harbor Master is an the port and the approaches clean important part of port regulations. Main and preventing oil, filth, rubbish and events include: reports on arrival and any other thing from being thrown departure of a vessel, reports of danger- into the port waters; ous goods on board a vessel and reports on accidents/incidents on board the ves- • The provision and maintenance of sel, when calling at the port or being adequate pontoons for landing of alongside a berth. persons, moorings buoys, gangways, landing stages, moorings and Reports are usually made to the berthing facilities; and Captains Room of the Port or Marine Authority responsible for disseminating •Prohibiting the embarkation and dis- the relevant information to all parties embarkation of persons except at concerned, such as the terminal of desti- such places as may be authorized by nation, the tug company, the boatmen, the Port Authority. customs and immigration, shipchandlers and others. Information is often entered Safety in the Port into a Port Community System serving the entire port community. (See Box 66) Since it is not feasible to mention all port regulations on port safety, only those Vessels Loading and Discharging provisions that are of general applica- Dangerous Cargoes tion are listed here. With respect to vessels loading and dis- The main subjects are: charging dangerous cargoes, port regulations usually include detailed provi- •Transport, handling and storage of sions. Often, handling liquid cargoes dangerous, hazardous and/or harm- such as oil, oil products, gasoline, dan- ful good; gerous chemicals may only take place in

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Box 66

Reference Clauses on Reporting Arrival and Departure

•The Master of a vessel shall inform the Harbor Master of:

- the ETA of the vessel at the port at least 24 hours before arrival;

- the shifting of the vessel in port at least three hours prior to such event;

- the vessel’s departure from port at least three (two, one) hour before unmooring;

- damage to the vessel, the equipment, machinery and other items which may impair maneuverability of the vessel and which may endanger the safety of the port area and/or the nearby population, directly upon occurrence of such incident;

- other data required by the Harbor Master in connection with the vessel’s presence in the port area.

•Notifications shall be made in digital form to the address determined by the Port Authority.

Dangerous Goods

•The Port Authority may require reporting data on dangerous cargoes loaded to or discharged from vessels in the port, or from vessel which have not been cleaned from such substances.

•The Port Authority may also require when and in what manner these data shall be provided to the Authority.

Reporting Data on Dangerous Goods

•The following data shall be provided by the Master of a vessel:

- Name and call sign of the vessel and the IMO identification number, if applicable;

- Nationality of the vessel;

- Length, breadth and draught of the vessel;

- Expected Time of Arrival (ETA) in port or at the pilot station, as required by the competent authority;

- Expected Time of Departure (ETD);

- Planned route;

- The correct technical names of dangerous or polluting goods, the UN (United Nations) identification numbers, where applicable the IMO hazard class in accordance with IMDG, IBC and IGC Codes and the type of vessel as described in the INF Code, the quantities of the goods and their location on board. In the case such goods are transported in tank or cargo containers; their identification marks and signs;

- Confirmation that a cargo list, manifest and suitable stowage plan is available on board which accurately lists the dangerous and polluting cargoes carried on board as well as their location;

- The number of crew members on board.

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designated harbor areas/zones that do Box 67 not pose a threat to nearby population centers. (See Box 67) Reference Clauses on Loading and Discharging Dangerous Cargoes Reception Facilities •The Authority shall make regulations for the The Marine Pollution Convention transport, loading, handling or discharging of 1973/78 (MARPOL) aims to prevent dangerous hazardous and/or harmful goods in pollution from ships. It has been widely the port and the approaches thereto. Such regula- adopted throughout the world. It obli- tions may concern, inter alia: gates signatory states to ensure the provision of adequate port reception facili- - Documents to be presented to the Harbor Master; ties for waste, which can be used without undue delay. - Berthing requirements including tug assistance;

National legislation implementing the - Security and supervision; convention usually places responsibility for ensuring such provision on Port - Fire prevention and accident control; Authorities. Many ports meet the obligation by allowing suitable, qualified - Activities which may cause danger, hazard waste management contractors to offer and/or hindrance; services. In such cases the Authority is - Loading and discharging of cargoes; and responsible for thorough quality control at the facility. Cleaning facilities for oil - Incident reporting. and oil wastes can often be economically exploited. However, cleaning facilities •The Authority may prohibit loading, handling or for chemical wastes generally do not discharging of dangerous good at wharves or offer by-products that can be extricated docks where such loading, handling and discharg- and marketed by a waste management ing appears especially dangerous to the public. contractor.

An important issue to consider is whether the port will merely facilitate the provision of these services directly to ships through licensed, qualified contractors or provide the facilities itself (shore facilities and collection barges, if necessary). In the latter case, the port takes responsibility for the effective removal of waste materials. (See Box 68)

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Box 68

Reference Clauses on Waste Management

•No person shall provide any waste handling facility cum collection service unless he is authorized to do so by a public license granted by the Port Authority (or Environmental Agency).

•Every public license granted under this section shall be in such form and for such period and may contain such conditions as the Authority may determine.

•A public license for the exploitation of a waste handling facility may include conditions requiring the public licensee:

- to comply fully with the requirements of the Marine Pollution Convention 1973/78 on adequate port reception facili ties, especially with regard to Annex I (Oil), Annex II (Noxious Liquids), Annex III (Packaging), Annex IV (Sewage) and Annex V (Garbage), if and when applicable;

- to prepare itself to deal with any emergency threatening the health of the population and the pollution of the environment;

- to comply with any rules, regulations, procedures and standards as specified in the license or which are given by a competent Authority;

- allow control and inspection of facilities and administration by any competent Authority at all times;

• Subject to this Section, the Authority may modify the conditions of the public license granted.

•Any public licensee aggrieved by the modification of conditions by the Authority under this subsection may, within 30 days of the receipt of it, appeal to [Court], (ask for arbitration).

•The Authority may give directions for or with respect to standards of performance and procedures to be observed to ensure the reliability and the environmental friendliness of the facilities and the waste collection, as well as the prevention of undue delay to vessels.

•Any person who fails to comply with any direction given under this section shall be guilty of an offense.

•It shall be the duty of the public licensee to provide environmentally acceptable, reliable, efficient and economical services to the shipping community in accordance with the provisions of public license granted to it and the directions of the Authority.

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

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

HE551.P757 2003 387.1'068—dc21

2003045093 42705_MOD5_AGS 5/27/03 8:01 AM Page 1

PORT REFORM TOOLKIT

MODULE 5 FINANCIAL IMPLICATIONS OF PORT REFORM

THE WORLD BANK 42705_MOD5__TEXT_AGS 5/27/03 7:56 AM Page 1

MODULE 5 FINANCIAL IMPLICATIONS OF PORT REFORM

The introduction of private management This analysis demonstrates that the notion in the port domain has represented a of port terminal operator covers a range strong trend both in industrialized and in of different situations, depending on the developing countries over the last few type of traffic handled and the degree of years. This principally concerns the competition surrounding the activity. handling and storage of freight transiting This diversity substantially affects the via the port, and funding and operation degree of required regulation of the oper- of the infrastructure, superstructures and ator's activity on the part of the Port equipment required for these activities. Authority or other regulating body (see This trend has involved the setting up of Module 6). This regulation, in turn, has complex, multidimensional partnerships major implications for the operator, both between public port authorities and ter- in terms of the level of risk carried and minal operators. capacity for risk management. This being so, the principles adopted for sharing the Module 5 presents an analytical frame- risk between the Port Authority and the work for assessing the risks confronting terminal operator must take this essential port operators with the aim of identifying consideration into account. principles for equitable sharing of each risk between the public and private sector Reducing the situation to its simplest parties involved. terms, the terminal operator carries two

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fundamental risks: vided the rules of the game are established at the outset, and provided they •Acost risk, or a risk of exceeding ini- are clear, stable and complied with, they tial cost estimates for the construc- do not affect the excess cost risk, which tion or operation of the project; and then only depends (apart from cases of force majeure) on the ability of the oper- •Arevenue risk, or commercial risk, ator to implement his project. Under depending on traffic and revenue such circumstances, it is reasonable to yields. expect the operator to identify and There is nothing extraordinary about assume the full cost of attendant risks. this situation. Any enterprise operating Where risks and associated excess cost in any field of activity has to carry these stem from changes in the regulatory sys- risks. However, the terminal operator tem or legal framework established conducts its activity largely in the public prior to signature of the contract, the domain, and can have the support of principles of risk sharing must then public investment, supply a public serv- depend on the very nature of the activi- ice, and enjoy a de facto monopoly. ty. Two situations are possible in this Over and above the overarching legisla- case: tive and statutory framework, some measure of regulation of its day-to-day • The service provided by the operator activity is often deemed necessary. This is not regarded as a public service. regulation can cover a number of techni- The degree of regulation is then low, cal aspects (definition of the project, per- and has no reason to change. The formance standards, standards relating risk of changes in the legal frame- to maintenance of the facilities, etc.), work is considered by the operator economic aspects (public service obliga- as a country risk, such as exists for tions, restriction of the field of activity) any industrial company. It is reflect- and financial aspects (control of prices, ed by an adjustment of the initially fees or subsidies). Module 6 reviews in anticipated level of return, and can detail the aspects pertaining to economic be subsequently passed on to cus- and financial regulation. tomers through increases in charges.

What is the impact of regulation on the • The service provided by the operator cost and revenue risks, and in what way is regarded as a public service. The does it condition the principles for shar- contract concluded between the Port ing these risks? Authority and the operator is then similar to a public service franchise Cost Risk agreement. Integration of this risk by the operator would increase the The constraints imposed by technical cost of the service provided and regulation have an impact on the initial would have an adverse impact on estimation of project cost (investment the user. Furthermore, regulation of and operation). On the other hand, pro- tariffs imposed on the operator could

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make it impossible for the operator temporary or even implement a nega- to pass on increases to the user at a tive concession formula, where the oper- later date. It therefore appears equi- ator bids for the lowest level of subsidy table that this risk should be shared. required when the traffic is acknowl- The principles of risk sharing should edged to be too low to sustain commer- be clearly defined on signature of the cial viability. agreement, and can cover guarantees of stability or provide appropriate While the operator is then no longer compensation (e.g., lifting of pricing fully at risk for meeting the project’s constraints, indemnities or other con- projected revenue level, he must contin- siderations). ue to bear responsibility for its costs. The regulatory system therefore must Revenue Risk not deviate from the principle of assigning the project risk to the operator. This In contrast to the cost risk, regulation is the case where the contract provides has a direct impact on the extent of the for a guaranteed minimum level of revenue risk for the operator and on the return, or adjustment of rates and latter's ability to manage this risk. The charges according to costs. revenue risk is in fact the principal risk involved in a port project, due to the Another risk for the operator is present uncertainty inherent in traffic and in all cases. This is the political risk of throughput level predictions. non-compliance with the terms of the contract by the public authority, or the As a general rule, it is desirable to imposition of discriminatory measures assign the traffic risk to the operator. affecting the project. This risk can be This is possible and justified in a case reduced by various methods, or hedged. where the activity is not a public service. The assessment of this risk nevertheless Sharing of profits between the Port represents a major factor in the decision Authority and operator can be envis- of the operator to proceed with the proj- aged under certain circumstances. This ect or not. Political risk may manifest is also possible in the majority of cases itself either as a revenue risk or a cost where the activity is subject to genuine risk. competition. In the end, the principles of risk sharing On the other hand, sharing of this risk is between the public Port Authority and frequently necessary in the case of a the operator depend, to a large extent, public service monopoly. The substan- on the degree of public service accorded tial degree of regulation required in this (or not) to the activity concerned by the case imposes such constraints on the national authority and the resultant reg- operator that the latter has little means ulation. The initial situation frequently of managing the commercial risk. The is that of a stagnant public sector, with Port Authority can then, as appropriate, little means of clearly identifying among either provide the concessionaire with a the various tasks in which it is engaged guarantee of non-competition (possibly those which relate genuinely to the pub-

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lic service, and which, when delegated This requires the establishment of a or franchised to an operator, demand clearly defined, stable contractual frame- strict regulation. While a form of part- work that enables the operator to quan- nership always exists between the Port tify and manage the risks with which he Authority and the operator, the activities will be confronted, and which is based of the port terminal operator do not on comprehensive legal procedures and always embody the characteristics of a techniques. However, no contract can public service, and do not therefore provide for all eventualities. It is there- require the same level of regulation in fore necessary to include clauses that all cases. Note, however, that any form define the conditions and procedures for of regulation imposes costs, namely the periodic reviews and negotiations for cost of the additional risk imposed on the purpose of making necessary adjust- the operator (reflected by a requirement ments. Apart from this renegotiation for a higher rate of return) the cost of process, the option of issuing new calls resultant considerations, or simply the for tender at periodic intervals during cost of supervision. To minimize such the lifetime of the project is a possibility, costs, the objective should be to regulate despite practical problems of implemen- only in those cases where this is clearly tation. In some cases, a clear division essential. between infrastructure and equipment management and activities management The port terminal operator has numer- may be desirable. (See Module IV for a ous partners in the provision of compre- full discussion of legal issues.) hensive port and transportation service, the most important of which is the Port Once the risks have been distributed Authority itself. Often, the Port between the public and private partners, Authority therefore, often is not only a the private operator – the concessionaire regulator but also the primary partner of – will seek to "quantify" and "rate" the the terminal operator. From this point residual risk he must bear. The risk val- of view, the type of "horizontal" partner- uation will be determined through coun- ship between terminal operator and Port try and project ratings. Tariff setting Authority does not differ from that will be contingent upon a minimum which can exist between two companies. financial break-even point, below which Of necessity, this partnership involves prospective concessionaires will be reciprocal obligations, with the Port unwilling to participate. From the point Authority guaranteeing not only the of view of the concessionaire, then, the services that it provides directly, but also riskier the project, the higher the those which it may be led to delegate to requirement of expected returns. other entities operating within the port complex. A risk-return assessment is an integral part of a comprehensive profitability The involvement of private companies analysis of the project. Such analysis in port management leads to the intro- would help determine under what con- duction of a complex, multidimensional ditions and terms the project will suc- partnership with the Port Authority. ceed in meeting the needs of the market,

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given the ever changing nature of these is essential. Part A takes a pragmatic needs. This is what is implied when view of the subject and seeks to estab- analysts speak of "project bankability." lish a basic understanding of what is at The operator is now faced with two stake. It does not attempt to undertake a compelling sets of parameters resulting comprehensive treatise on the more from the profitability analysis and the sophisticated mechanisms for coverage cost-effectiveness analysis of the project, and financing. and their impact on the socio-economic returns for the community at large.

Because of these market-driven financial constraints and the fragile nature of the public and private partnership, there is as much a case for sharing financial obligations as there is for risk distribution between the Port Authority and the concessionaire. To reach agreement on an equitable distribution of risks, the difficult balance between socio-economic returns of a project one the one hand and financial profitability on the other hand must first be achieved. This amounts to finding the optimal equilibrium within the framework of a regulatory system acceptable to both partners.

Part A of Module 5 focuses on the issue of "financial engineering" and the effort to secure the best terms for financing and coverage of the project based on the risk analysis and the financial constraints. The key components are the structuring of the project equity and debt, and the management of "exogenous" and political financial risks. Financial engineering is a complex process given the constant introduction of new and more sophisticated financial tools; it is also a delicate process since financial partners commit to projects on a long-term basis. Since project funding is such a critical element of any significant port reform initiative, a solid understanding of financial engineering

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MODULE 5 PART A PUBLIC-PRIVATE PARTNERSHIPS IN PORTS: RISK ANALYSIS, SHARING AND MANAGEMENT

INTRODUCTION parties involved (private sector, investors and lenders). We are witnessing a vast movement towards the privatization or private These developments also require public management of public services through- authorities to take on a new role, that of out the world, in industrialized as well "concessioning authority" or regulating authority. These changes permit the as in developing countries. This trend is public authority to concentrate on its especially marked in the port sector, essential tasks of economic, social, spa- where calls for tenders, aimed at intro- tial and temporal regulation, to achieve ducing private management of ports the best balance among the interests and previously under the control of the demands of the various port and ship- Government or a public entity, have ping entities and of the general public. increased substantially in the last few years. In Part A of this Module, we review a number of financial aspects of port This trend has created a market for com- reform using the example of a public panies to develop port concessions. "landlord port" that has decided to Projects of this type, which are frequent- transfer a terminal into the hands of a ly set up on a project financing basis, private operator. (See Module 3 for a generate significant risks for the various full discussion of service, tool, and land-

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lord ports.) This involves to a greater or •Aset of principles constituting a lesser degree the delegation of design, "code of good practice" that have construction and operating functions to proven acceptable to all parties for the private sector. risk allocation and sharing in various situations; and In this context, the partnership established between the Port Authority and • An assessment grid that can be used operator can take a number of different to perform a quick evaluation of the forms. These are difficult to describe main risks of a project and the ability accurately by means of a simple topolo- of a candidate operator to manage gy as many different types of contracts these risks. can be used (see Module 4). Apart from the usual distinctions in terms of the CHARACTERISTICS OF THE delegated services, ownership of the PORT OPERATOR facilities or the point in time at which the operator intervenes during the life- In the majority of cases, private sector time of the project (operation and main- participation in port operations compris- tenance contracts, lease contracts, con- es industrial and commercial activities, cession, BOT or BOO agreement, etc.), the foremost of which are the handling particular attention will be paid to the and storage of merchandise passing problem of risk sharing between the through the port. These port activities Port Authority and the operator. Any involve business practices common to public-private partnership is defined in all companies as well as aspects that are a contract, the content of which must be highly specific to the port sector. adapted according to the characteristics of the particular project. These contracts One can characterize the port operator reflect the mutual commitments of the through a description of these basic and parties and in defining them, the risks specific aspects and, using this charac- assumed by each party. terization, establish an initial classification of the risks that the operator is like- One of the essential conditions for the ly to encounter. This approach deliber- success of port reform projects is the ately leaves the definition of the "port" ability to identify risks. This is a prereq- very broad, in order to demonstrate the uisite to determining optimum risk shar- complexity of the environment of the ing between the various participants port operator, whose activity simultane- according both to their respective capac- ously takes place in a port community, a ity for risk management and their will- transport chain, and national and an ingness to carry these risks. We shall international economies, while neverthe- therefore address the question of risk less preserving the principal characteris- sharing analysis in greater depth, by tics of an ordinary company. means of a pragmatic examination of what it signifies from the point of view of the terminal operator. The tools we will employ will include:

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General Aspects government, the possible risk of armed conflict, labour climate, etc. National Environment. In common with any other private company, a port The port operator is thus subject to the operator must transact business accord- full range of national legal, economic, ing to the legal, economic, social, and social and political influences that deter- political environment of the country in mines the stability of the nation and which it is conducting its activity. locale in which the project is located. This must be analysed in detail, as this The legal and statutory environment environment generates a number of incorporates the applicable common law risks, typically referred to as "country rules and regulations, whether stem- risks." ming from national legislation or international agreements of which the coun- Industrial and Commercial Dimension. try is a signatory. These include A port operator is a service provider, company law, rules of fair competition, although with a substantial industrial tax law, exchange control, regulations and commercial (i.e., infrastructure and governing transfer prices and tax with- investment) dimension. This is one of holding on the payment of dividends, the reasons behind the desire to intro- labour laws, laws relating to the protec- duce private management in ports. It is tion of the environment, police, conces- generally admitted that a private com- sion and property ownership regula- pany has a degree of flexibility and an tions, and customs regulations. ability to react quickly that enables it to achieve greater efficiency than a public This environment also comprises entity. specific measures applicable to ports, such as those concerning their legal sta- In the course of its activity, the operator tus, rules regarding police and security must finance, install, operate and main- services, and even special measures tain the necessary infrastructure, super- relating to property ownership, labour structures and equipment. In common laws (as specific to dockworkers), taxa- with any other company, the operator tion, etc. must apply his own know-how and resources, while also establishing con- The economic environment is defined by tractual relationships with various the relevant macro-economic factors equipment suppliers or service (growth, inflation, exchange laws, debts, providers (construction contracts, pur- etc.), as well as the wage and salary lev- chase of tooling, purchase of water and els, the level of training and skills of electricity, etc.), employing sub-contrac- local human resources, price levels, etc. tors for specific operations (maintenance, security, or even the operations In its broadest sense, the political and themselves), and with the banking sec- social environment is based on prevail- tor for the financial package on which ing geopolitical conditions, the stability the operation is based. This industrial of the existing national, local or regional dimension of the operator’s activity cre-

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ates what are referred to as "project • The tasks undertaken by the operator risks." may have the characteristics of a public service and may be burdened The port operator deals daily with its with at least some of the obligations customers, whether ship-owners or inherent in the notion of public serv- shippers, who are sensitive to the quali- ice including non-discrimination and ty of service supplied and the rates continuity of service; charged. These aspects, in turn, are directly affected by the extent of compe- • The nature of the activity in or the tition confronting the operator. This physical location of the port can lead relationship with customers, on which to the development of de facto the level of activity is largely dependent, monopolies with substantial entry generates a "commercial risk" or "traffic barriers (e.g., rarity of sites, need for risk" for the operator. public investment, insufficient level of activity for more than one opera- Specific Aspects Particular to the tor). This type of situation makes the Port Sector intervention of a regulating authority necessary to protect users from abu- "Vertical partnership” with the conces- sive advantage being taken of a sioning authority. Apart from the legal dominant position. However, this environment as described above (com- recognized need for oversight should mon law and sector-related rules), under not cast doubt on the principle of the terms of its contract with the opera- legal security, and must avoid any tor the Port Authority imposes a set of malpractice whereby the port opera- measures on the operator defining, tor could be subjected to arbitrary directing, regulating or simply authoriz- decisions; ing the latter's activity over a given period. This form of relationship between • The activity of the port operator can the Port Authority and the operator is require public investment in addition described here as a "vertical partner- to private investment. The invest- ship." ment necessary for the operator's activity can produce a return on This vertical partnership reflects the invested capital that, while satisfac- extensive scope of public service activi- tory for the public entity involved, is ties the Port Authority often delegates to insufficient for the private investor. the port operator. Inclusion of these This is the case where the project measures in the operator’s contract is generates positive externalities and justified for a number of reasons: where it is not possible to obtain a direct contribution from all the indi- • The port activity involves public rect beneficiaries of these external issues including issues relating to effects. The need to draw on public national economic development, funds also stems from the lengthy land use, and the handling of exter- lifetime of port facilities, which nal trade; makes it necessary to obtain a return

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from the latter over periods that sub- thus in a de facto partnership with serv- stantially exceed the term of loans ice providers handling the other compo- available on the financial markets; nents of an integrated transport and and logistics chain. This is referred to as a "horizontal partnership." This type of • The shoreline forms part of the pub- partnership may also exist with the Port lic domain in many countries, which Authority if it is a service provider, and means that, at the least, express with other players of widely differing authorization (unilateral or contrac- specializations. It can also be an tual) is required to engage in an impromptu partnership, not formalized activity along the waterfront. by direct contractual links between the parties concerned. The extent of and It is the integration of these constraints parties to this horizontal partnership by the public authority that makes a ver- depend on the legal position of the cus- tical partnership and government over- tomer and his activity. sight essential. This has substantial consequences for the port operator and One can broadly describe the integrated the risk he incurs and his ability to man- service expected by the port operator’s age this risk. These consequences flow principal customers, ship-owners, and from several factors including: shippers.

• The concessioning authority may For a ship-owner, the integrated service impose conditions and constraints on expected covers all operations required the operator's industrial project, for the ship's call. The services provided resulting in cost increases; by the terminal operator (handling and storage) represent the most sensitive and • Regulation imposed by the conces- costly part of the call, although a vessel sioning authority can limit the ability call also requires suitable maritime of the operator to manage commer- access, operational buoying, properly cial risks, requiring a sharing of that maintained basins protected from the risk; and swell, efficient services to the vessel •Vertical partnerships by their very (pilot, tugs, in-shore pilot), and modern nature lead to "contractual risk" for EDI and VTS traffic control systems, etc. the operator, as the partnership with Above and beyond the service offered the Port Authority is based on a con- by the terminal operator, this means that tractual relationship. the ship-owner is sensitive to factors such as the level and reliability of the "Horizontal partnership" with numer- supporting services provided in the port ous players. The service a port operator zone. This identifies a first level of hori- provides to its customers, whether ship- zontal partnership within the port com- owner or shipper, is part of a more glob- munity, where the partners can be other al service of which the operator only public or private companies, and the provides one element The operator is Port Authority itself. Procedures imple-

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menting this partnership are formalized conditions under which customs control in contracts concluded between the Port is exercised can distort the competitive Authority and the companies operating situation ("Douane 2000" programme). in the port zone, or via police and oper- Similarly, a number of countries in ating rules and regulations. Africa have recognized this problem and taken steps to harmonize their customs For a shipper, the relevant service is the rules and practices (Central African end-to-end transport service, using a States Customs Union). transport chain in which transit via the port is merely one link, or more precise- It is therefore apparent that the port ly a node. This means that the shipper operator does not control all compo- is sensitive to the existence and competi- nents of the global services delivered to tiveness of the land transport modes his customer. The customer's decision to serving the port as well as to the co- use the operator's services, then, also ordination of these services with the depends on factors external to the oper- port services. This depends on a multi- ator. These factors are under the control tude of factors – controlled by numerous of numerous players with which the players – including the quality of road, operator is not necessarily in direct con- rail or inland waterway transport infra- tact. This situation creates a further structure, the quality of the services pro- commercial risk for the port operator vided by the operators of the different and complicates the management task. modes of transport, and various regulatory measures (flag restriction, charges, Long-term Commitment. The port oper- etc.). This leads to a second level of hor- ator runs a business. Consequently, he izontal partnership, where the partners seeks to maximize profit, although his are of varying types and frequently primary objective is at least to achieve a remote from the port activities proper. minimum acceptable level of return on This situation leads a number of trans- operations and investment to be able to port companies to seek the integration cover his costs and to remunerate its of the port operator and land carrier lenders and sponsors. The investments business to achieve more efficient con- that the operator makes typically dis- trol of a larger part of the transport play two special characteristics: chain. • They are substantial, indivisible, and Additionally, it is clear that the ways in have extended lifetimes, meaning which the government agencies carry that they can be depreciated and out their functions in a port (e.g., cus- yield a proper return only over peri- toms, veterinary and phytosanitary ods frequently exceeding 20 years; departments, frontier police) represent and another aspect of performance that is taken into account by customers when • They are "non-recoverable," either assessing the competitiveness of a par- because they cannot be physically ticular port. In this context, for example, dismantled (e.g., a coffer dam), or the European Union recognizes that the because the concessionaire does not

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own the infrastructure or equipment •Risk identification; in question. • Sharing of risks with the Port The justifiable demand of the operator Authority, the State or other public for a reasonable return on his invest- authorities where this is justified or ment necessarily requires that he have possible; the right to exploit those investments for a sufficiently long period of time. The • Sharing of risks with partners (e.g., above-mentioned characteristics gener- sponsors, customers, suppliers, sub- ally mean that an operator’s early with- contractors); drawal from a project would have substantial negative financial consequences. •Reduction of exposure to residual In some cases, though, a long-term com- risk (or the probability of its occur- mitment by the operator may also rence); become a source of concern to the con- • Reduction or limitation of the conse- cessioning authority. It is therefore in quences of residual risks (e.g., use of the interests of both parties to seek a insurance, accruals); and clear and stable legal arrangement by: • Adjustment of the expected rate of •Agreeing to an appropriate contract return according to the degree of period giving due recognition to the residual risk. special characteristics of the project; Two principles should be applied in sit- •Attributing genuine rights of owner- uations where the activity of the opera- ship to the operator for facilities tor represents delegated management of installed in the public domain; a public service: •Agreeing on an equitable and clear • Reduction of the project’s global risk cancellation procedure (stipulating (and consequently of project cost) causes and indemnification); and requires the proper allocation of risk. •Adopting rules of the game that both Risk sharing between concessioning reduce uncertainty and ensure prop- authority and concessionaire on the er transparency. one hand, and the various sponsors and lenders on the other, must be RISK MANAGEMENT based on analyzes designed to identify and allocate risks to those parties Principles which can carry them best (with least negative impact). Risk management by the terminal operator involves a number of these steps. • Any risks allocated to the operator Based on the approach adopted by will be reflected in a requirement for many financial institutions for funding higher profits, in terms of level or projects with limited or no recourse duration, with a resultant increase in these steps are: the cost of the service provided. It is,

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consequently, in the interest of the Antwerp). Consequently, a thorough concessioning authority to restrict, as legal analysis should be undertaken far as possible, the unnecessary prior to the implementation of the proj- imposition of risks on the operator ect. Especially when the project is locat- where the latter is not in a position to ed in a locale unfamiliar to the operator, manage them. In other words, it is it is prudent to call on the services of undesirable to make the operator local legal advisors specializing in the carry risks that the public sector various disciplines involved in the proj- would be able to carry at a lower ect. This will help to reduce the inci- cost. dence of circumstances that might delay project implementation. The risk of This section explores the approaches non-compliance by the operator with operators can use to manage the various legal or regulatory requirements types of risk previously identified, and through ignorance is one carried exclu- applies the principles set out above to sively by the operator. suggest equitable systems for risk sharing between concessioning authority The risk of changes in legislation or reg- and concessionaire. ulations stems from the possibility the circumstances in effect at the time of Country Risks their promulgation may change at a later date. In line with the principles This section deals with risks resulting put forward at the beginning of this from the national and international chapter, one can argue that the operator framework within which the project is justified in calling for guarantees of must operate. the stability of the legal environment to Legal Risk. Legal risks arise in connec- guard against changes over which the tion with the lack of precision in and the operator has no control. Nevertheless, possibility of changes in the legislation any such guarantee of legal security and regulations governing the project. It should not come at the expense of fair must be assumed that a set of rules exist competition among operators as long as at the time the project is initiated. continued operation of the public service is not jeopardized. On the other Insufficient precision in applicable laws hand, in the case where management of and regulations can lead to disputes and public service is delegated to an opera- misinterpretations and therefore creates tor, the operator is not in an ordinary a risk. In some cases legal issues can be business situation. Firstly, because the extremely complex, not only because permanency of his activity is essential to laws and regulations can be subject to a ensure continuity of the public service. variety of interpretations, but also in Secondly, because the degree of regula- terms of jurisprudence. Furthermore, tion imposed on the operator may well common practice frequently imposes a prevent the latter from adapting to such number of mandatory rules in terms of changes in the legal environment. port operation (e.g., FOB Dunkirk, Consequently, it is desirable either to

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guarantee stability or to include a con- Monetary risk. In a country where the tract revision clause to avoid situations national economy is weak or unstable, where change in the legislation or regu- macro-economic problems or fiscal rules lations could put the financial viability imposed by the host country create a of the project in jeopardy. risk, for both shareholders and lenders, that the project may be unable to gener- The risk of changes in legislation relat- ate sufficient income in strong curren- ing to the environment can be particu- cies. The main monetary risks that can larly significant, and can materialize create this situation include: during the construction and/or the operational phase. Prior to any decision • Exchange rate fluctuations, concerning privatization, the prudent concessioning authority should under- • Non-convertibility of the local cur- take an environmental study of the rency into foreign currencies; and project. Conventionally, such studies • Non-transferability (i.e., funds can- distinguish between: not be exported from the host coun- • The impact of the construction of try). marine infrastructures on the exist- Where the project can generate foreign ing marine environment; currency income, which is frequently the •Management of pollution from ship case when services are invoiced to for- wastes; eign ship-owners or shippers, the foreign exchange and convertibility prob- • Management of dredging-induced lems can be easily overcome. The best contamination; and way of hedging the transferability risk is for the operator to be paid via an • Management of pollution resulting account opened outside the host country from accidents. (offshore account). Use of such accounts frequently requires approval by the local With respect to environmental risk man- authorities. When an offshore account agement, the aspects specific to environ- can be opened, exchange controls or the ment-related regulations should be prohibition of the export of foreign cur- established prior to the bidding process rency from the host country would have and, where appropriate, negotiated at no direct impact on the economics of the the time of signature of the contract. project. In this case, the monetary risk is Any increased construction costs caused not hedged, but eliminated. by changes in environmental legislation during the life of the concession should In the contrary case, where no authori- trigger renegotiation of the contract zation can be obtained to open an off- between the two parties to define the shore account, other measures must be amount of and procedures for indemni- considered. The concessionaire should fication of the operator by the conces- seek convertibility and transferability sioning authority. guarantees from the government or cen-

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tral bank. Decisions about such guaran- account in the market survey undertak- tees often become political issues. en for the purpose of estimating the traffic and throughput risk. The principles As for the exchange risk, this can be par- of traffic and throughput risk sharing tially hedged by ensuring that the are analysed in a later chapter devoted majority of expenses are paid in local to this subject. currency; for example, by raising part of the debt in the currency of the host Force majeure. Force majeure generally country. However, frequently this is not covers all events outside the control of sufficient. It is rarely possible to raise the company and events that cannot be the required funding for large projects reasonably predicted, or against which locally. Further, foreign investors must preventive measures cannot be taken at be remunerated in foreign currency. The the time of signature of the contract, and latter also applies to part of the purchas- which prevent the operator from meet- es and personnel expenses (expatriate ing his contractual obligations. Apart personnel). Where conditions allow, from this general definition, cases of hedging products (e.g., exchange rate force majeure are generally stipulated in swaps) can be used to manage the the contract. These include: exchange risk. If, on the contrary, such products do not exist due to the instabil- • Natural risks: climatic phenomena ity or weakness of the host country cur- (cyclones and exceptionally heavy rency, the exchange risk represents a rainfall), earthquakes, tidal waves, major problem as it can only be carried volcanic eruptions; by the shareholders and/or lenders, unless an exchange rate guarantee can •Industrial risks: fire, nuclear acci- be obtained from the central bank of the dent; host country. The latter solution can •Internal socio-political risks: strike, only be envisaged in the event the riot, civil war, guerrilla or terrorist project is of critical importance for the activity; and host country. Such considerations again add a political element to management • Risks of war or armed conflict. of exchange risk. In certain contracts, unilateral decisions Economic risk. Port activities form part by the local authorities can be included of national and international transport in the list of events covered by force chains. The volume of trade moving majeure, in particular where such deci- through these chains depends to a large sions discriminate against the operator. extent on macro-economic factors, namely population, consumption, pro- These risks are included under country duction, exports, etc. Consequently, the risks, as it is the national context that macro-economic situation and its determines the probability of their expected evolution have a strong impact occurrence. It is reasonable that, if any on the level of activity in a port. It is such event occurs, it should result in the essential to take this element into suspension of reciprocal obligations of

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the parties involved, with a resultant only states unequivocally the objectives limitation (although not elimination) of of the parties, but also specifies the lim- their consequences. The contract can its on government authority to inter- also include procedures for sharing the vene. The contract may also include burden of the consequences of such provisions that will obviate the need for events between the parties, in particular arbitrary government intervention, e.g., where the operator is managing a dele- price escalation clauses or the obligation gated public service. to increase capacity above a certain traffic/throughput level. Interference or "restraint of princes" risk. Interference or "restraint of prices" Clearly, it is impossible to foresee all risk covers those risks that relate to the events that might give rise to interven- direct intervention of the public authori- tion by the government. Hence, it is a ties in the management of the project. good idea to include contract provisions that call for periodic meetings to discuss Public service requirements are normal- the status of the contract and allow for ly defined in contract specifications, and renegotiation of the contract to adjust the concessioning authority should not, the concession agreement to account for in principle, interfere in any way during significant changes in circumstances. the construction or operating phases, provided the concessionaire complies Political risk. The operator cannot con- with these requirements. However control the risks inherent in decisions taken cessioning authorities frequently do by public authorities. The operator nat- intervene in the name of public service urally seeks protection against harmful or for the protection of the users, for rea- decisions through the clauses of the con- sons of security, for the protection of the tract by transferring this risk to the con- environment, or simply on an arbitrary cessioning authority. This is not suffi- basis. Such interference can take the cient, however, since non-compliance form of the imposition of new operating with the terms of the contract by the requirements, additional investment or concessioning authority or the govern- new constraints, the result of which is to ment is just one of the risks facing the increase operating costs or reduce rev- operator. Additionally, the approval of enue. contracts or the issuance of authoriza- tions from administrative authorities can Intervention by the government may be cause delays and increase costs for the well-founded, but the concessionaire can operator. Finally, the risk of expropria- then legitimately expect compensation tion or nationalization is a danger. The from the concessioning authority for the risks of non-compliance, inefficiency or constraints imposed and indemnifica- expropriation and nationalization are tion of losses resulting from the conces- grouped under the designation of politi- sioning authority’s actions. cal risk.

The best way of attenuating the interfer- Apart from the detailed analysis of con- ence risk is to have a contract that not tractual commitments, there is also the

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problem of the credibility of the applica- United States, which act as guarantors ble legal system. The effectiveness of for the political risk during the loan contractual commitments depends ini- period. tially on the mechanisms available for settling disputes. Recourse to interna- Actual insurance cover can also be tional arbitration is desirable, involving obtained to hedge certain specific risks. a neutral jurisdiction applying recog- Such policies can be obtained from both nized international rules, such as those public insurers such as MIGA (World of the International Chamber of Bank Group) and private insurance Commerce. Likewise, the applicable companies. contract law can be that of a mutually acceptable third-party country. Quantification of the political risk is always a delicate matter, and there are This purely contractual approach, while no reduction or hedging methods that useful, is frequently inadequate to make it possible to eliminate the politi- ensure the acceptable management of cal risk entirely. Thus, if the perceived the political risk. In practice, the arbitra- political risk is great, and the ability to tion phase of disputes is rarely reached, mitigate those risks is slight, the opera- but when this is the case it reflects tor may opt to abandon the project. degradation of relations to such an extent that the future of the project is Project Risks very often threatened. Project risks are those risks associated There are, however, other strategies for with the investment in and operation of protecting against political risk. The the resources required for implementa- inclusion of multilateral organizations, tion of the project by the operator as set such as the World Bank or the out in the contract between the operator International Finance Corporation and the Port Authority. The majority of among the shareholders or lenders rep- these risks are carried by the operator, resents a form of protection for the oper- who consequently manages and ator. The presence of these institutions assumes their consequences. is not a formal guarantee, but governments generally seek to avoid antago- Project risks include: nizing these important multilateral institutions by imposing measures that • Construction risks; would upset the equilibrium of a project in which they are involved. Similarly, •Hand-over risks; the financial involvement of sponsors or • Operating risks; lenders from the host country can also serve to limit the political risk. •Procurement risks;

Another approach involves recourse to • Financial risks; and the export credit agencies such as COFACE in France or ExIm Bank in the • Social risks.

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Construction risks. Risks associated the design phase so that he can help with the construction of the project shape the project for which he will be involve unforeseen cost increases or responsible. The operator can then con- delays in completion. A construction clude a "design and build" type contract delay also translates into increased costs, with the construction company. If not principally for the operator, in one of involved from the outset, the operator several forms: must analyze and accept imposed specifications (e.g. basis of design), proposing • Penalties the operator may have to alternative solutions or refusing certain pay to the concessioning authority or aspects that he considers unacceptable, its customers under its contractual but may ultimately have to accept a less commitments; than optimal design (for which he will bear the consequences). • Delays in start-up of the operational phase of the project, causing a loss of Increased costs or delays caused by the earnings; and government or concessioning authority are considered as country risks (e.g., • Increased interim interest charges political, restraint of princes or legal (interest due during the construction risks) rather than project risks. In par- phase, most often capitalized). ticular, this is the case when the functional definition of the project is modi- In turn, the principal causes of excess fied or when, subsequent to signature of costs or delays are: the contract, constraints are introduced • Design errors leading to the underes- concerning the choice of technical solu- timation of the cost of equipment or tions. work, or the time required to com- Hedging of excess cost increases and plete the job; completion delay risks by the operator is • Inadequate assessment of local con- generally undertaken simultaneously. A ditions (terrain in particular), which common method of managing these can necessitate modification of the risks is to transfer them to the construc- original technical solution ; and tion company or equipment supplier. This is effected in a couple of ways. • Poor management of the job site, Where the project includes a major con- poor co-ordination of the parties struction phase, the financial package involved or the bankruptcy of a sup- generally requires the inclusion of the plier or sub-contractor. primary construction company among the project sponsors. The construction These project design and management risk (and design risk where applicable) tasks are under the control of the opera- is then allocated to the shareholding tor, which justifies the risks associated construction company, enabling the non- with them being carried by that partly. construction company shareholders to It is desirable, therefore, for the operator avoid bearing a risk over which they to be associated with the project from have little or no control. Transfer of the

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risk to the shareholding construction estimate the rehabilitation and mainte- company is achieved via the construc- nance costs to which he will be exposed. tion contract or the design and build contract. From the operator’s perspec- Even with the ability to inspect facilities, tive, then, the objective is to bind the it is desirable to include a clause in the construction company in a lump sum concession contract to safeguard the design and build turnkey contract that concessionaire against recourse relating incorporates a performance guarantee to events and conditions existing prior and appropriate penalty clauses. This to the contract, thereby exempting the makes it possible to convert the con- operator from resulting liabilities. struction risk of the project promoter Operating risks. The concessionaire into a credit risk for the construction operates the facilities necessary to meet company. his contractual obligations at his cost, Careful selection of a technically compe- risk and peril. Consequently, operating tent and financially sound construction risk is allocated entirely to the operator. company makes it possible to reduce Operating risk principally comprises: both construction and credit risks •Non-performance risk, which can because of the assumed capacity of the lead to payment of penalties to the construction company to honor its con- concessioning authority and adverse- tractual, technical and financial commit- ly affect commercial operations (e.g., ments. cause traffic levels to fall below It should also be noted that the sponsors expectations) and result in financial of the project (future shareholders) and losses; lenders to the project do not always • Risk of operating cost overruns stem- carry the construction risk in the same ming from underestimating operat- way. The lenders will often call on the ing costs in the bid proposal (e.g., sponsors for a credit guarantee covering omitting a cost category or making a the construction phase, since the lender defective calculation) or inefficient is protected by limited recourse for the management of the project by the operating period. operator; and

Hand-over risks. Hand-over risks arise • Risk of loss of revenue not associated when the operator takes over the man- with a drop in traffic level; e.g., as a agement of existing infrastructure and result of the non-collection of rev- facilities, undertakes operation and enue, fraud or theft in a case where maintenance, and in some cases first has the operator has not complied with to undertake rehabilitation work. The the procedures demanded by the general rule is that the operator takes insurers, and claims by customers or over the existing facilities at his own frontage residents. risk and peril. The operator is authorized to carry out prior inspection of the Non-performance risks can be mini- facilities, to assess their condition and mized by selecting an operator with rec-

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ognized experience in port and terminal Procurement risks. Procurement risks management. Cost overrun and loss of arise due to the potential non-availabili- revenue risks can be transferred to the ty of critical goods and services and operator through use of a fixed-price unforeseen increases in the cost of exter- contract between the master concession- nal resources necessary for the project. aire and operator (which may provide This is significant for port projects since for escalation by application of an index- they often depend on public monopolies ing formula), with the possible inclusion to supply critical services, for example of a variable component designed to for the supply of water and electricity. reward better-than-expected commercial performance. Concessionaires and Port Two approaches can help the operator to Authorities should avoid cost-plus-fee reduce or eliminate this risk. type contracts with operators, since they do not transfer any of risks. The operator can choose to produce the critical resource himself. For example, Like the project construction company, the installation of a dedicated generator the operator may become one of the in a refrigerated container park or refrig- project sponsors. This then makes it erated warehouse makes it possible to possible to associate the operator at the reduce the cost of the resource in some outset with the definition of the operat- cases and limit the risk of power cuts ing system and its cost, thus making the (which, in addition to simple interrup- operator fully responsible for the aspects tion of the service, can cause damage to of the project for which he will subse- the merchandise). This solution often quently carry the risks. requires specific authorization from the local authorities. Furthermore, provid- Such measures, however, do not elimi- ing such goods and services oneself may nate the operating risk completely. The not always be possible, or financially responsibility of the operator is neces- feasible for the operator. sarily capped. Furthermore, this approach in fact converts the operating Alternatively, the operator can sign a risk into a credit risk for the operating long-term purchase contract with the company. The latter generally has limit- producer of the resource. This makes it ed initial capital, which will not exceed possible to set the purchase cost using a its working capital requirement, as it has pre-determined price escalation formula, no investment expenses. The responsi- and to limit the risk of a unilateral price bility of the operating company can then adjustments or restrictions on supply. be covered by shareholder guarantees or Further, the contract may include a a bond system. clause to indemnify of the operator against losses incurred in the event of In any case, the concessionaire should interrupted supply of a critical resource. have the resources to manage this This is referred to as a "put or pay" con- endogenous operating risk, and it is tract. therefore logical that it be allocated to the concessionaire in full. The concessionaire may require the

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assistance of the concessioning authority appropriate financial instruments (e.g., or the government to be able to con- rate caps, ceilings on variable rates, rate clude a "put or pay" contract with the swaps). public monopolies concerned. This usually can be justified in cases where the Where projects are built or operated project has a substantial public service with the aid of subsidies, there is the dimension. risk that the government will fail to make good on its subsidy payments. Where the procurement of imported This risk is relatively small where supplies is concerned, the procurement investment subsidies are concerned, as risk can stem from customs-related the construction phase covers a relative- problems; thus, it becomes a component ly short period. However, international of the country risk. In such cases, the agreements (e.g., the Marrakech concessioning authority may reasonably Accords) or the dictates of internal law bear a portion of the risk. can still intervene to prevent the payment of subsidies. Financial risks. The operator bears all risks associated with raising the share- Social risk. The social risk arises when holders' equity or obtaining loans operators may have to restructure its required for funding the project. workforce and bear the cost of severance Likewise, he carries all risks associated payments, retraining, etc. The risks of with formation of the project company general strikes or civil disturbances in (the Special Purpose Company or SPC). the host country are frequently classified Contractual documents define the rela- as cases of force majeure (see country tionships among the various private risk), which means that they are often players involved in the project (e.g., the only partially covered by the protections shareholders' pact and loan agreement). afforded in the contract. Additional Apart from raising the initial tranch of insurance can be obtained to cover shareholders' equity and loans, the residual social risks. establishment of standby credit loans should also be considered, as this makes The port sector presents special chal- possible to fund any excess costs with lenges relating to social risk: which the project company may be confronted. • Dockworkers often enjoy a special status under national law, which Likewise, the interest rate fluctuation may put the operator in the dimin- risk is carried exclusively by the opera- ished position of merely acting as an tor. This risk arises when loans used to employer of hired labour. These spe- fund the project are based on floating cial treatment situations are disap- rates (e.g., Euribor plus margin). An pearing in some countries, but where increase in the reference rate conse- they still exist they are a source of quently increases the amount of interest risk and excess cost for the operator; to be paid, and hence the project costs. This risk can be hedged by means of • Port or terminal concessions, while

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requiring the operator to continue the operator and the Port Authority employing a portion of the existing leads, in practically every case, to shar- personnel, often result in a very sub- ing of traffic risk, both in terms of stantial reduction in the number of responsibility and consequences. The port workers (reductions of the order terms of the concession agreement effec- of 50 to 70% are not exceptional). tively allocate these risks between the Although the Port Authority or gov- two parties. However, even though they ernment may give the concessionaire are partners in port reform, there is a free reign to rationalize the port natural tension between the Port workforce, this alone is not sufficient Authority as a custodian of the public to eliminate the social risk. The interest and the operator as a profit operator must also be assured that maximizing business. the local authorities have the capability to manage the social situation Regulatory Risks thus generated (e.g., through retraining, early retirement, relocation This relationship between the conces- allowance, etc.). Otherwise, dis- sionaire and the Port Authority or other placed port labor may seek recourse government agencies is important in against the concessaire. defining the “rules of the game” for the concessionaire and, hence, his risks. • In addition to the social risk relating to dockworkers, the presence in the The concessionaire generally desires to port of other categories of personnel limit the scope of the "vertical partner- with special status (e.g., seamen, cus- ships" with the Port Authority, taking toms officers, Port Authority person- the view that his activity should be reg- nel) can amplify the social risks. ulated predominantly by market conditions. Consequently, he seeks greater Module 7 describes port labor issues in freedom of action in the management of depth. his project to be in the strongest possible position to manage his risks. Commercial or Traffic Risk The concessioning authority is con- Commercial risks arise from potential cerned with protecting the user, safe- shortfalls in projected traffic and from guarding the general interest, and pricing constraints. Traffic and pricing avoiding abuse of dominant market risks are significant in port reform positions. The concessioning authority, projects due to the high degree of uncer- consequently, seeks to restrict the opera- tainty associated with medium- or long- tor's freedom of action through technical term projections of port activity. These or economic regulatory measures. risks are affected by the operator’s pricing decisions and by any price regula- The search for a fair balance between tion imposed by government. regulation imposed by the concessioning authority and the discipline imposed by The nature of the partnership between the market is complex and effectively

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determines how the commercial risk takes the form of specifications and per- will be shared (see Module 6 for a formance standards included in the con- detailed discussion economic regula- cession contract itself. These might be tion). set by the concessioning authority in detail prior to the initiation of the selec- Regulation invariably generates costs. tion procedure. Or, they might be These include costs for the concession- defined only in broad terms, with the ing authority in the form of additional bidders required to provide details in compensation it may have to pay to the their proposals (e.g., maximum price concessionaire plus the direct costs of levels, fee, expected amount of subsidy enforcing the regulations through to be received). In this latter, these ele- inspections and other measures. ments serve as a means for comparing Regulation also generates costs for the the submitted bids and then become the concessionaire, which bears greater risks performance standards to be applied to and has less freedom of action than it the winning bidder. would in the absence of regulation. Thus, he will expect this higher risk Regulation by the concessioning author- level to be rewarded. ity can be classified as either technical or economic. The costs or regulation are ultimately borne by the port users or by the tax- Technical regulation. Technical regula- payer. Government regulation, there- tions define the minimum technical fore, should be kept to the minimum requirements of the project. It establish- necessary to correct market imperfec- es a set of parameters within which the tions and protect the public interest. concessionaire must operate, and goes a long way toward defining the risks to The nature and extent of government which he will be exposed. Technical regulation in connection with port regulation includes regulation of invest- reform are many and varied. Ideally, ments, maintenance, and performance. the concessionaire and the Port Authority or other regulating entity can i) Regulation of investments arrive at a situation acceptable to both parties by adjusting regulation and the Regulating investments is necessary guarantees and compensation allowed only when the operator is himself to achieve equitable sharing of risks. responsible for the execution of the Because situations affecting port reform project. The Port Authority may then vary so widely, there is no single set of choose to impose a number of rules applicable under all circumstances. regulatory measures: Instead, this section describes the different regulatory tools available to the Port •Afunctional definition of required Authority and identifies how each capacity, or traffic and throughput might affect the distribution of risk. thresholds that would trigger new investments in capacity to ensure a Regulatory tools. Regulation often minimum level of service (where

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market conditions might lead to ii) Regulation of maintenance under-capacity); Defective maintenance of port facilities • Construction standards to ensure creates three types of risks: that the work is satisfactorily executed; and • Commercial risk for the operator as a consequence of the deterioration in • Constraints or special specifications the level of service offered to cus- relating to security or protection of tomers; the environment. • Risk of default by the operator with Oversight by the concessioning authori- respect to the public service obliga- ty should be limited to the verification tions contained in the contract; and of compliance with the defined meas- • Risk of deterioration of assets during ures, but should not extend to the impo- the term of the contract. sition specific technical solutions, as long as the concessionaire meets the per- The commercial risk is properly borne formance standards. Any requirement by the operator, and poor service will be on the operator to obtain approval of penalized by the market. No regulation various aspects of the project by the Port by the concessioning authority is Authority, above and beyond these pre- required to guard against this aspect of defined standards, creates uncertainties maintenance-related risk. that increase the concessionaire’s risks. This makes it difficult for the operator to The public service obligation, in particu- properly estimate future costs for his lar the obligation for the operator to provide continuous service, typically is project, adding an element of risk for defined in performance requirements which he will seek compensation. contained in the concession contract or Tenders should not be judged solely on sub-contract with the operator. An inter- the basis of the amount proposed to be ruption of service resulting from a fail- invested by the candidate. Indeed, mak- ure to performance maintenance can ing sure that a minimum amount is then give rise to penalties. invested is not an end in itself (except In the case of a concession where assets perhaps for the construction company). are handed over to the Port Authority Indeed, such one dimensional measures on termination of the contract, the need can have adverse effects by possibly for regulation can go beyond a defini- encouraging non-economic investment. tion of functional obligations. It is nor- It is preferable to impose functional obli- mal for the concessioning authority to gations and performance requirements require that repair and maintenance on the operator and to leave to the inge- work is correctly carried out to ensure nuity of the operator the task of finding that the installations are handed over in the best way to meet those require- good operating condition at the end of ments. the concession period. The concession-

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ing authority can impose specific main- er stacking equipment. tenance standards in the contract to ensure the satisfactory preservation of Economic and financial regulation. the assets. Virtually all concession contracts contain economic and financial provisions defin- iii) Regulation of performance ing the scope of permissible activity, the minimum services required, the degree Finally, where the lack or absence of of competition the operator can expect, competition is liable to discourage the the freedom to set prices, and any fees operator from providing an adequate or subsidies associated with the project. level of service, the concessioning authority can include specific perform- These provisions are designed to estab- ance standards in the concession con- lish some level of certainty for the oper- tract; e.g., minimum levels of productiv- ator with respect to its flexibility to man- ity. While sometimes deemed necessary, age the project so that the operator can this approach is not without difficulties, assess risks and ways to manage them. since it assumes that the concessioning i) Permissible scope of the authorized authority: activity • Is in a position to define and codify a level of service, whereas the content Fundamentally, the concession contract of the service and the required level should define the activities the operator of performance can change over is authorized to conduct in the area time; defined by the contract. The Port Authority will define this scope based •Is capable of determining compliance on its reform strategy and operational by the operator with the set stan- needs. For example, the Port Authority dards; and may prohibit the operator from engaging in any activities other than the han- • Has the ability to apply either incen- dling and storage of merchandise within tives or penalties when the perform- the project’s defined domain, or specify ance objectives are exceeded or not the types of traffic the operator will be achieved, respectively. authorized to handle. In the latter case, Beyond productivity criteria and service such limitation may be the consequence standards, performance standards can of an exclusivity guarantee previously also include a minimum capacity for the granted by the Port Authority to another terminal. These standards might be operator in the port. based on investment levels or on direct measures of storage and throughput By restricting the scope of permissible capacity. Generally, it is preferable to activity, the Port Authority increases the permit the concessionaire sufficient flex- commercial risk for the operator. With a ibility to meet the standards in the most narrow scope, the operator’s capacity to cost-effective manner (e.g., extension of adapt or diversify its activity in yard space versus the purchase of high- response to market changes is limited.

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On the other hand, the Port Authority activity, including differentiation in tar- could allow the operator considerable iff/pricing, berthing priority, and service freedom of initiative and action to levels, provided these are based on exploit port land and facilities, in return objective criteria such as annual traffic for the operator’s performing unprof- or throughput volume, the period of itable public service activities. commitment of the parties or the characteristics of call or vessel, and provided ii) Public service obligations these are applied uniformly to all simi- The Port Authority may require the larly situated users. operator to comply with principles governing the provision of a public service. iii) Guarantees of non-competition This obligation on the operator typically Under certain circumstances it may be imposes requirements for: reasonable for the concessioning author- • Continuity of service, with the ity to grant the concessionaire a "guar- assessment of penalties or early ter- antee of non-competition" to compen- mination of the contract in cases sate for the imposition of strict regula- where the service is interrupted due tion, since such regulation may deprive to the fault of the operator; the concessionaire of the normal means available to a company for positioning • Equal access and treatment for users itself in a competitive market. This type (i.e., non-discrimination with respect of guarantee is generally limited in time to pricing, priorities, level of service, and terminates on a specified date or etc.). when the level of traffic reaches a pre- It is not always possible or desirable to defined threshold. avoid all discrimination among an oper- Although they can be useful in limiting ator’s customers. For example, obliging a concessionaire’s risks, we do not an operator who is a subsidiary of a recommend creating de jure monopolies shipping line to serve other competing where this is not necessary, even if they shipping lines under the same condi- are limited in time. Instead, we recom- tions as its affiliated company, irrespective of contractual stipulations, is unre- mend that the concession contract pro- alistic. This problem can and should be vide for renegotiation in the event that avoided when developing the conces- the competitive situation significantly sion bidding qualifications. Business changes. Renegotiation may include a affiliations of the bidder, and any restric- review of the regulatory clauses to adapt tions thereon should be taken into them to new market conditions. In cer- account when designing the concession tain cases, this could lead to the indem- and awarding the contract. nification of the operator where the newly created situation calls into ques- The principle of non-discrimination tion the viability of the project. among users does not prohibit prudent commercial management of the affected iv) Pricing controls

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The procedures for setting tariffs repre- ator only conducts its activity for his sent a critical element of the economic own account or on behalf of his share- regulatory system. Prices and pricing holders. This is also the case where the flexibility affect the terminal’s level of port customers are not "national eco- traffic and throughput and the prof- nomic units" (e.g., where they represent itability of the concessionaire’s opera- transit traffic or transhipment activity). tion. Regulation of prices by the public The operator should then be free to authority affects the operator’s flexibili- negotiate charges with its customers on ty in two key ways: a case-by-case basis.

• The ability to negotiate the terms of Pricing regulation is necessary, however, service provided to the customer on in other cases, namely where the opera- a case-by-case basis or the obligation tor provides an essential public service for the operator to publish a list of and is in a position of strong market charges applicable to all users; and dominance. Apart from the requirement of equal treatment of users and the pub- • The ability to set the level of charges lication of prices, in such cases the in the case of a published list. administrative authority may choose to Operators should be free to set tariffs establish a maximum charge (a price without significant government over- cap). This maximum charge can be set sight when the market is effectively reg- initially by the market, as the set of tar- ulated by competition. Competition can iffs submitted by the terminal operator come from another terminal in the port, as part of his bid. The price caps are another port, or another means of trans- generally accompanied by price escala- port (air, land or coastal transport). tion formulas indexed to a set of eco- Estimation of the true level of competi- nomic indicators. However, these esca- tion can be difficult (see Module 6 for a lation formulas are generally applied methodological approach). From the only for a short term, (e.g., for a period concessioning authority’s perspective, of up to five years). Following that, the objective of price regulation should periodic renegotiation of the price caps be to limit the risk of the operator abus- is required, which becomes another ing a dominant market position. As source of uncertainty and, hence, risk indicated above, when sufficient compe- for the operator. tition exists to discipline pricing, the tariff regulation need be nothing more than The problem of regulating public an obligation to treat all users on an monopolies over the life of a long-term equal basis and the requirement to pub- concession continues to be a subject of lish a tariff. concern in industrialized countries. So far, no clear and fully satisfactory Government oversight can also be kept response has been produced. The prob- to a minimum when the activity in lem is even more acute in the develop- question does not constitute a public ing countries where regulatory oversight service. This is the case where the oper- capabilities may be weak.

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A radical approach to regulating such v) Fee or subsidy monopolies would be to re-compete the entire concession at periodic intervals, Vertical partnerships between the con- at the same time setting new tariffs cessioning authority and concessionaire according to market conditions. But involve some form of fees or subsidies. This constitutes another form of regula- such a re-competition of the concession tion, as the level of the fees or subsidies cannot be envisaged every five years. is closely linked to the tariff policy. The Moreover, a re-competition would also fees or subsidy mechanism typically has require the inclusion in the contract of a fixed and variable component. provisions on equitable withdrawal conditions for the concessionaire includ- The fixed component can be a fee equiv- ing concession repurchase clauses. alent to a rent paid by the operator to These are generally based on the dis- the Port Authority for the use of land counted value of anticipated profits and facilities/utilities provided by the from the concession through the origi- public sector. This fee also incorporates nal termination date. This amount profit sharing; i.e., the rental fee effec- depends directly on the tariff assump- tively includes an element to reward the tions for the residual period. concessioning authority for permitting the operator to profit from the operation Another approach might be to require of the terminal. the concessionaire to use several handling, companies for the same facility, as Conversely, the fixed component can be in Reunion Island (see Box 1). a subsidy paid to the operator when the concession is acknowledged to be an Box 1 unprofitable undertaking. This is a way of compensating the operator for pro- Port Réunion: A Single Container viding essential public services. In this Terminal Using Several Handling kind of concession, the subsidy level will usually be one of the main award Contractors criteria during the selection process. In common with the majority of island economies, Réunion does not generate sufficient traffic to justify The variable component of compensa- more than one container terminal. The majority of the tion to the concessioning authority can containers are consequently handled by a single container terminal. However, the containers are handled be a payment by the operator of a fee by a number of competing cargo handling contrac- based on the level of activity. The vari- tors. able component can also be an indexed subsidy based on traffic level. These This has not prevented recourse to private investment or management.The resources required for these same things include a minimum traffic operations have been provided by an economic inter- threshold that can be used to share the est group comprising the cargo handling operators traffic risk and indemnify the operator if and other partners. The partners include the Chamber of Commerce and Industry, yard equipment owners, the level falls below the predefined land storage management and gantry crane owners. threshold. This latter approach may be most appropriate when there is signifi-

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cant uncertainty about the potential traf- authority owning the port also has an fic moving through the terminal and ownership interest in the terminal oper- when the concessioning authority ator company (IAPH Institutional desires to impose tight technical and Survey, 1999). For example, in the case pricing regulations. of Hamburg, the port (owned by the Hamburg regional government) has a Experience shows that these fee and majority interest in the operator compa- subsidy levels and any escalation claus- ny. This situation often gives rise to es should be decided as part of the con- conflicts of interest between the share- cession contract and should be based on holder and regulator roles of the conces- traffic levels rather than the degree of sioning authority, which tend to out- profitability for the operator. weigh the perceived benefits of such a scheme. Control and monitoring of the The Port Authority could choose to set concessionaire’s behavior generally is the initial levels for the fixed and vari- best carried out through a well-drafted able components of subsidies or fees. concession contract, making proper However, these levels represent the allowances for the concessioning author- most frequently adopted financial crite- ity’s interest in reviewing certain strate- rion for judging bids and, therefore, gic decisions of the concessionaire. This preferably should not be set by the Port will safeguard the concessioning author- Authority, but left for the bidders to pro- ity’s role as an impartial regulator with pose. all its operators, which runs the risk of being compromised if it becomes Golden share or blocking minority. involved as an equity holder in any of Over and above the contractual condi- the private parties it is supposed to tions included in the bid specifications, oversee. the concessioning authority can retain a "right to know" concerning decisions Risk and Port Typology taken by the concessionaire. The most commonly used techniques for this are Sharing of risks, and the extent of to hold an equity interest in the project required government oversight, can also company and to hold a “golden share” be influenced by the nature of the termi- or blocking minority. This enables the nal operations being concessioned. This concessioning authority to exercise over- section identifies several different types sight from within, but also can invali- of operations and the resultant implica- date the risk sharing balance by intro- tions for regulatory oversight and risk ducing chronic interference by the con- sharing. cessioning authority in the management of the concessionaire company. Operator handling only his own traffic. This method of operating is frequently Despite its drawbacks, this form of gov- encountered in the case of a terminal ernment oversight is widespread. In handling industrial bulk (e.g., ore or oil) over one-third of the privatized port ter- and general cargoes (e.g., forest prod- minals worldwide, the port or municipal ucts, fruit). Under these circumstances,

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it is frequently the shipper, a group of Operator acting on behalf of a third several shippers, or the ship-owner him- party in a competitive situation. In this self who serves as the operator of the case, it is desirable for the traffic risk to terminal. be carried in full by the concessionaire. This means that the concessionaire must This type of special purpose operation be able to manage this risk by control- does not necessarily represent a public ling the operating parameters affecting service. Hence, it does not require sys- his competitive position. This assumes tematic regulation by the Port Authority. substantial freedom for the concession- Nevertheless, standards governing the aire in terms of investment, level of maintenance of the facilities can be service and the tariff, although some imposed for the preservation of the limited regulation may still be necessary assets given in concession. to ensure compliance with the public The administrative document formaliz- service obligations, preservation of pub- ing the contractual relationship between lic assets, and maintenance of minimum the Port Authority and the operator of capacity. special purpose facilities merely needs On the other hand, the tariff can be set to authorize the the use of the site for freely, as the market is regulated by the defined activity. A fixed fee is typi- competition. The contract is awarded to cally paid for the occupation of public the candidate proposing the highest land, and where appropriate, the provision of infrastructure or equipment by rental fee or the lowest subsidy require- the public sector. Port dues billed ment, whichever is relevant. (See Box 3) directly to users (ship-owners and ship- Box 3 pers) by the Port Authority already generate remuneration for the use of the Container Terminals in the "general" infrastructure, and therefore North European Range would not be further billed to the terminal operator. (See Box 2) The current situation in Northern Europe provides a example of genuine competition between dif- Box 2 ferent terminals in the same ports, and between the different ports of the Le Havre-Hamburg Owendo Ore Terminal in Gabon range. The high level of traffic, the opening of European frontiers and the quality of the avail- The Owendo ore port was built in 1987 to export man- able land transport services support the existence ganese ore mined in Moanda Province. A number of of numerous container terminals, while providing agreements were signed at the time including an shippers and ship-owners with a genuine choice agreement for the construction of the port and anoth- of port and operator. This situation allows the er for the use of public land and installations and the coexistence of public and ship-owner–dedicated operation of private facilities. These agreements pro- terminals. vide for the transfer of responsibility from the Port Authority to the private operator for maintenance of This situation, however, is rarely the case in devel- the facilities and dredging along the wharf, thus mak- oping countries where traffic is thin, border crossing the operator responsible for all maintenance and management of the terminal it uses. In return for the ings are difficult, and intermodal connections are operator assuming these responsibilities, the Port poor. Hence, the ports on the West African coast Authority reduced the fee paid by the operator. have virtually no competition.

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Operator acting for a third party in a traffic fails to reach a minimum thresh- monopoly situation. This situation is old, in order to protect the operator relatively common in developing coun- from significant revenue shortfalls. tries, in particular in African and insular countries. The existence of a natural Finally, the concessioning authority and monopoly of the port terminal manage- the operator can agree to share profits ment activity undeniably introduces a when traffic exceeds a specified volume. public service dimension requiring close (See Box 4). economic oversight. This can involve Box 4 the setting of charges and award of the concession to the candidate proposing the highest fee (or lowest subsidy) or, Container Terminal Operator alternatively, setting the amount of the in the Port of Klaipeda fee (or subsidy), and awarding the con- The Port of Klaipeda in Lithuania has a new concession to the candidate proposing the tainer terminal designed to handle import-export lowest weighted mean tariff rates. Price traffic as well as a high volume of (competitive) escalation and indexing clauses are transit traffic between Western Europe and the Baltic States and Russia. Although the terminal essential in all cases. was financed from public development aid funds (EIB), an operating concession was awarded to the There are several ways that traffic risk German operator Eurogate, in association with and profit can be shared between the local partners. concessioning authority and private operator. Transit or transhipment traffic. Transit First, the concessioning authority can traffic refers to goods whose origin or guarantee that the monopoly will be destination is a country other than that protected from competition for a speci- of the port. Transhipment is the dis- fied time or until a specified traffic level charge of cargo/containers from one is reached. The agreement may contain ship and the loading onto another in the clauses providing for modification of the same port (vessel-to-vessel). Both activi- regulatory system or even indemnifying ties may have a positive impact on the the concessionaire from completion of economy of the country, generating the contract should the monopoly disap- opportunities for value-added activities, pear. jobs, and national wealth.

Second, the concessioning authority can Where the customer is not an economic guarantee minimum traffic levels when unit in the country of the port, the gov- the volume of traffic forecast by the con- ernment does not have the same interest cessioning authority is regarded as high- in protecting the customer. Con- ly uncertain by the concessionaire. sequently, in the absence of any special When such uncertainties exist, the con- agreement, there is little reason for the cession agreement typically limits the government to accept any of the risks amount of the fixed part of the fee and associated with transit and transship- introduces a variable part (reduction) if ment traffic or to regulate economic

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activity by the operator. Box 5 In fact, the port may benefit from the operator’s market dominance in han- Port of Djibouti: dling transit traffic, which is disciplined Transit and Transhipment by the existence of alternative transport systems (transit), the capacity of com- The independence of Erythrea has deprived peting ports in the region (tranship- Ethiopia of its maritime access (ports of Assab and Massawa). Ethiopia is now land-locked. The ment) and the degree of international recent conflicts between the two countries have competition. Under these circum- made Ethiopia substantially dependent on the stances, it is reasonable for the Port Port of Djibouti for its maritime trade. A lack of budgetary resources has led the Djiboutian Authority to seek to obtain maximum authorities to seek private funding for the neces- profit from this favorable (although per- sary development projects (e.g., cereal terminal). haps transitory) situation. In this case, This project, based on the realization of a "situation rent," should achieve a fair yield for the the Port Authority charges an operator investors. It will generate new revenue for the with managing of this "natural resource" independent international Port of Djibouti and (i.e., the country’s geographic advan- economic activity for the country. tage), with the objective of maximizing The Port of Djibouti has long enjoyed a strategic spin-off benefits for the country. situation in the container transhipment domain, this activity representing a significant proportion Regulation of the activity is not of its container traffic and resources. The Dubai Ports Authority now manages the Djibouti con- required, apart from the actual authori- tainer terminal under a concession agreement. zation and an obligation to preserve existing assets where appropriate. There is no need to subsidise the activity nor to share commercial risks, these being Mixed situations. The situation fre- fully carried by the operator. On the quently existing in ports is a mixture of other hand, the Port Authority will seek the configurations described above, fur- to maximize its profit, by awarding the ther complicating decisions about the concession to the highest bidder, namely procedures to be adopted. This leads to the candidate proposing the most favor- a hybrid approach, combining compen- able profit-sharing arrangement (fixed sation systems, regulatory oversight and variable fee) to the authority. (See mechanisms, and encouragement of "sit- Box 5) uation rents" (highly profitable operations in select activities to help fund a needed public service that might otherwise generate a loss). (See Box 6)

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It is logical for the Port Authority to pro- Box 6 vide the operator with guarantees concerning standards of facilities and per- Djibouti Fishing Port: formance of services in the port (e.g., Public Service and Semi-industrial depth of access, buoying, operating Activity hours, ship services), whether provided directly by the Port Authority itself or The Republic of Djibouti has constructed a fishing delegated to other service providers port to encourage the development of a small- within the framework of a vertical part- scale fishing industry that can provide the country with new sources of animal protein for human nership. These commitments, frequent- consumption. Financed by public development ly grouped in a clause headed "conces- aid funds (concessional loan from the African sioning authority's obligations," can Development Bank) the port cannot be financially profitable on the basis of this small-scale activity result in financial penalties against the alone. Port Authority in the event of failure to meet its obligations. The resultant com- On the other hand, the fishery resources of the region, combined with certain advantages grant- mercial risk for the operator is then ed to the country (Lomé 4), make it possible to transformed, theoretically, into a credit look towards the development of an export-ori- risk for the Port Authority. Clearly, it is ented semi-industrial fishing activity. Furthermore, this project has led to the prepara- important for the operator to conduct a tion of reclaimed, back-filled sites, the privileged thorough analysis of operation of the location of which will provide for the develop- complete port community and its repu- ment of various activities. tation before committing himself to the Placing of the complete entity under concession project. Irrespective of the clauses could possibly enable the concessionaire to make included in his contract with the Port a profit from the overall project, while meeting its Authority, the operator will inevitably public service obligations relating to small-scale fishing activities. suffer the consequences of any defective operation of the port.

Likewise, while it may be useful to Other Concessioning Authority Guarantees include guarantees regarding land transport modes (e.g., hours of operation, access to carriers, creation of new infra- The existence of a horizontal partner- structure, maximum charge or minimum ship between the various players in the capacity for a rail service), the quality of port community on the one hand, and the intermodal service at the port is criti- the transport chain on the other, was cal to efficient and cost effective opera- described earlier. The operator will tion and should be analysed before the often seek to combine the various servic- operator puts in a bid. (See Box 7) es required by his customer into an integrated whole or, alternatively, give contractual guarantees to customers as to the level of service provided in these various domains.

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A terminal’s main customers–shipping Box 7 lines or large shipping companies–will frequently become project sponsors, Horizontal and Vertical much like construction companies or Partnerships in the Port of Maputo, operators. In such cases, the customer- Mozambique shareholder, himself, carries part of the commercial risk. In a horizontal partnership, the public Port Authority has awarded a concession for the However, this arrangement has a num- Matola terminal to a private operator, with the aim of developing transit traffic for the export of ber of disadvantages, particularly the coal from South Africa. As the admissible draught risk of discrimination against non-share- of vessels is a major strategic element for the holder customers. Non-shareholding operator, the contract stipulated that the Port Authority would maintain a minimum access customers can guard against this possi- channel depth. The concessionaire has claimed bility by entering into a "take or pay" that the Port Authority has failed to meet this contract with the terminal operator. (See commitment, and has declined to pay the scheduled fee as a result. Box 8)

In a vertical partnership, the port itself and the Box 8 railway that serves the port are in the process of privatization. The port has been profitable while the railway has operated at significant losses. Richard’s Bay Coal Terminal: Separate privatization requires adjustments to A Wholly Private Terminal balance the two concessions without raising doubts as to the global cost of the transport chain for customers. A solution under considera- South Africa is one of the world’s leading tion involves the creation of a joint price regula- exporters of coal. The seven most important tion authority for the port and railway conces- mine operators in the country have funded, built sions. and now operate a huge coal terminal at Richard’s Bay, with exceptional rail access facilities, to serve their export business. The terminal has no public service obligation and handles the traffic of its Management of the Commercial Risk by shareholder-customers on a priority basis. This the Operator places the small producers in a situation of dependence. They in effect are obliged to sell their production to large operators or use other, Where the number of customers using a less competitive and more expensive ports (Durban or Maputo) or use the terminal as second port, a terminal, or other facility is limit- class customers. ed, or where a small number of customers represent a major share of the activity, the operator can protect himself CONTRACTUAL RISKS against traffic/commercial risks by means of a "take or pay" contract. This Relationships between the Port is a long-term contract under which the Authority and concessionaire on the one customer undertakes to generate a mini- hand and the concessionaire and his mum level of traffic and agrees to pay a suppliers, lenders, customers and sub- fixed sum to the operator whether or contractors on the other are defined in not he requires and uses the service. contracts. This section highlights the

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principal risks involved in the drafting party or another and the applicable and implementation of such contracts. procedures relating to penalties or compensation. These clauses must Contract Management also be compatible with the underlying loan contracts signed by the To protect both the concessioning operator, where these agreements authority and the concessionaire, con- provide for a lender's right to substi- tracts typically include provisions gov- tute another operator in the event of erning the possibility of changed circumstances or disputes about contract the bankruptcy of the original opera- implementation. The main elements of tor; and the contract governing such develop- •Procedures for settlement of dis- ments include: putes: risks associated with disputes • Revision clauses: at the outset of the were addressed in the section on project it is impossible to foresee all political risk management. The rele- the events that might arise over a vant clauses cover settlement out of period of several decades. This court, the eventual intervention of means that revisions will be required independent experts subject to prior to adjust the terms of the contract to acceptance by the parties, and arbi- changing situations. The conditions tration clauses (e.g., place, applicable and procedures for these revisions law, arbitrator, expenses). must be defined; e.g., periodic revi- Indexation Risk sion at defined intervals, revision scheduled for key project dates, revi- Indexation formulas have been men- sion triggered when a particular throughput level is reached, or revi- tioned on a number of occasions in con- sion at the request of one or other of nection with changes in tariff levels, the parties; long-term contracts with customers or suppliers, operating contracts, etc. • Contract termination or renewal Indexing designed to enable the opera- clauses: the duration of the original tor to cover or reduce certain risks (in contract period is a major risk con- particular the inflation risk) itself sideration for the operator. The pos- induces other risks: sibility for renewal or extension of the contract must be defined, as must • Risk of significant deviation of real- the procedures for take-over or world conditions from the indexation repurchase of the project assets on formula over a certain period; termination of the contract; •Risk of divergence between the • Early termination clauses: these indexing conditions of different con- clauses define the conditions poten- tracts signed by the Port Authority tially leading to cancellation or early and the operator (procurement, oper- termination at the request of one ation and sale).

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The risk for the operator is that the cession) authority and the private con- indexing formulas can lead to an cessionaire. This section looks in gener- increase in costs that exceed the increase al terms at other aspects of risk sharing in revenue or the potential reduction in from the perspective of each party and negative effects. The risk for the conces- the particular risks affecting it. sioning authority is that the operator’s Concessioning Authority prices rise too high when competition is inadequate. The primary challenge for the Port Credit Risk - Bonds Authority is to identify a balanced set of risk management measures, the Port Sharing or mitigating the many risks Authority being responsible for defining associated with port projects frequently this essential state of balance. This gives rise to contractual obligations and requires expertise in numerous areas, attendant financial sanctions if one which can lead to the use of the services party’s or another’s obligations are not of specialist consultants. In addition to met. Sanctions convert the risk into spe- the terms of the contract concluded with cific financial obligations (payment of the operator, which defines risk sharing penalties). This, in turn, generates the between the Port Authority and the credit risk of the partner being unable to operator, the composition and character- meet his financial obligations. istics of the sponsors raise major issues for the Port Authority in terms of: The most efficient method of ensuring that the partners honor their financial • the capacity of the operator to com- commitments is to require bank bonds. ply with the terms of the contract; These are frequently demanded from the • the degree of commitment of the var- concessionaire or by the operator from ious shareholders; its private partners. The amounts and call conditions for these bonds must • the commercial positioning of the accurately reflect the respective commit- operator, with particular reference to ments of the parties. On the other hand, the equal treatment of users or cus- the operator's credit risk with respect to tomers; and the concessioning authority cannot be covered by bonds, and generally • the transfer of technology and the remains a political risk. participation of national players in the project. APPROACH OF THE DIFFERENT PARTNERS TO RISK AND RISK This means that the process for selecting MANAGEMENT the partner is a matter of prime importance for the Port Authority. Apart from Part A of Module 5 has been largely selecting a partner who can meet finan- devoted to analyzing the principles of cial objectives (e.g., reasonable tariff lev- risk sharing between the public Port els, minimization of subsidies and maxi- Authority (as the entity offering the con- mization of the fee), the Port Authority

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must also be able to select a reliable or return on equity. partner. This is one capable of complying with all the terms of the concession However, apart from this determination, contract and capable of carrying all the which is the same one every investor risks allocated to the partner. must make, each sponsor generally adopts his own particular approach Recommendations relating to the man- according to his own agenda, enabling agement of calls for tender are pub- him to reduce this risk/shareholder lished by the principal international return profile. For example: financial institutions. These documents describe in detail relevant selection crite- •a constructor or equipment supplier ria and methods for achieving the satis- seeks to maximize his return for the factory selection of candidates. The construction phase and through the involvement of the international finan- upstream services he provides; cial institutions in these privatization initiatives also may permit Port • an operator seeks a return on the Authorities to avail themselves of addi- facility management services that he tional assistance provided by these enti- provides; ties. These sponsors can thus play the •a customer, shipper or ship-owner dual role of lenders and advisors to the looks for a high quality of service concessioning authority. and reasonable rates over the long Apart from the challenge of selecting the term; and original partner, as time passes there is also an issue associated with the contin- •a financial investor is primarily look- ued commitment of the shareholders. A ing for the sustainability of the proj- particular risk arises if the initial share- ect throughout the life of the invest- holders decide to dispose of their inter- ment period. ests in the project company to third par- The agendas of the various sponsors can ties that do not meet the expectations of lead to different expectations in terms of the concessioning authority. This risk concessionaire policy. This situation must be anticipated by appropriate con- also creates major differences in each tractual clauses. sponsors willingness to carry risk or in Project Sponsors the length of time over which he expects to earn his return. The concessionaire Having first analysed the risks of the consortium clearly must manage possi- project, the shareholders will logically ble differences in objectives among the seek to align the level of risk with the sponsors; but these differences also con- expected return on the operation. Their cern the concessioning authority. This is decision to become involved, conse- because they can lead to situations that quently, depends on their assessment of are prejudicial to the general interest, for indicators such as the project internal example as regards the continuity of rate of return, investment coverage ratio, service.

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Lenders measures including comfort letters or commitments by the concessioning The project’s lenders primarily look for authority, domiciliation of revenue or the project to have the capacity to repay debt, assignment of debt, and technical its debts. They consequently adjust the and financial performance bonds. amount of the debt and the repayment profile according to the annual and actu- CONCLUDING THOUGHTS arial debt coverage ratios (see Part B of this Module for a precise definition of It is not possible to cite universal princi- these concepts). ples for risk sharing in view of the widely varying characteristics and environ- Apart from these financial ratios, the ments of port projects. lenders frequently impose other constraints on the sponsors to ensure their The public service dimension of port continued commitment throughout the operations, which the public authority defined repayment period. This stems assigns to each port activity, is a core partly from the fact that the loans are element in the process of defining and not (or are only partially) guaranteed by sharing risk. However, the notion of project assets (which tend not to be liq- public service is by no means universal. uid in port projects), but principally While some principles are constant, the from the cash flows forecast for the peri- definition of public service varies from od of the loan. one country to another, and does not remain constant over time even within a The lenders, therefore, invariably call for given country. a minimum equity investment on the part of the sponsors. In the alternative, This is, consequently, a major considera- lenders may consider the replacement of tion to be taken into account in the pre- equity participation by subordinate debt liminary thinking on the introduction of (which presents the same advantages) as private management in ports. This acceptable. Furthermore, reserves can aspect is all the more delicate as the ini- be set up for the purpose of earmarking tial situation is frequently one of a stag- cash flow surpluses for debt repayment, nant public sector, often with limited thereby preventing the shareholders capacity for clearly identifying the from recovering their equity contribu- responsibilities that fall within the pub- tions before loans have been repaid. It lic service domain. is also rare for so-called "non-recourse" loans to be genuinely without recourse, For example, the activity of a port termi- and the lenders frequently impose guar- nal operator cannot be qualified as a antees on the part of the sponsors, in public service in all cases, and is more particular during the construction peri- akin to a purely commercial activity in od. many instances. At the same time, the activity of the port terminal operator The techniques adopted by the lenders cannot be fully classified as to that of a to limit their risk also include other commercial company, as the notion of

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partnership with the Port Authority is still present, although the levels of regulation and guarantees may be considerably reduced.

In a case where the public authority assigns this public service dimension to the activity, it is legitimate for the authority to retain careful oversight of the activity, while being free to delegate its actual implementation. The public authority might regulate the activity of the implementing entity to a greater or lesser degree, while the delegatee must reconcile the right of fair competition with the proper protection of the interests of users (or customers). This has complex implications for risk sharing, the procedures for which must be very carefully adjusted to achieve a fair balance, one that respects the objectives and constraints of the parties involved. The main objective of this part of this Module has been to describe various approaches for identifying risks involved in port reform projects and to suggest ways that these risks might be shared equitably among the interested parties.

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MODULE 5 PART B PRINCIPLES OF FINANCIAL MODELING, ENGINEERING AND ANALYSIS UNDERSTANDING PORT FINANCE AND RISK MAN- AGEMENT FROM PUBLIC AND PRIVATE SECTOR PERSPECTIVES

INTRODUCTION party, to include an assessment of the likelihood that the full economic value Concessioning authorities, concession- will materialize (i.e., taking uncertainty aires (Special Purpose Companies or and risk into account). SPCs), investors, lenders, and guarantors involved in port reform use a wide Part B of Module 5 provides a tour of variety of economic and financial analyt- the most commonly used analytical ical tools and performance measures to tools and measures of economic per- evaluate the feasibility of prospective formance and risk. Its purpose is to projects. Each partly has a different per- familiarize interested parties with the spective on what makes a proposed types of tools and measures that are project a success and, consequently, may used by their potential partners in port use somewhat different tools and meas- reform projects so they can better under- ures. All measures, however, are stand what motivates and concerns each designed to capture the economic value of them. It will especially help govern- of the proposed project to the interested ment decision makers without a private

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sector finance background to appreciate • The various costs and benefits must the private sector’s perspective on port be considered net of all taxes (direct reform and will permit them to "speak or indirect tax, customs duty, etc.) and the language" of their private sector national subsidies, regardless of the counterparts. This, in turn, should help nature of the national economic entity governments and concessioning authori- in question. The various taxes and ties design port reform projects to be subsidies correspond to monetary more attractive to the private sector. transfers between national economic entities and are therefore not to be taken into account in the national economic assessment of the project. MEASURING ECONOMIC PROFITABILITY FROM THE The assessment of commercial benefits PERSPECTIVE OF THE CONCESSIONING AUTHORITY and costs does not pose any particular valuation problem, since their value is Differential Cost/Benefit Analysis determined by the market. However, assessing non-commercial benefits and Traditionally, economic assessment is costs is more difficult. based on a comparison of two solutions: Commonly Used Economic a solution with a proposed project and a Profitability Indicators reference solution (i.e., a solution without a proposed project). In the case of a Socio-economic discounted profit or net proposed expansion versus a greenfield present value (NPV). In the field of pub- project, the reference solution corre- lic investment and port investment in sponds to a solution in which the exist- particular, the principal criterion on ing port infrastructure would evolve which the investment decision is based is without modernization or expansion. the socio-economic discounted profit. This criterion enables the intrinsic value The assessment is based on a differential of the project for the community to be cost/benefit analysis. The costs and assessed, and only projects with a posi- benefits are assessed in terms of eco- tive discounted profit should be selected. nomic value. This has a dual implica- tion in terms of methodology: The discounted profit is defined as the difference between the discounted • The project assessment framework investment expenditure and the dis- must be calibrated according to the counted value of the net benefits gener- nature of the national economic enti- ated by the project during its lifetime. ty in question: State, local authority, We also use the expression economic net port community, etc. In other words, present value or economic NPV. economic assessments must be carried out at several levels to ascertain For a project whose operations begin in to which economic entity the benefits Year t, the discounted profit is calcu- of the project will accrue. latedas follows:

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ed profit is zero. We then talk of the economic internal rate of return or economic IRR of the project.

C = Discounted investment cost The economic IRR is the solution r of the equation: a = National economy discount rate

Ai = Benefits in year i t = Year in which the infrastructure is put into service

The discounted profit criterion enables C = Discounted investment cost government officials to decide on the appropriateness and interest of the Ai = Benefits in year i project for the community. However, employing this tool does not provide This second criterion enables us not only any information as to the date on which to assess the intrinsic interest of the it should be carried out. With certain project for the community by accepting hypotheses (e.g., investment made at the only projects whose economic IRR is beginning of a period, net annual bene- higher than the discount rate of the fits increasing with time, unchanging national economy, but also enables us to chronicle of benefits with time) it can be arbitrate among several projects or vari- shown that discounted profit reaches a ants by choosing the one with the high- maximum for a certain commissioning est economic IRR. date, referred to as the optimal commis- Sensitivity studies. The economic sioning date. If the project is carried out assessment of a project is normally sup- before that date, the community “loses” plemented by a sensitivity study, which benefits. Conversely, once that date is enables decision-makers to ascertain the passed, the project should be carried out effect of changing a number of parame- as quickly as possible. ters on the value of the economic IRR. Internal Rate of Return or Economic By way of illustration in the port sector, IRR. The (positive or negative) value we can test the effect of changes in traffic obtained when calculating the discount- levels, investment costs, operating costs ed profit is an absolute value (as and cargo handling productivity on any opposed to a relative value) that does project’s discounted costs and benefits. not allow public decision makers to weigh the relative merits among several Assessing the "Economic Costs" of the projects or variants. To permit this Project weighing of alternatives, another way of tackling the economic assessment of a Assessment of "market" economic costs. project is to consider the value of the Traditionally, the "market" economic discount rate at which the net discount- costs of a project consist of investment

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costs, maintenance and operation of Assessing these economic costs is a par- equipment and materials used in each ticularly difficult exercise, but one that is solution (i.e., the solution with the pro- essential in order to determine the eco- posed project and without the project.) nomic rate of return of a project. In the case of a project to expand an exist- Assessing the "economic benefits" or ing infrastructure versus a greenfield "positive externalities" of the project. project, the costs to be considered in the reference solution take account of the nor- The economic benefits of a port project mal expenses necessary to maintain the can be analysed as an increase in real operating life and the normal safety con- revenue for the various elements of the ditions of port equipment and structures. national economy. They can take the form of: The inventory of project costs includes induced infrastructure costs such as the •Adirect increase in national added new land service networks required by value corresponding to an increase in the project. For example, a greenfield the wages created by net job creation project often requires the building of a or an increase in company profits new access road, the investment cost of which to the community can sometimes (new activities whose development be higher than the cost of the port proj- depends on the realization of the ect itself. project).

Assessment of "non-market" economic •Aprice reduction translating into an costs. The inventory of project costs increase in real income for con- must also take into account "non-mar- sumers and an increase in profits for ket" economic costs. In the port sector, companies. This covers, for example, these include but are not limited to: reductions in ship turnaround times • The costs related to transferring traf- resulting from improved handling fic from one transport route to anoth- efficiency (theoretically leading to a er (e.g., if several ports are compet- fall in freight rates), benefits from ing within the same country); economies of scale, lower insurance costs, reduced cargo inventory costs, • Possible effects of the project on lower inland transport costs, etc. town planning (in particular, traffic congestion); and The benefits can theoretically affect all • The impact of the project on the national economic agents who, in some environment and safety (e.g., marine way or another, are concerned with the pollution, nuisance to locals, pollu- production, marketing, transport and tion resulting from handling bulk handling of goods passing through the cargoes). port in question.

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RATING RISK FROM THE PERSPECTIVE OF structure. In practical terms, only oper- THE CONCESSION HOLDER ating cash flows (calculated after tax and duty), consisting of investment and Financial Profitability and "Bankability" operational flows, are considered. of the Project Taking the predicted financing structure into account in the project’s forecast Once the risk allocation chart between cash flows would result in accounting the public and private sectors has been for them twice over. produced, as described in the first section of this module, the private conces- The purpose of this first stage of the sion holder will then seek to "quantify" financial profitability analysis is to and then "price" the residual risk of the decide whether it is interesting for the project he will have to bear. This risk is private concession holder (sponsors and assessed by producing a country and banks) to continue the analysis of the project rating. Once this first stage is project from a financial point of view. In carried out, rating the risk is then fact, a financially unprofitable project at defined by setting a minimum financial this stage will not become profitable profitability threshold for the project regardless of how it is financed. below which a private concession holder will refuse to commit himself. In other This economic model of the prospective words, the more risk associated with the project, which is described below, is project by the concession holder, the usually produced by the sponsors in col- higher the required project profitability. laboration with the financial advisors (merchant banks or specialist agencies). It is within this framework that one ana- This model should not to be confused lyzes the financial profitability of the with the economic analysis carried out project. In other words, a financial by the Concessioning Authority as analysis is designed to determine the described above. conditions under which the proposed project can respond to market require- Assessing the Project Risks by ments, which usually vary with time. Producing a Rating This is what is understood by the "bankability" of a project. General principles. The first section of this module presented the principles for In terms of methodology, the financial allocating and managing risks between profitability of a project is determined the Concessioning Authority and the by the forecasting the cash flows gener- concession holder on the one hand, and ated by operation of the project. This between the concession holder and the aspect will be developed later in the sec- sponsors/lenders on the other. The tion on financial modelling. method used, inspired by the logic of the banking analysis of project financ- The calculation of the financial ing, consisted of: profitability of a project does not take into account the envisaged financing • Drawing up a list of types of risk:

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e.g., country risks and project risks; Commonly Used Financial Profitability Indicators • Distributing the risk to the party best able to assume it, e.g., Concessioning The purpose of financial profitability Authority, sponsors, lenders, cus- indicators is to determine the conditions tomers, suppliers, sub-contractors; and under which the proposed project is financially justified. There are four main • Reducing the exposure of the Special measures used to assess a project’s Purpose Company (SPC) or the like- financial viability: payback; internal rate lihood of the occurrence of a resid- of return; net present value; and invest- ual risk. ment cover.

The next stage consists of quantifying The time required for a return on invest- the residual risk that will be borne by the ment (payback). The payback time is SPC. This risk is assessed by producing the first indicator enabling investors and a rating. There are two types of ratings: operators to assess the financial profitability of a project. It is measured by • Country rating, the purpose of which relating the value of the investment to is to quantify the risk attached to the the average annual cash flow. project’s background and, therefore, to establish whether the country risk is "acceptable" to the market;

•Project rating, a project risk assessment through the establishment of a checklist, the purpose of which is to establish whether the intrinsic risks T = years to pay back investment in the project were "correctly" handled by the sponsors. I = total investment

Assessing the background risk by means R = average annual operating income of a country rating. There are numerous C = average annual operating costs country risk assessment methods. Box 9 presents the method developed by Nord R-C = average annual operating cash Sud Export (NSE), which acts as an flow adviser to the French insurance company COFACE (Compagnie Francaise Other things being equal, an investment d’Assurance du Commerce Exterieur) in project will be more interesting for the its country risk assessment process. private investor if its payback period is shorter. A high value for T reveals, Project rating: the Project Checklist. among other things, the need for long- The Project Checklist, established fol- term financing and introduces great lowing the principles spelled out in the uncertainty. first section of this Module, is included as an annex to this document.

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Box 9

The Country Ranking Developed by Nord-Sud Export (NSE) By : Mr. Jean-Louis TERRIER - NSE Founder

The Country Ranking process by NSE aims at ranking a hundred or so emerging economies according to, on one hand, market opportunities, and on the other, the risks those countries may represent for international operators (industrialists, bankers, insurers), either for mere export operations or for investments. This ranking is made possible thanks to an objective rating system based upon more than 100 criteria, coming out of a database having been developed by NSE for 18 years.

1. What is included in the country risk ?

Strictly speaking, the country risk concept includes three main kinds of risks:

• The political risk, which may affect property rights through confiscation, expropriation or nationalization, with or without compensation, through contract or debt repudiation;

• The transferability risk, when a country’s Central Bank cannot convert resources in local currency into international means of payment;

• The payment risk for Governments themselves, or for public enterprises, when the public buyer or debtor does not meet its financial commitments.

These three risks make up the basis of the country risk, i.e.:

• For lawyers, the Act of Government, knowing that recourse against a foreign government is for all practical purposes a very difficult undertaking;

• For bankers, the "sovereign risks," knowing a sovereign guarantee often constitutes the financial safety scheme;

• For insurers, the "political risks," knowing those risks can be interpreted as catastrophe risks, and as such should be covered by specialized insurance companies acting either on behalf of governments or within the market reinsurance framework.

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Box 9, cont’d

2. Country Ranking Methodology proposed by NSE

NSE developed a two-step methodology: a rating of risk factors identified and distributed by categories; and use of weighing coefficients for each identified risk factor.

(a) Rating of Country-Risk Factors

The country risk assessment is established based on the following classification:

• Parameter 1: Sovereign Financial Risks

• Importance of public debt and debt service (6 criteria)

• Sovereign default risk (6 criteria)

•Inconvertibility risk (3 criteria)

• Parameter 2: Market Financial Risks

• Command of fundamental economic balances (5 criteria)

• Exchange risk/sudden currency devaluation (4 criteria)

• Systemic risk and economic volatility (6 criteria)

• Parameter 3: Political Risks

• Homogeneity of the social fabric (4 criteria)

• Government and regime stability (7 criteria)

•External conflicts (4 criteria)

• Parameter 4: Business Environment

•Conditions for foreign investments (6 criteria)

• Labour conditions (4 criteria)

• Good governance (5 criteria)

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Box 9, cont’d

(b) Weighing of the Risk Factors

There cannot be any country ranking without weighing of the risk factors. The exercise is all the more difficult to carry out when there are about 100 criteria to assess. Furthermore, the specificity of NSE’s country ranking method is to provide for a differentiated weighting system depending on whether a country is being assessed from an exporter’s standpoint (taking a risk for less than 18 months), or from an industrial investor’s standpoint (local long-term development). This leads, therefore, to proposing two specific weighing systems.

One needs to know how to make good use of country rankings, which can lead to questionable results for at least four reasons:

• It is hazardous to compare countries as different as South Korea and Egypt, for instance, speaking of countries within the newly industrialized economies;

• Country ranking methods mix various risk factors according to a necessarily subjective weighting system;

• Most of country rankings are made after experts’ assessments, and therefore reflect more their own perceptions of the risks involved, rather than the sheer reality of the countries;

• Finally, country rankings have as an objective to deter commercial operations in countries deemed to be—objectively or subjectively—"high risk," when no country ranking system is able to foresee events of a revolutionary type. As a result, most of country ranking systems have to go through sudden and ex-post downgradings, an impediment to effective decision-making. In other words, it may be questionable for a company to decide on long-term commitments only on the basis of country rankings, which, by definition, offer only limited reliability.

The project’s internal rate of return or flow, which can be dangerous in the case IRR. The advantage of the internal rate of income and costs that are very of return as a measure is that it does not changeable with time. rely on the notion of average year cash

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The Project IRR is the solution r of the ative. The NPV value is an absolute fig- equation: ure that does not allow for comparisons among several projects or variants. Because of this shortcoming, it is generally appropriate to calculate the investment cover ratio as well.

Investment Cover Ratio or ICR. The I = amount invested in year i i investment cover ratio compares the R = operating income in year i project’s discounted cash flows to the i total of the discounted investments. Ci = operating costs in year i

Ri-Ci = operating cash flow in year i n = length of concession contract

The higher the value of r, the more interesting a project will be from the financial point of view. The factors are the same as those used in Net Present Value of the Project or calculating the Project NPV. Project NPV. Athird indicator of the Aproject will be considered profitable financial profitability of the project is the from a financial point of view if its ICR net present value of the project or is greater than one. This is a variant of Project NPV. the previous indicator but it has the advantage of providing a relative value, thus enabling investors to compare the results of several projects or variants. Project Discount Rate – Cost of Capital

Ii = amount invested in year i Apart from the rate of return on investment (the payback method), the other Ri = operating income in year i three measures of profitability noted above take into account performance Ci = operating costs in year i over a project’s lifetime. These methods require the use of a project discount n = length of concession contract rate based on the notion of the time t = project discount rate value of money. This rate can be used directly in the formula (Project NPV Aproject will be considered insufficient- and ICR) as well as indirectly (compar- ly profitable from a financial point of ing the Project IRR obtained to the pro- view if the obtained Project NPV is neg- ject’s discount rate).

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The concession holder, therefore, discount rate that cancels the present requires an accurate value for the project value of the sequence of expenses creat- discount rate. In financial analysis, the ed by this financing. It therefore incor- profitability of an investment is meas- porates all the elements of the cost of ured against the cost of the financing finance; i.e., the interest rate of the loan required to own the resources placed and all the fees charged in setting up the under the company’s control. In other loan. If there are no fees and expenses, words, it is the cost of capital (Weighted the yield to maturity is the same as the Average Cost of Capital or WACC) that interest rate. gives a true measure of the project’s discount rate. The yield to maturity engendered by the flow sequence [F0,F1,...,FN] is the solution Traditionally the cost of capital repre- for the rate r of the equation: sents the weighted average cost of all the financial resources invested in the project and is measured as follows:

There are four fees usually charged by lenders in financing projects:

g = financial gearing/leverage or the •An arrangement fee (up front com- amount of the financial debt in relation mission) to pay for the time spent in to the total financial capital studying and setting up the dossier;

rd = cost of the financial debt or the •Aparticipant’s fee, to pay for the financial debt remuneration requirement time spent in studying the dossier drafted by the arrangers; re = cost of equity, in other words, the return on equity requirement •Acommitment fee, designed to pay for the commitment to make unused In the next sections the remuneration funds available in the future (e.g., the requirements of the various private capi- cost of a forward rate agreement); tal providers (lenders and sponsors) will and be analysed. This means determining both rd and re. • An agent’s fee, which pays for the administrative work consisting of Financial Debt Remuneration checking and applying the Loan Requirement Agreement and managing credit flows (draw downs, repayments). Definition of the yield to maturity of debt financing. The financial debt remu- The interest rate is expressed as follows: neration requirement relates to the yield to maturity of the financing. It is the Interest rate = Base rate + Bank margin

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The interest rate may be any of the fol- place. The nominal interest rate initially lowing: represents the sum of the real interest rate and expected inflation. The real interest • In the case of a fixed rate loan, a ref- rate therefore represents the cost of the erence rate such as the return on money excluding all monetary erosion. treasury bonds of the country of the currency concerned; The relationship between the real and nominal interest rates is given by the • In the case of a revisable or variable following formula: rate loan, a reference rate quoted in a financial market such as EURIBOR (Europe interbank offered rate) or LIBOR (London interbank offered rate); or

• In the case of an indexed rate loan, Within the framework of assessing the procedures for changing the base financial profitability, the rate used for rate are laid down from identified the initial approximation is the nominal parameters (e.g,. inflation). interest rate. It should be remembered that: Risk rating by determining rd. The •Arate is said to be "revisable" if the financial analyst faces the difficult prob- reference is predetermined; in the lem of translating the risk, established bond market, the coupon relating to by means of the project rating, into a a period (paid at the end of the peri- remuneration requirement. That is, the od) is known at the beginning of the analyst must determine the risk premi- period. um, or the spread attached to the project for the lenders on the understanding •Arate is said to be "variable" if the that there are no guarantees other than reference is post-determined; in the the cash flows produced by the project. bond market, the coupon relating to The spread is established by the lenders a period is not known until the end taking into account the: of the period. •Intrinsic characteristics of the loan The bank margin is known as the (maturity and repayment terms); "spread." It is usually fixed and determined when the loan agreement is • Sovereign risk assessment; signed. • Diversification policy of the bank’s Taking inflation into account: real and asset portfolio; and nominal interest rates. Real and nominal interest rates translate the cost of money at • Liquidity level in commercial banks a given moment in time, for a specific when the financing is being struc- period and in a specific financial market tured.

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Conclusion on Debt Remuneration Equity Remuneration Requirement Requirement. Based on these various elements, it becomes a relatively easy Capital Asset Pricing Model or CAPM. task to determine the financial debt Assessing the equity remuneration remuneration requirements. However, requirement in a port project is a diffi- these largely theoretical calculations cult exercise. Undoubtedly the most must not lead one to lose sight of the commonly used approach in financial fundamental objective of commercial analysis is the Capital Asset Pricing banks to not get "stuck" with too high a Model or CAPM, which is used in level of commitment above the ceiling assessing the risk/profitability profile. allowed by their management board, and defined within the framework of The equity remuneration requirement, their own development and risk man- re, is given by the formula: agement policies.

Since the beginning of the 1980s, deregulation of financial activities has occurred contemporaneously with an increase in market volatility and competition between financial establishments. r = equity remuneration requirement This situation has contributed to the e

development of assets/liabilities man- rf = risk free rate agement as a stand-alone function in the banking world. Traditionally focussing = equity beta parameter representing mainly on development of commit- sensitivity ments and increases in market share, commercial banks have come to appreci- rm = market rate ate the need to enhance their balance r - r = market risk premium sheet value and their operating margins. m f = sovereign risk factor The decision on whether to invest in a specific project thus has to meet all This method is based on the strong these considerations, largely intrinsic to hypothesis that the risk in any financial the company and generally unknown security can be broken down into two to the other private partners in the proj- categories: ect. And when a positive decision is reached, it is not unusual to notice sig- • Market risk (systematic or non-diver- nificant differences in the remuneration sifiable risk) due to a set of factors levels required by different banks. This exogenous to the company; e.g., underscores the theoretical nature of changes in the economy, tax system, the approach described above and illus- interest rates, inflation. trates the complexity of the job of the financial analyst assigned to this kind • Specific risk (intrinsic or diversifiable of project. risk) due to a set of factors endoge-

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nous to the company; i.e., all the mined following normative approaches. risks previously mentioned under These consist in determining the Beta the term "project risks." parameter for each of the sectors the project sponsors are involved in (con- The CAPM translates the fact that the tractors, terminal operators, cargo han- profitability required by an investor is dling companies, shipowners, shipping equal to the risk-free money rate plus a companies, etc.) and comparing them to security risk premium, that premium the parameter generally assigned to a being equal to a market risk premium port operating company. The value multiplied by the security’s volatility assigned to the project, called Asset factor. The market risk premium meas- Beta, should logically be the highest ures the difference in profitability value uncovered in this process. Finally, between the market as a whole and the the determination of the Equity Beta risk-free asset. The current level market stems from the difference that could risk premium in France is in the region exist between the specific financial struc- of 3 to 4%. ture of the project (as determined by the There are two questions that are essen- SPC) and the one observed in the nor- tial for a financial analyst involved in a mative approach. port privatization project to pose: "Differentiated" remuneration require- • How does one translate a risk quan- ments depend on the type of shareholder. tification (achieved by establishing It should be remembered that the the aforementioned ratings) to an expected remuneration requirement lev- equity and quasi-equity remunera- els of the project differ depending on the tion requirement? In this regard, type of shareholder concerned. This what should be the risk premium fundamental point can be explained by attached to the equity supplied by the different outcomes sought by the the project’s sponsors ? various sponsors involved in the project:

• What dividend payment policy • The constructor or equipment manu- should be recommended? In other facturer will seek to maximize his words, how does one reconcile the margin in the sale of the works con- necessarily antagonistic objectives tract to the SPC; and interests pursued by the lenders and shareholders (who want the • The operator will seek to maximize cash flow from the project to exceed his margin in the downstream sup- the term of the loan) on the one ply of management services; hand, and between the sponsors and the SPC, on the other. • The customer (shipper or ship- owner) will seek a high quality of These are complex questions requiring service in the long term and a maxi- complex answers. As far as the risk pre- mum reduction in the cost of using mium is concerned, it is generally deter- the port; and

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• The pure investor will primarily seek of view but not from the financial point the maximum financial return on his of view. With port projects this is the investment in the project. most frequent situation given that port infrastructure investments are discontin- There is also the difficult problem of dif- uous or "lumpy," with a long working ferentiating the remuneration require- life. They must therefore be designed ment for the pure investor and the other from the start to their definitive size types of sponsors, with respect to which even if port traffic only builds up gradu- the SPC represents only a fraction of ally. their objectives in the project. Generally speaking, discussions relate to the opti- As a result, it is not unusual for the mal time for the pure investor to place Government to contribute to the fund- his capital with the SPC, given a traffic ing of a project. This constitutes the risk may be experienced. In this regard, value of the project to future genera- should he come in as early as the project tions, which is often difficult to ask the set-up stage, at the beginning of the customers of the present generation to operating stage, or when the operation bear without running the risk of increas- of the investment has shown its ability ing the cost of using the port to such a to produce sufficient revenue? level that the port loses its competitiveness. Even though proper remuneration All of these questions, which are of of the benefits offered within a reason- interest not only to the Concessioning able economic life of the project should Authority but also to the lenders, are at be the rule, depreciation and remunera- the heart of the discussions surrounding tion of the Government’s contribution the financial analysis of the project. over a longer period, commensurate with the life of the long-term assets it Sharing of public/private financial com- financed, should not be seen as a depar- mitments: arbitration between financial ture from this principle. It would obvi- profitability and socio-economic prof- ously be different if the capital market itability. If the project offers both a pos- offered financing on a cycle equal to the itive discounted socio-economic net ben- investment cycle existing for port proj- efit and Project NPV, it should be car- ects (25 to 50 years). This, however, is ried out since it is favorable for the com- not the case today. munity and the concession holder alike. Conversely, when both discounted In conclusion, the financial constraints socio-economic net benefit and Project imposed by the market on this fragile NPV are negative, the project should not public/private partnership often leads be carried out. These are fairly straight- to a sharing of financial commitments forward outcomes leading to relatively between the Concessioning Authority straightforward “go-no go” decisions and the concession holder. The search for an equitable split is based on the The real challenge is how to reach a rea- need to balance the socio-economic prof- sonable decision when the operation is itability of a project on the one hand and profitable from the socio-economic point the financial profitability on the other.

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FINANCIAL PROJECT ENGINEERING In project financing schemes, the structure of the SPC’s liabilities directly stems Definition of Financial Project from the project’s ability to Engineering service its debts. The main measures being used in this respect are the follow- Capital markets are highly diversified. ing: Whether one should use such a source of finance is dependent on many criteria • the Capital Structure Ratio (CSR); such as its cost, the type of assets to be financed, the guarantees required, flexi- • the Annual Debt Service Cover Ratio bility of use, and conditions of accept- (ADSCR); and ability by the financial market. The • the Net Present Value Debt Cover financial engineering of a project con- Ratio (NPV DCR). sists in seeking out the optimal terms and conditions of finance and cover for These three ratios enable one to assess the project based on analysis of the from the outset the amount of the debt financial constraints and risks of the with limited recourse that is acceptable market. to the banks. From this flows the amount of equity and quasi-equity Implementing financial engineering is a required to finance the project. sensitive and complex exercise. Sensitive because of the commitment of If the shareholders’ aim in financing the the financial partners over periods that project is to enable the project to benefit can be very long. Complex because of from a non-recourse or limited recourse the multiplicity and increasing sophisti- loan, then this means that the repay- cation of the financial tools available in ment ability of a project may be less the market. It is also essential to under- than the amount of external finance that stand that the financial project engineer- the shareholders wish to obtain. In this ing must first and foremost conform case, the loan will be split into several with a pragmatic logic that is dictated tranches differentiated according to the by common sense and a thorough degree of recourse the lenders want to understanding of the issues. It should be granted with respect to the project not be based on a desire to use sophisti- shareholders. This is called subordinat- cated finance and cover mechanisms for ed debt or mezzanine debt. In this case, their own sakes. these financial resources are considered to be the same as the partners’ current Financial Structuring Within the accounts, namely quasi-equity. Framework of a Project Finance Set-up The Capital Structure Ratio. The most Once the financial profitability of the commonly used ratio to ascertain the project has been determined, the SPC financing structure is: must define the structure of its liabilities; i.e., the value of its equity and (Equity + Quasi-equity) ÷ Financial quasi-equity and the value of its debts. capital

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Financial capital covers all of the finan- The discount rate used in calculating the cial resources invested and placed under NPV is that of the average interest rates the company’s control by the capital of the financial debts. As regards the providers. In other words, it includes period over which the NPV is calculat- permanent financial resources (equity ed, there are two possibilities: and quasi-equity + medium/long-term financial debts) and bank advances • The length of the financing cycle, in (short-term financial debts). other words the length of the loan; this is the Loan Life Cover Ratio or The Annual Debt Service Cover Ratio LLCR; (ADSCR). The ADSCR is calculated as: • The length of the investment cycle, ADSCR =Available cash flow for or the length of the concession con- servicing the debt÷Annual debt service tract; this is the Project Life Cover Ratio or PLCR (if the debt is not This ratio is calculated each year and repaid by the time the loan agree- therefore provides a continuous view of ment expires, subsequent cash flows the project’s ability to service its debt. It will be used to pay it off). also enables the debt repayment profile What are the minimum requirements for to be changed if the values obtained these ratios in the case of a port proj- reveal too high a disparity during the ect? In practical terms, it is difficult to finance cycle. suggest precise thresholds for the fore- The Net Present Value Debt Cover Ratio going ratios that could apply to all (NPV DCR). The average of all the projects. However, it seems reasonable annual cover ratios, known as "average to state the following, as far as project debt cover ratio" is also used by some financing in OECD countries is con- analysts. This ratio enables, among cerned: other things, a comparison to be made •Acapital structure ratio below 15% between several methods of paying off would likely lead the lenders to the loan and provides a global view of demand an increased equity or the economics of the project. quasi-equity contribution from the sponsors as a token of their commit- But, as always happens in financial ment to the project; analysis, the discounted value of a series is preferred to its average value because • An annual ADSCR below 1.3 would the time value of money is taken into inevitably require restructuring of account. For this reason, we prefer the the financing set-up, likely along the Net Present Value Debt Cover Ratio or lines of an amendment of the loan NPVDCR, which is defined as follows: amortization profile;

NPV DCR = NPV Of Cash Flow •ANPV DCR below 1.7 would run available for servicing the debt ÷ the risk of deterring any potential Outstanding Debt private investor; the project would

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then require an increased public • Equal installments of interest and financial contribution to make it principal; and viable for the private partners. •Installments depending on the avail- These thresholds are given only as able cash-flow. potential indicators and do not apply to all cases; nor do they take into account Some terms include deferred repayment the country risk factor. Clearly, their or a grace period, which means that final assessment is contingent upon the over a certain period (rarely more than overall project risk analysis described in two years) the borrower pays only inter- Part A of this Module. est to the lenders. Deferred repayment may prove necessary for projects in Debt Structuring which the ability to generate operating income significantly lags behind project Debt markets are highly diversified. costs. This is usually the case with Consequently, in complex transactions, "greenfield" port projects. debt is often broken down into several tranches (segments) of different loans. Average length and loan duration: the The aim of structuring the project’s debt average duration of a loan is usually consists of seeking the optimum finance used as an instrument of comparison conditions for each of these tranches to where the loan repayment profile is reflect the requirements of the project’s dependent on available cash flow. various financial partners. The average duration of a loan is given Debt financing is usually defined by a by the formula: set of "intrinsic" characteristics. The four main ones are:

The 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 made by the SPC. Outstanding Amounti represents the various annual outstanding amounts of Availability period: the closing date of the loan over its lifetime. validity of the loan, which limits the lender’s undertakings in time. A variation of average duration of the loan introduces the discount factor and Loan repayment terms: the repayment of represents the "center of gravity" of the a loan must be tailored to the project for finance flows over time. which it was set up. There are three

types of repayment profiles generally Acredit sequence [F1, F2, ...,Fn] at a dis- used: count rate of t has a duration of:

• Equal installments of principal;

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of the loan is either primarily or solely dependent on cash flows generated by the project itself. In the first case, this is called limited recourse financing and in the second, non-recourse financing.

The two characteristics common to limited recourse financing are: This latter measure of duration is more often used as an instrument for measur- • The loan is repaid on the basis of ing and managing the rate risk. cash flows generated by the project; and Long-term Commercial Debt • The lender has no guarantees other The alternative to corporate financing: than the assets of the project itself, project finance. To finance public serv- which often are not financially recov- ice infrastructure, the first two methods erable for port projects. that spring to mind are public budget finance or pre-financing the investment Foreign currency loans. One way of reducing exchange risks is to obtain by the project sponsors. Both of these financing in local currencies. However, methods are referred to as corporate this type of financing quickly reaches its financing. This implies the inclusion of limits in developing countries. In fact, the amount of the investment in the the weakness or non-existence of a public accounts of the Concessioning national money market, high local cur- Authority as well as in the company rency interest rates, the absence of accounts of the constructor, respectively. investors willing to provide finance over These finance solutions have the major periods compatible with infrastructure disadvantage of being a burden on the projects, all combine to exclude local investment capacity and balance sheets currency debt or at least restrict its use of the parties. This is particularly true to a short-term revolving line of credit in the case of transport infrastructure designed to finance operating expenses. where the sums to be financed are large Foreign currency debt also poses problems of exposure to the residual and the balance sheet ratios (see above) exchange risks of convertibility and are weak in the first few years of the transferability. project due to the slow increase in revenue generating traffic. An alternative Guaranteed Commercial Debt: Export to these methods is project finance. Credits and Financial Credits with a Multilateral "Umbrella" It is difficult to define the characteristics of a typical project finance set-up, since Export credit agencies (ECAs) and "tailor-made" solutions are so important. multi-lateral agencies (MLAs) offer However, the financial set-ups have one guarantees or "cover" that can mitigate essential point in common: repayment political risks associated with port

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projects and therefore open up new payment to be made before delivery, financing possibilities. When the com- and the overall payment schedule) that mercial banks are to a large extent freed will serve as a basis for the buyer credit. from worrying about political risks, they can concentrate their efforts on the com- The Credit Agreement is signed between mercial risk within the framework of the commercial bank and the foreign terms offered by these agencies. The buyer. Under this agreement, the bank fact remains that these agencies are commits itself to pay the exporter and themselves subject to term and cost con- the buyer agrees to pay back the bank straints that must be taken into account for all amounts paid to the supplier (particularly the OECD Consensus for according to terms and modalities export credit agencies). spelled out in the Credit Agreement.

Export credits. Export credits can prove Buyer credits, as well as supplier credits, very useful where the project is located can both benefit from public support for in a developing country and involves medium/long-term export financing. the contribution of foreign technology. This support, governed by the consen- Among export credits, one must distin- sus rules drafted by the OECD Member guish between supplier credits (credit Countries, can be expressed in two granted directly by the exporter) and ways: buyer credits. Buyer credits, the more •Provision by credit insurers of cover common of the two, are granted by com- for political and commercial risks on mercial banks for a maximum length of foreign debtors (the SPC would be two years to a foreign borrower to the foreign debtor within the frame- enable him to pay cash to his supplier work of a project finance transac- (the exporter) according to the terms of tion); and the commercial contract. Buyer credits free the exporter from the financial risk •Provision of a fixed rate for the loan, he would have had to take in making a known as the reference commercial credit-based sale to the buyer. interest rate or RCIR, for instance, in the case of COFACE, the French When an export sale is supported by a export credit agency; in Europe, buyer credit, two distinct cross-refer- such a rate stabilization mechanism enced contracts are signed: the is possible for loans in both Euros Commercial Contract between the and foreign currencies. exporter and the foreign buyer, and the Credit Agreement between this same Buyer credits are of three varieties: buyer (as a borrower) and the lending banks. • Administered credit, when the buyer credit benefits from public support The Commercial Contract spells out the through a rate stabilization mecha- respective obligations of the supplier nism on top of a guarantee provided and the buyer. It must indicate the pay- by an export credit agency. Also, this ment modalities (in particular the down type of loan is placed at a more com-

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petitive level (fixed rates and long must represent 85% of the share able to terms) than syndicated financial be repatriated (national share + foreign loans or bonded debt. share). Box 10 describes how the concepts come together in an example. • Pure cover credit, when the buyer credit only benefits from a guarantee It should be pointed out that, while the provided by an export credit agency. principal activity of export credit agen- In this case rates are neither stabi- cies is now to cover political risks, some lized nor enhanced. They are freely of them have project financing teams established by the banks, indexed on and are beginning to consider covering a reference index (Euribor or Libor, the commercial risk in some projects. for instance), and can be variable, revisable, or fixed. Furthermore, there is an increasing number of major project financing con- • Financial credit or free credit, when tracts in the form of multi-sourcing the buyer credit is established with- operations, in the sense that they are out any public support and without structured either by major multinational any export credit guarantee. The groups which can "source" from differ- manufacturing risk is carried by the ent countries through their subsidiaries, supplier and the credit risk by the or by multinational consortiums organ- bank. Because of the risk involved, it ized on a co-contracting or sub-contract- is in fact limited to the best known ing basis. This change can be explained borrowers, and generally limited to by the fact that the ever increasing size down payment financing. of the investment level of the projects does not always coincide with the total Export credit agencies exist in most commitment limitations (geographic or industrialized countries: COFACE in sector) set by the export credit agencies France, SACE in Italy, HERMES in and governments within the framework Germany, ECGD in England, SACE in of their risk policy. (See Box 11) Italia, CESCE in Spain, EXIM Bank in the United States and Japan EXIM in Financial credits with a multilateral Japan. "umbrella" (A-Loan and B-Loan). Multilateral organizations, such as the In a port project, this source of financing World Bank Group, through the relates more to port equipment (e.g., International Bank of Reconstruction handling equipment, container gantries and Development (IBRD) or regional and computer systems) than infrastruc- development banks (EBRD, ADB, IDB), ture (e.g., civil engineering, dredging), are also involved in these types of trans- which is usually sub-contracted locally. actions alongside commercial banks and To enjoy the export credit cover, the export credit organizations. This is project must fulfill certain criteria. The referred to as co-financing. first of these is that payments made under the contract concluded with the Most of the time this co-financing is car- exporting equipment manufacturer ried out in the form of so-called "paral-

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Box 10

An Example of Export Cover by COFACE in a Port Project

Assume there is a "greenfield" port construction project in China requiring the supply of quayside gantries. Let us further assume that the equipment manufacturer, whom we shall call the "exporter," identified for this service is French and that the commercial contract concluded between the SPC and the industrialist represents an investment of 100 M FRF broken down as follows: • 50 M FRF "French share" (parts exported directly from France); • 10 M FRF "foreign share" (parts manufactured in Germany, for example, and exported to China); and • 40 M FRF "local share" (for the installation of port equipment in China sub-contracted locally by the exporter).

The proposed financing for this contract is a buyer credit (structured by the exporter’s French bank) with a request to COFACE for export cover against the political risk during the manufacturing stages (6 months, for instance) and credit (5 years for this kind of investment according to OECD rules) with an application for stabilization of the loan’s interest rate.The notion of "export cover" is a complicated one as will be illustrated by the following example.

During the manufacturing stage, the extent of the export cover granted to the exporter is 100 M FRF,for an amount of cover which can vary (depending on the policies issued by the export credit agencies) from 70 to 85% of the value of the commercial contract (i.e., 70 to 85 M FRF in this example). The 15 to 30% of the value not covered cannot be covered by additional insurance by the exporter.

During the credit stage, the extent of the export cover granted to the exporter’s bank, amounts to 100% of the portion of the contract that can be repatriated (i.e., the French share + the foreign share or i.e., 60 M FRF). The amount of cover granted to the bank is 95% of the extent of cover (the remaining 5% cannot be covered by additional insurance by the bank).

In other words, the export cover granted by COFACE in terms of cover for the political risk and rate stabilization only relates to an amount of 60 M FRF. The additional financing required for the port investment (i.e., 40 M FRF in this example) is then known as "straight back-up credit." It can be provided either by the exporter’s bank or by another commercial bank (a local Chinese bank, for example).

Generally speaking, finance structuring with export credit leads to the credit being split into two tranches: one guaranteed and the other not guaranteed at market conditions (rate and duration). One then speaks of a "joint" financing technique because each of these tranches refers to one and the same investment.

lel" financing where the project is split leads to the financial credit being struc- into separate lots, each covered by a tured at two levels (or in two seg- World Bank loan or a commercial debt ments): granted by a bank or a buyer credit covered by an export credit agency. These • An A-Loan granted by the multilat- co-financing methods, relating to financ- eral organization itself; and ing of separate lots, should not be confused with the technique of "joint financ- •AB-Loan underwritten by commer- ing," which combines several sources of cial banks under the multilateral finance in a single lot, according to a percentage agreed to in advance. umbrella.

In practice, the involvement of a multi- The World Bank, through the IFC, can lateral agency in this type of set-up be involved in three ways in A-Loans:

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Box 11

Principal Guarantees Offered by an Export Credit Agency for Project Financing: The COFACE Example RISK DEFINITIONS

COFACE insurance policies cover four categories of risks:

• Manufacturing Risk: materializes when the fullfilment of exporter's contractual obligations is suspended for at least a 6-month period, inasmuch as this situation results exclusively from factors spelled out in the insurance policy subscribed by the exporter.

• Credit Risk: materializes when the exporter's commercial bank finds it impossible to recover all or part of the debt relating to the guaranteed contract, inasmuch as this situation results exclusively from factors spelled out in the insurance policy subscribed by the exporter.

• Performance Bond and Advance Payment Reimbursement Guarantee Risk: upon request from the exporter, these guarantees and bond commitments may be included in the scope of the Manufacturing or Credit Risk guarantees.

• Bid Guarantee Risk: materializes when the exporter cannot recover from the beneficiary of the bid guarantee all or part of the guarantee amount.

In principle, the COFACE also demands that:

• In order to cover the Manufacturing Risk, the Credit Risk must be covered; • In order to cover the Credit Risk, in the case of progressive payments, that the Manufacturing Risk must be covered.

FACTS TRIGGERING GUARANTEES

COFACE General Conditions list eight factors triggering a call on guarantees (manufacturing or credit):

• Arbitrary cancellation of the guaranteed contract by the debtor; • Mere carence of the debtor • Insolvency of the debtor, consisting in its incapacity to meet its financial commitments, resulting from: • A judicial act resulting in the suspension of individual lawsuits (as the judicial liquidation); • An agreement reached with all creditors; • A de facto situation leading the insurer to conclude that any payment, even partial, is unlikely. • General moratorium enacted by the Government of the debtor's country or of a third party country through which the payment must be processed

• Any other act or decision of a Government of a foreign country preventing the guaranteed contract from being carried out

• Occurrence, outside France, of war, revolution or riot, or acts of nature such as hurricane, flood, earthquake, volcanic eruption, tidal wave, etc.

• Political events, economic hardships occurring outside France, or legislative or administrative measures taken outside France, preventing or delaying the transfer of funds paid by the debtor or its guarantor

• Act or decision by the French Government such as a ban on exports of the goods or services that are the object of the guaranteed contract, or requisition of the goods in the course of manufacturing.

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Box 11 cont’d

Principal Guarantees Offered by an Export Credit Agency for Project Financing: The COFACE Example (cont’d)

CONCEPTS OF POLITICAL RISK, EXTENDED POLITICAL RISK, AND COMMERCIAL RISK

The risk definitions above, as well as the guarantee triggers, constitute the basis of the guarantees offered by COFACE to its clients. However, to get a good understanding of the scope of the guarantees offered, it is necessary to grasp the following concepts:

• Public Buyer: an entity exercising the Government's responsibility and which cannot be judicially bankrupt.When a Public Buyer benefits from a letter of guarantee from its Finance Ministry, it is then called a Sovereign Buyer.

• Private Buyer: an buyer that does not meet the previous criteria, and which can therefore be judicially bankrupt. • Political Risk: risk resulting from a political fact like a war, revolution, or an act of Government preventing the contract from being carried out. It becomes an Extended Political Risk when the event leading to the materialization of the risk is not of sovereign origin, but comes from a local community, a public establishment, etc.

• Commercial Risk: risk resulting from the financial instability of the private buyer (insolvency).This implies that any payment default by a public buyer, sovereign or not, exclusively results in materialization of a political risk, or broad political risk.

SPECIFICITY OF RISK COVERAGE BY COFACE IN PROJECT FINANCING

In project financing schemes, the borrower is the Special Purpose Company (SPC).Therefore, in all cases, even when the public partner would have chosen to take equity participation alongside the private sponsors, the borrower is considered a Private Buyer. However, COFACE will not cover, in principle, the SPC's commercial risks; i.e., insolvency resulting from an inadequate assessment of future traffic in particular.

Political risks are covered, both in Manufacturing and Credit Risks. As far as the Extended Political Risk is concerned, the risks potentially eligible must be "measurable," and refer to specific clauses in the contract, the non-respect of these clauses allowing the SPC to terminate the contract, with a right to indemnity by the public partner, this indemnity being defined so as to allow to cover, as a minimum, the outstanding debt balance.

Those risks refer to the public partner's commitments to do or to pay, with specific contents spelled out in the contract. In case of non-compliance, this constitutes a breach of contract.These may include availability of land, issuance of building or operating permits, payment of investment or operating subsidies, fiscal measures initially granted, etc.

• Direct financing of the last install- • Conditional participation of the ments of the loan granted by the World Bank in variable rate credits, if commercial banks, usually translat- the final charge corresponding to ing into a 10 to 25% participation; payment of interest exceeds the repayment ability as originally •Provision of a guarantee relating to assessed. the last installments, in return for a guarantee fee; and As far as B-Loans are concerned, the notion of a multilateral umbrella does

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not mean that the multilateral organiza- It should also be noted that using this tion gives the commercial banks any type of financing source can create prob- kind of guarantee on this credit. It sim- lems for inter-creditor relations. While ply means that the banks will feel reas- the problem of seniority between the sured by the participation of the multi- debt categories can be easily solved, the lateral organization, since the host ability of the various quorums to call in States are unlikely to take detrimental their sureties and the differences in the measures against the project because of level of information supplied to the pro- their presence. tagonists poses major problems (e.g., a club of a few banks does not receive the Finally, although multilateral institu- same information as a large, liquid syn- tions are often unwilling to bear certain dicate of heterogeneous investors). risks, they have the advantage of being Structuring Equity and Quasi Equity able to offer much longer loan periods at fixed rates than the commercial banks. Equity is a financial resource that is flex- Bonded Debt ible enough to earn its return over a variable and unspecific timeframe, with- Bonded debt is a source of long-term out creating any risk of financial sanc- financing that is currently enjoying tion by the equity holders. In other widespread popularity, particularly in words, equity refers to financial financing transport infrastructure. It is resources placed under the control of the used extensively in the North American company and designed to cover the market and is reserved for institutional materialization of project risks in the clients. This option should not be con- first instance. fused with bond issues for public sav- Equity provided by the public sector. ings. There are many ways in which the pub- Issuing bonded debt (under what is lic sector can become involved in port referred to as Rule 144A) enables finan- investments. Which of these is applied depends to a large extent on the config- cial terms (margins and fees) to be uration of the project. In a non-exhaus- obtained as well as maturities that are tive way, one can list the following more favorable than those available in options: the banking market. This method of financing is fairly recent, as it only took • Contribution of assets: this solution off in the early 1990s and it has still not has the dual advantage of reducing reached maturity. In fact, it is only in the initial amount of the investment the last few years that the market has and possibly providing income dur- come to agree to cover financing ing the construction period. Within requirements during the construction the framework of a port extension period. It is therefore more a method of project, a contribution of assets could refinancing for banks than of financing consist of entrusting the private con- for investors. cession holder with the operation of

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an existing terminal managed until Emerging Country Reserve in then by a public Port Authority. In France); this way, the financial profitability expected by investors is reinforced • EU financing, which can come from by the assurance of cash flows on the European Investment Bank (EIB) signature of the concession agree- or the European Commission ment. This is known as backing. (European Development Fund financing, in particular); and • Cash contribution: the concessioning public authority can invest cash in •Multilateral financing from the the project and/or provide operating World Bank Group (IBRD or IDA) or subsidies. This increases the avail- Regional Development Banks. able cash flows for servicing the debt. For example, in the case of a With the exception of export credits, the greenfield port project, investment beneficiary of this type of financing is subsidies are frequently required for the host State of the project, which then financing swell protection structures retrocedes the credit, frequently granted because of the "discontinuous" on concessionary terms, to the Port (lumpy) nature of this investment. Authority concerned. While this technique has the undeniable advantage for • Guarantee contributions: the conces- the lenders of avoiding the risk of a sioning public authority offers a min- shortfall caused by the local public imum revenue guarantee, a guaran- authority, given that the credit enjoys a teed return on invested capital and "sovereign guarantee," the fact remains or a guarantee to make good on lia- that in some developing countries (in bilities in the case of force majeure. Africa in particular) this procedure of the State retroceding the credit is carried There are many financing vehicles for out on terms and conditions that are not the public sector to contribute "equity" always favorable to the local company, to the SPC. The intervention can take as the State wants to make a profit on the form of: the transaction.

• Public financing drawn from the Financial analysts liken all these public budget of the concessioning authori- sector financial investments in the ty or the host State of the project; project to equity, whether or not the con- •Export credit (usually buyer credit) cessioning authority is one of the share- granted to the concessioning authori- holders of the SPC. The risk that these ty by one or more export credit agen- resources will not be made available to cies (creating sub-sovereign risk for the private concession holder remains. the bank); This risk is an integral part of the political risk. One can therefore understand • Bilateral financing (e.g., French why the private concession holder (and Development Agency) or govern- the banks, in particular) have tended to ment protocol (now renamed prefer investment subsidies, payable

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right at the start of the concession, to quasi-equity in the financing struc- operating subsidies. ture; and

Equity invested by the project’s spon- • Shareholder advances granted to the sors. Equity contributed to the project project sponsors, which are similar to by its sponsors is in the first instance partners’ current accounts and are paid into the SPC’s share capital. This is also considered as quasi-equity. determined according to the minimum required by legislation and the available Equity invested by bilateral institu- funds of the future shareholders. tions. Some bilateral institutions become involved in these projects by Banking requirements are usually not investing in the SPC. In France this is too strict in terms of the amount of share the case with PROPARCO, an invest- capital required, as only the value of the ment subsidiary of the French equity and of similar funds is significant Development Agency (ADF). in terms of financing structure. The Established in 1977, PROPARCO has a equity balance is usually given to the mission to promote the creation and SPC by the sponsors in the form of con- development of private enterprises in firmed letters of credit in the name of developing countries, in particular in the shareholder. Africa. PROPARCO’s equity participa- tions are to be sold after an average of Equity invested by multilateral institu- six years, when the enterprise reaches a tions. Some multilateral institutions satisfactory growth rate. have financial tools that enable them to invest in these operations as a share- Specialist investment funds. In some holder of the SPC in the same way as cases, the use of specialist funds (geo- the project’s sponsors. The best known graphic, sector, religious) can also of these institutions is the International finance major projects. These sophisti- Finance Corporation (IFC), a subsidiary cated sources of finance are usually sim- of the World Bank Group, which invests ilar to quasi-equity because the invested in private companies in developing capital is mostly supplied to the SPC in countries. It acts as a catalyst, in the the form of mezzanine debt. absence of a government guarantee, by providing co-investors with protection This subordinated debt, which is junior against non-commercial, expropriation in ranking to traditional bank debt, is and profit repatriation risks. frequently given to the project for a long term and attracts a much higher rate of There are three ways in which the IFC interest than for traditional bank debt. can be involved: This type of financing is therefore reserved for highly specialist private • Direct investment in the capital of investors; e.g., pension funds, institu- the SPC; tional investors, finance company subsidiaries of major groups. • Long term subordinated loans granted to the SPC and then considered as

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Financial Engineering of the Project: fect for the investor, contrary to what Managing "Exogenous" Financial Risk happens in the interbank market. Imperfect means that the level of The interbank market (forward) and cover is only rarely an exact multiple organized markets (futures). of the nominal value of the futures "Exogenous" financial risks are a catego- contract. Similarly, it is almost ry of market risks as opposed to political equally as rare for the cover expiry risks. They arise from the perpetual date to correspond to the maturity changes in the capital market. Such date of the futures contract. Also, risks usually relate to interest rates, futures contracts provide only partial exchange rates and counterpart risks. cover, and there continues to be a residual risk for the company. With regard to interest rate and exchange risk cover, there are two main •In the organized markets, the vast families of market that, although differ- majority of contracts do not involve ent, are interdependent: actual delivery of the underlying securities. These delivery and • The interbank market: where con- receipt undertakings are in fact offset tracts are negotiated by private before maturity by a transaction in agreement and the bank usually acts the opposite direction to the original as an intermediary between several one. Conversely, in the interbank counterparts for a commission. This market, the obligation to deliver or is also known as the "over-the-count- receive the underlying security usu- er" market. ally exists. In jargon, the futures markets are said to be "paper con- • The organized markets: whose main tracts" as opposed to the "physical feature is the offer of standard con- contracts" pertaining to the underly- tracts, futures contracts and option ing security. contracts continuously quoted on the international stock exchanges. • As the interbank market is an over- Standardization relates to the nomi- the-counter market, transactions are nal value (also known as the notional executed principal to principal, value) and the maturity dates of which implies a counterpart risk that those contracts. is not present in organized markets because of the presence of a clearing While the cover principles are identical house. in both of these markets, the methods employed in their operation are quite The financial engineering of a project in different. Three reasons explain why: terms of risk cover always has to be tailor-made. As such, it must adapt itself • Standardization of contracts (nomi- to the configuration of the project and nal value and fixed maturity dates) its environment, the cover requirements implies that the cover obtained in the sought by the investors, and the local organized markets is always imper- conditions of the country. Also, the

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products available on the capital market risk, which can be difficult to manage in are not applicable to all developing the case of a project financing set-up. countries. The market sees new risk management Several previously described methods of and cover instruments every day. Their financing already incorporate cover sophistication is limited only by the against certain financial risks in their imagination of the financiers. It would design. This is particularly the case therefore be futile to attempt to deal with "guaranteed" credits, which, with this field exhaustively. The aim of depending on circumstances, can offer the following section is to make the the SPC exchange or interest rate guar- mechanisms understandable and antees. Also, while it is easy to dissoci- explain the issues, specifically within the ate the method of financing a project framework of a project financing set-up. from the cover for financial risks in theory, in practice it is more difficult. Interest Rate Risk Management Designing the financial engineering of a project must therefore fall within a glob- Interest rate risk. As already men- al approach where the financing and the tioned, debt financing usually involves a financial risk management methods are variable interest rate, consisting of a ref- dealt with simultaneously. erence rate (variable) and a margin (fixed). As far as the SPC is concerned, All of the cover products, (detailed in the interest rate risk occurs when the the following paragraphs), are used reference rate rises and, along with it, more during the operating period than the financial costs of the project. Given the construction period for two main that concession contracts are concluded reasons. First, cover requirements are for long periods, the concession holder’s without common measure in terms of main concern is to try to cover himself duration — a few years for construction against the risk of rates rising in the and typically a minimum of twenty long term. years for operation. Second, using such products requires an accurate prior Several issues regarding interest rate knowledge of the amount of flows to be risk management merit further explana- covered, an exercise that is much more tion. The risk associated with rising ref- difficult to achieve during the construc- erence rates (eg., Euribor or Libor) can tion stage. result from two independent sources:

The principles of cover are based on the • An increase in inflation in the coun- notion of transfer (and not removal) of tries in which the reference index is the financial risk to a counterpart. The calculated, i.e., the developed coun- latter agrees to bear the risk for payment tries. This creates a need to neutral- of a premium because his cover need is ize the negative impact of inflation the opposite of that required by the on the cost of the debt, since it will investor. In other words, all these mech- make the debt more expensive. anisms involve the notion of counterpart Neutralizing the effect of inflation is

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possible only if the price indexing terminals that may have opted for a parameters laid down in the conces- variable rate loan), leading to a rise in sion contract make provision for this. the commercial risk. A prudent mix of Delaying the adverse affect of infla- fixed and variable rate loans is there- tion is the existence of a lag factor, of fore advisable, on the understanding varying length, between the time the that there is no ideal formula. real interest rates rise and the time Although a 50-50 ratio is often used as they are passed on in the concession an initial approximation, the final holder’s interest charges. This determination of this cover threshold is increase might lead to an increase in an extremely complex exercise as it the project’s revenue if the project is assumes the ability to forecast long- carried out in one of the indexing term rate trends over a ten, fifteen or countries, thereby partially offsetting twenty-year financing cycle. the affects of increased inflation and interest rates. Finally, let us remember that existing cover instruments are used more during • An increase in real interest rates the operating than the construction peri- wherein the annual increase is not od. It is harder to determine the rate offset by a parallel increase in avail- risk and fix drawings on the loan in time able cash flow for servicing the debt. (dependent on the state of progress of This implies a corresponding rise in the cost of the debt. Consequently, the works) than to fix the repayments the SPC bears the whole brunt of the that are stated in the loan agreement. rate rise if no other cover mecha- Interest rate swaps or IRSs. The use nism was originally provided in the of swaps to protect against the risk of set-up. interest rate changes, particularly long- Conversely, interest rates could fall sig- term rates, has become popular over nificantly during the operating period. the last few years. Banks have played If but the SPC had managed, either a lead role in the development of this directly through the loans granted to it market. or indirectly through the cover instruments it contracted, to maintain a fixed A swap is an exchange of interest rates interest rate on its debt, it would expe- between two dealers, the bank usually rience higher interest expenses than acting as an intermediary and charging competitors with variable rate debt. a commission. A rate swap can also be This would necessarily imply that the obtained where two counterparts are port’s customers would have to bear involved in different currencies. In this "surcharge" through the prices they practice, the SPC with a variable rate were charged. In other words, setting debt pays the corresponding interest up a fixed rate loan during a period of and receives in return interest calculat- falling rates would translate into a less ed on the basis of a fixed rate. This favorable competitive position for the effectively provides the SPC with a SPC (vis à vis other competing ports or fixed rate debt.

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In project financing, it can be difficult to •Aforward-forward rate: this enables find a counterpart who will agree to a company or an investor who wish- swap interest rates with the SPC, prima- es to borrow on a future date and rily for two reasons: over a set period to fix the cost of borrowing now. • First, the SPC can only offer the cash flows produced by the project as a • Forward rate agreement (FRA): this guarantee. Also, the credit risk enables a company or an investor attached to the SPC, which the coun- who wishes to borrow on a future terpart will have to accept, depends date and over a set period to cover on the project configuration. In his rate position with a bank or countries subject to significant politi- financial institution. cal risks a possible but difficult to While these two products offer excellent implement method consists of trans- protection against rate risks, they differ ferring this credit risk to the project’s on one essential point. The forward rate sponsors by asking them to guaran- agreement completely dissociates the tee the swap if the SPC were to fail. rate guarantee transaction from the • Second, a variable rate loan granted financing transaction, which is not so in by a banking syndicate usually has the case of the forward-forward rate. a repayment profile based on the For this reason, FRAs are more frequent- profile of the cash flows produced ly used in project finance, given the by the project. It is extremely rare diversity and specific nature of the loans for this to correspond perfectly to granted in these set-ups. the counterpart’s cover require- Firm financial instruments in the organ- ments. It is also common for the ized markets: In the organized markets, swap to relate only to a fixed por- futures are also able to offer efficient tion of the loan repayment (possibly protection against interest rate risks. smoothed out over the financing The standard contracts traded in these period), the balance remaining markets are undertakings to deliver (for exposed to the rate risk. This is the contract vendor) or to receive (for known as a residual interest rate the contract purchaser), on a clearly risk. This technique enables the defined date, fixed income financial SPC to enjoy a possible rate reduc- securities with features strictly specified tion on the uncovered portion of the by the contract itself, at a price fixed on loan, while at the same time enjoy- the day the contract was negotiated. ing cover on the portion with the fixed rate in the event of a rise. The general principle with these cover transactions is to take a position in the Firm financial instruments in the over- contract market opposite to that held in the-counter market. Two so-called firm the cash market of the underlying secu- financial instruments exist on the over- rity, the loan transaction in our case. In the-counter market: practice, an SPC wishing to cover itself

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against an interest rate rise (in particular •Acollar is a combination of a cap long-term interest rates) will sell for- and a floor (which enables a borrow- ward standard contracts. The number er to set a floor rate). This product of contracts sold is calculated in such a enables a dealer to set an interest rate way that the duration factor, defined in fluctuation range outside of which advance, is equal in both transactions. he has to pay the difference between the market rate and the floor rate Conditional financial instruments: and within which his counterpart interest rate options. An option confers will have to pay him the difference. a right on its holder to buy or sell the underlying security of the option, (e.g., Although these products exist on organ- financial securities) at a rate fixed in ized markets, they are more commonly advance (called the exercise price or traded on the over-the-counter market, striking price). This right can only be which offers the purchaser of the option, exercised during the life of the option, the SPC, a product tailor-made to meet i.e., up to the exercise date. If the its requirements. option grants its holder an option to buy, it is called a call option; if the The principal limiting factor in the use option grants its holder an option to of these cover instruments is the some- sell, it is called a put option. In return times extremely high premium associat- for the right resulting from the purchase ed with them, i.e., the cost of the option. of the option (regardless of whether it is As the volatility of the underlying secu- a call or put) the purchaser pays the rity depends on the exercise date of the vendor of the option a premium, which option, a cover application from an the vendor keeps whether the option is investor relating to a very long period of exercised or not. time will automatically result in a rise in the return required. There are two main types of interest rate options available to an SPC fearing a Foreign Exchange Risk Management rise in rates: Foreign exchange risk within the frame- •Acap enables a borrower to set an work of a port privatization project. interest rate ceiling beyond which he For a company investing in a foreign no longer wishes to borrow and will country, the risk of a change in foreign receive the difference between the exchange rates traditionally materializes market rate and the ceiling rate. in two different ways: This product is perfectly suited to the cover requirements sought by an •Aconsolidation exchange risk or SPC, while at the same time asset risk that arises where the finan- enabling it to benefit from a gain in cial results of a subsidiary company the event of rates changing favor- (the SPC in this case) are included in ably, which in this case would trans- the consolidated accounts of the late into a rise in rates. sponsors in different currencies.

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•Atransaction exchange risk that aris- circumstances, the SPC will have to bear es where investments or operating a part of the exchange risk. Against the income and expenditure involves backdrop of an international economy several currencies. characterized by floating currencies and wide fluctuations in currency rates, The consolidation exchange risk, managing the foreign exchange risk is a although sometimes overlooked by necessity for an SPC. Consequently, it financial analysts in privatization proj- will strive to transfer this risk to a coun- ects, is a major concern for the project’s terpart expert in dealing in the foreign sponsors. The ways of managing it exchange markets. relate to the accounting and taxation details of the consolidation, which will General introduction to the foreign not be dealt with here, since there are exchange market. The foreign large local disparities in these details exchange market is the most challeng- between one country and another. We ing segment of the capital market. Spot note simply that the consolidation risk is and forward transactions between usually approached from the point of banks occupy a central position there- view of tax optimization of the project in. It would be wrong, however, to and is dealt with once the methods of think that the foreign exchange market financing and risk cover have been set. is reserved for these interbank transactions. Since the beginning of the As far as the transaction exchange risk is 1970s, new markets, the derivatives concerned, several risk management markets, have gradually developed. methods were mentioned in the section devoted to risk management. These Within these markets, it is customary to techniques are intended to: make a distinction between standard contract markets, which are located in •Eliminate the risk by pricing the port stock exchanges that have clearing hous- services in foreign currencies (the es, and non-standard contract markets, project is then said to be foreign cur- which are a compartment of the inter- rency generating) or obtaining a loan bank market in which over-the-counter in local currency. deals are transacted. Within these standard contracts, there is a further distinc- •Transfer the exchange risk to public tion between futures and options. entities by obtaining an exchange rate guarantee over the period of the The principal existing cover products. concession from the host country’s All of the methods relating to interest central bank (at the request of the rate risk cover also exist for exchange Ministry of Finance), which converts risk cover. the exchange risk into a political risk. Thus, the cover products available on These techniques, although highly desir- the derivatives markets are: able for the concession holder, are a challenge to implement. Depending on • Forward currency sales on the inter-

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bank market; Finally, the use of these cover products, as in the case of rate risks, requires an • Currency futures on the organized accurate prior knowledge of future for- markets; and eign currency cash flows. This is referred to as the company’s "net foreign • Foreign exchange options in both exchange position." Determining this compartments of the foreign position is a difficult exercise, particular- exchange market. ly during the operating period. As a rule, investors involved in project Assessing the value of the basket of cur- finance set-ups tend to prefer the over- rencies to be covered can therefore only the-counter market, which is more flexi- be a "guesstimate." Nevertheless, it is ble in terms of choice of amount to be important to estimate these flows care- covered (which may exactly match the fully during the financial modelling of expected amount of flow), maturity the project. We shall return to this point dates, and exercise prices in the case of at a later stage. foreign exchange options. Counterpart Risk Management With regard to the options market, there The notion of counterpart risk. All of the exists an "option option," which has techniques mentioned in the first part of proved to be a particularly interesting this Module relating to risk management product for the investor at the stage of are based on the principle of risk sharing bidding on a tender. The project prof- in project financing set-ups: to minimize itability calculations carried out by the the costs of covering risks, they must be company are based on a certain assump- borne by the party in the best position to tions about exchange rates even though assume it. This involves transferring the company is not certain of winning each identified risk to a private counter- the contract. If it wins the contract after part. The risk that any of these counter- the invitation to tender, it is not uncom- parts may disappear is what is called the mon for the market to have shifted sig- counterpart risk or credit risk. nificantly in the meantime. Also, an "option option" gives the option holder The counterpart may be directly the right to buy a foreign exchange involved in the project and therefore option whose exercise price is close to belong either to the SPC or the bank the reference exchange rate used, there- syndicate. But, it may also take no by covering itself as early as the tender direct part in the project other than stage. If the company is not successful, through the risk it agrees to take on, it doesn’t exercise its "option option." either because it counter balances an Finally, it is worth mentioning that, as opposite cover requirement or because it the volatility of the price of an option is expects payment for doing so. less than the volatility of its underlying security (in this case the foreign curren- Also, with regard to counterpart risk cy), the price of the "option option" management, a distinction must be tends to be low. made between the credit risk relating to

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the sponsors of the project and the credit However, one should note that the risk resulting from the other counter- counterpart risk cover instruments part, as the financial cover instruments include credit derivatives that are begin- used are of a totally different kind. ning to appear in the project financing market. For the moment, however, they Project sponsors’ credit risk cover: the are still handicapped by a certain lack of use of performance bonds. The need to liquidity and a small choice of available cover the counterpart risk in a project counterparts. financing set-up stems principally from a requirement of the bank syndicate that Financial Engineering and Political Risk structured the loan and wishes to satisfy Management itself as to the solvency of the various sponsors of the project; (e.g., builder, Political risks and investment guaran- operator, supplier, owner, shipper). tees. The first part of this Module, devoted to risk management, discussed To satisfy itself that these parties will political risk, an expression that covers honor their financial contractual com- all risks resulting from unfavorable and mitments, which might be expressed in unilateral decisions taken by the public terms of contract penalties, the bank authorities of the host country of the syndicate may require the establishment project, whether they are the State, local of guarantees known as performance authorities or port authorities. Financial bonds. These are usually issued by one engineering of political risk manage- of the party’s "friendly" banks, which ment consists of setting up adequate must also have an "acceptable" rating. insurance products to mitigate any The bank syndicate is then confident of financial consequences that may result being indemnified if any of the project’s from a public decision that is detrimen- sponsors become insolvent. tal to the viability of the project.

This is also a good way for the arrang- The separate presentation of political ing banks to limit their liability by only risk and market risk (the exogenous accepting projects with top ranking part- financial risks presented above) within ners as sponsors. the framework of this Module needs to be distinguished. The risks of non- Project financial counterparts credit transferability and non-convertibility of risk cover: the use of credit derivatives. the local currency, which are compo- As far as the other financial counterparts nents of foreign exchange risk, can be of the project are concerned (i.e., banks, used as an example. While it is clear insurers and specialist financial institu- that fluctuations in foreign exchange tions), the use of these credit risk cover rates are partly due to market dealings, products is still not common today. In the fact remains that they are also fact, project financing set-ups remain the dependent on the monetary policy reserve of a small number of players of either set by the national central bank or international stature who usually have the government. It is impossible to an excellent rating. determine with precision the exact split

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between these two classes of risk and, ment guarantees is the Multilateral hence, to design the optimal cover Investment Guarantee Agency or MIGA, arrangement. This example illustrates a the aim of which is to "encourage invest- "grey" area that makes the financial ana- ments for productive purposes between lyst’s challenge a little more complex. member countries of the World Bank Group." In this sense, it is in a position The financial treatment of political risk to guarantee the SPC’s investments management harks back to the notion of against losses that may result from a investment guarantee, which poses the non-commercial risks including: difficult question of knowing under which balance sheet headings to place • The risk of non-transferability as a this cover. While the answer may seem result of restrictions imposed by the obvious with regard to the guarantees host government; offered by secured loans (which were dealt with in the section covering the • The risk of loss as a result of legisla- financial structuring of the project), tive or administrative measures or existing insurance products relating to omissions of the host government investment guarantees can, depending that effectively deprive the foreign on the type of policy, relate either to a investor of the right of ownership or guarantee of equity invested by the the control he exercises over his sponsors or a guarantee relating to all investment; the project’s assets. This distinction, which is fundamental in terms of its • The risk of breach of contract by the potential consequences, is difficult to host government vis-à-vis the grasp in practice. investor; and

The calling in of these guarantees and • The risk of armed conflict and civil indemnity procedures provided by disturbance. insurance policies in the event of default Investment guarantees offered by the is not without problems. Without going World Bank (Bank or IBRD). Since into detail, it should be mentioned that 1994, the World Bank has promoted the the notions of "events of default" and use of political risk mitigation guaran- "subordination of rights" between an tees to address the growing demand investment guarantee and a secured from sponsors and commercial lenders loan in practice prove to be particularly contemplating financial investment in complex and difficult to manage for all the infrastructure sectors of developing private partners. countries. The Bank's objective in main- Guarantees Offered by Multilateral streaming guarantees is to mobilize pri- Agencies vate capital for such projects on a "lender of last resort" basis while mini- Multilateral Investment Guarantee mizing the host government's requisite Agency (MIGA). The best known of the indemnity to the Bank as a condition of multilateral agencies offering invest- providing the guarantee.

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World Bank guarantees are provided to • Maintaining an agreed regulatory private lenders for infrastructure financ- framework, including tariff formulas; ing where the demand for debt funding is large, political and sovereign risks are • Delivering inputs, such as fuel to a significant, and long-term financing crit- private power company; ical to a project's viability. • Paying for outputs, such as power or water purchased by a government The Bank offers commercial lenders a utility; and variety of guarantee products: partial risk, partial credit, enclave and policy- • Compensating for project delays based guarantees in IBRD countries, caused by political actions or events. and partial risk guarantees in IDA-only countries. Broadly speaking, all guaran- Partial risk guarantees may also cover tees provide coverage against debt transfer risks that may be caused by service default arising from sovereign constraints in the availability of foreign risk events. Each guarantee is tailored exchange, procedural delays and to match the specific need of an indi- adverse changes in exchange control vidual transaction. laws and regulations.

IBRD guarantees are offered for proj- Partial credit guarantees cover all events ects in IBRD eligible countries, with of non-payment for a designated portion the exception of certain foreign of the financing. While these guarantees exchange earning projects in IDA-only historically have been used to encourage countries. IBRD guarantees can be extension of maturity by covering the later years of the financing, the Bank both partial risk and partial credit in recently structured a partial credit guar- nature. Bank guarantees are generally antee to cover a single coupon interest available for projects in any eligible payment on a rolling basis throughout country, irrespective of whether the the life of the facility, plus the final prin- project is in the private or public sec- cipal repayment. tor. The bank may, however, at times limit the availability of guarantees in Enclave guarantees are highly selective certain countries, for example in coun- partial credit guarantees structured for tries undergoing debt restructuring. export oriented foreign exchange-generating commercial projects operating in IBRD partial risk guarantees ensure pay- IDA-only countries. Enclave guarantees ment in the case of debt service default may cover direct sovereign risks such as resulting from the non-performance of expropriation, change in law, war, and contractual obligations undertaken by civil strife but may not cover third party the government or their agencies in pri- obligations (such as those of an output vate sector projects. Sovereign contractu- purchaser or input supplier); nor will it al obligations vary depending on guarantee transfer risk. In all cases, the project, sector and circumstances. They scope of risk coverage under the guaran- typically include: tee would be the minimum required to

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mobilize financing for a given project. ering equity finance for the same project. These agencies cannot accept Partial risk guarantees are used in IDA host government guarantees. member countries in sectors undergoing significant reforms. IDA guarantees are Guarantees Offered by Export offered on a pilot basis to private Credit Agencies lenders against country risks that are beyond the control of investors and Export credit agencies also issue guaran- where official agencies and private mar- tee policies covering investment opera- kets currently offer insufficient insur- tions abroad. These instruments usually ance coverage. IDA guarantees are provide a guarantee for the SPC against available selectively, where an IBRD the political risks of: enclave guarantee is not available. IDA guarantees can cover up to 100 percent • Attack on shareholders’ rights; and of principal and interest of a private debt trench for defaults arising from • Non-payment and non-transfer of specified sovereign risks including gov- the payment, or non-transfer of the ernment breach of contract, foreign cur- investment or of the indemnity pro- rency convertibility, expropriation, and vided in the concession contract in political violence. the event of nationalization.

Bank guarantees facilitate the mitigation The guarantee package (with a cover of risks that lenders cannot assume, cat- ratio in the region of 90 to 95%) relates alyze new sources of finance, reduce not only to the initial investment but borrowing costs, and extend maturity also to the self-financing produced by beyond what can be achieved without the project; i.e., the profits to be reinvest- the bank guarantee. They also provide ed and the profits to be repatriated. more flexibility in structuring project Generally, there is a ceiling on the basis financing. of cover relating to the self-financing produced by the project: in the case of Clearly, within the World Bank Group, COFACE in France, the cumulative lim- IFC and MIGA are the preferred sources its are respectively 100% (with respect to of support to the private sector. As such, profits to be reinvested) and 25% (with sponsors and financiers should consult respect to profits to be repatriated) of with IFC and MIGA as to their potential the initial investment. interest in financing or covering the project. IFC supports private sector Finally, we should point out that secur- projects through equity and debt financing such a guarantee is conditional on ing, the syndicated B-Loan programme, the existence of a bilateral investment security placement and underwriting agreement between the country of the and advisory services. MIGA provides export credit agency and the host coun- political risk insurance primarily for try of the project. equity investments, but it can also cover debt financing, as long as it is also cov-

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The Use of Private Insurers for Covering The investment breakdown must be suf- Political Risks ficiently detailed. The total amount of the investment should be broken down Private insurers sometimes offer viable by type of homogenous assets; i.e. assets alternatives to public insurers for cover- that have similar working lives and ing political risks. The cost of this insur- methods of depreciation. Capex cate- ance may be quite high, but it is some- gories relevant to port projects might times the only alternative for making include: buildings, open areas, port financing of projects in difficult coun- equipment, infrastructure, superstruc- tries possible. tures, and dredging work. A private insurer insures the banks The categorization of Capex must also against the occurrence of a political risk take account of the type of work envis- causing the loan to default. Private aged; e.g., refurbishment of existing insurers are sensitive to the monitoring procedures that the banks put in place structures and/or new works. to assess the political risk and its devel- Investment phasing. Traditionally, opment. The banks must therefore pro- determining the investment phasing at vide evidence of their ability to assess the set-up stage satisfies two require- and avoid political risks during the ments: project set-up stage. This is a condition of underwriting the policies. • It records the capital expenditure FINANCIAL MODELING OF THE flows required by the project in the PROJECT economic model; and

Construction of the Economic Model • It fixes the value of the basis of the instruments providing cover against Constructing the economic model of a exogenous financial risks (rates and port project consists of identifying, from foreign exchange). the SPC’s point of view, all the forecast cash flows generated by the investment. Also, investment phasing enables the They fall into three main categories: cap- financial analyst to: ital expenditure, operating revenue and • Structure the project as accurately as expenses, and tax-related matters. possible according to its ability to Capital expenditure (Capex) support its method of financing; and

Investment breakdown. The production • Reassess the appropriateness of the of a capital expenditure statement investment decision by testing real requires the gathering of data that is options; e.g., to defer the execution usually fixed and set out in the various of the project; to defer progress of the contracts defining the project: the con- works; to abandon the project; to cession contract, construction contract, reduce activity; to make the project equipment supply contract, etc. more flexible.

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Investment currencies. The amount and which is to give as true as possible an the required currency of payment by the account of the assets of the company. SPC must correspond to each item on Tax allowances represent the deductions the investment statement. The equiva- that the tax authorities allow on the lent of this amount in the model’s refer- investments the SPC makes. While they ence currency can be found by calculat- are, generally speaking, based on the ing the exchange rate initially set in the depreciation of the asset, considerations macro-economic hypotheses. The for- of economic policy also enter into the eign currency breakdown of the capital equation for tax allowances. This is to expenditure thus enables the SPC to encourage investors by enabling them to ascertain its exposure to exchange risks write off their assets over periods shorter throughout the life of the concession than the economic life of the asset. In contract; i.e., enables its "net exchange terms of financial analysis, this over- position" to be calculated. depreciation leads to an under-evaluation of the entity’s financial results at the Economic depreciation and tax beginning of the investment cycle and an allowances statements. A depreciation over-evaluation at the end of the cycle. statement must accompany the capital expenditure statement for each of the In the case of port projects, understand- identified headings. It is based on ing the notion of depreciation is compli- knowledge of: cated by the nature of the assets entered on the SPC’s balance sheet. If the depre- • The period of depreciation of each ciation methods seem easy as far as port asset; equipment or new infrastructure works are concerned, the fact remains that the • The method of depreciation author- question of the length of ownership or ized by the tax legislation of the host of the potential life of the refurbished country of the project; e.g., straight- assets is far from obvious. For example, line or double declining balance. what is the residual working life today of a fully refurbished 30 year old con- Confusion often arises between the crete quay? notions of amortization, depreciation and tax allowances. This confusion usu- Similarly, the distinction that must be ally stems from the improper use of the made between appropriations to depreci- same expression to express three differ- ation, which by their nature are not cash ent financial concepts. Amortization flows (referred to as calculated charges) refers to the capital repayments of finan- and maintenance charges, which are cash cial loans. Depreciation is designed to flows, is not always easy. For example, adjust the economic value of an asset should one depreciate dredging works, according to the loss of economic value it and if so by what method, when the undergoes with time. Appropriations to maintenance charges relating to main- depreciation appear in the profit and loss taining depths close to the quay or in the account, while accrued depreciation access channel are already included in appears on the balance sheet, the role of the charges account of the profit and loss

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account? Prevailing practice, in fact, is of the various headings. This exer- not to depreciate dredging works and cise, which is difficult to perform in access channels. practice, is fundamental in terms of financial analysis for determining the Residual value of the investment at the company’s economic break-even end of the concession. There is always point and for assessing the level of an "exit" for any investment, whether it risk attached to the formation of the is liquidated, ceded to the concessioning gross operating surplus. authority or sold. Thus, inevitably there is a need to assess the residual value of • The foreign currency or currencies the investment. There are several meth- for each of the revenue and expense ods based on the notion of value in use headings. or replacement value. In the port sector it is very difficult to assess the residual Operating revenue/charges in terminal value of infrastructures that do not have management operations. The various a true market value at the end of the sources of revenue produced by the concession. operation of a port project stem directly from the contents of the concession Operating Revenues and Expenses granted by the Port Authority. They break down into three main categories It should be noted that the word "oper- within the framework of a port project: ating" is used here as opposed to the word "construction." This distinction • Port dues, which are distributed enables one to identify all the revenues between dues on ships and dues on contributing to the formation of the cargoes, and typically cover the use gross operating surplus, the true balance of the port’s basic infrastructure; of the operating account. • Services to ships: e.g., piloting, tow- The summary statement of operating ing, stores, bunkering; revenues and expenses comprises: • Estate revenues, which constitute a •An item-by-item breakdown of oper- significant source of revenue for port ating revenue and expenses. The authorities and an operating charge same project may produce very dif- for terminal operators; ferent types of income. It is therefore important to know the various rev- •On-board and on-land services to enue headings according to the type cargoes: e.g., cargo handling, stor- of creditors and any interdependence age, packaging; between them. • Revenue from administrative opera- •Afixed (annual percentage that does tions; and not depend on the level of production) and proportional (amount per •Miscellaneous (e.g., rentals of equip- production unit) breakdown for each ment).

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The main items making up operating SPC. It is measured by subtracting charges include maintenance charges, operating charges from operating rev- personnel charges and the operating roy- enue. In practice, it forms the balance of alty due under the concession contract. the operating account. In jargon, the SPC is said to achieve basic equilibrium Operating finance requirement. if its GOS is positive. Traditionally, a company’s operating finance requirement is determined from Changes in the operating finance an analysis of the company’s operating requirement should be deducted from cycle: production, storage and market- the calculated GOS. One then gets the ing. In the case of a terminal operator, operating cash surplus (OCS), which is a the operating cycle is simply the deliv- cash flow, unlike the GOS, which is an ery of the service rendered to its cus- accounting aggregate. The OCS will tomers. It corresponds to the cash subsequently be included in the cash advance or working capital that the flow statements. company must have at its disposal between the time it begins operating Tax Flows and the time it begins receiving payment for its services. Tax flows means all the cash flows resulting from the impact of the tax sys- There are four factors that determine a tem on the project. In addition to the company’s need for working capital: deductibility of financial charges, which will later need to be built into the finan- •Volume of business (the more cial model (cash flow statements), the turnover increases, the higher the tax flows relate to taxes on company need); profits and the (total or partial) carrying • Length of operating cycle (the longer over of tax losses from previous years. the cycle, the higher the need); Traditionally, corporation tax is calculat- • Customer/supplier credit policy (the ed by multiplying a rate, which can vary longer the customer payment time, from country to country, by a basis of the higher the need; the reverse is taxation, which is determined according true with regard to supplier credit to the type of investment made. While policy); and it is easy to obtain the rate of corporation tax, calculating the basis of taxation • Operating cost structure (the more is difficult as it requires principles of operating costs increase, the higher accounting established by the tax legis- the need). lation of the host country.

Operating account balance: gross oper- Tax losses from previous years can be ating surplus (GOS) and operating cash carried forward over a number of years surplus (OCS). The gross operating sur- depending on national legislation. plus (GOS) is the first indicator of rev- Losses carried over in this way can enue produced by the operation of the then be considered as a tax credit grant-

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ed to the SPC. In the financial model, Models usually provide what are called this calculation is important to include reserve accounts, the purpose of which to avoid over-estimating the impact of is to freeze any cash flow surplus from corporation tax on the net profitability the project until the total value of these of the investment. accounts reaches a certain minimum level (usually set by the banks). This CONSTRUCTION OF THE FINANCIAL minimum level is usually set at six MODEL months of debt service.

A financial model of the project tradi- Capital expenditure related to financial tionally involves the production of three debts and quasi-equity is entered in a financial statements: the cash flow flow statement called a debt service statement; the income statement; and account. Traditionally, there are five the balance sheet. headings in this account, which are:

Cash Flow Statement • Balance at beginning of period;

Cash flow statements show all the com- • Drawings on the credit; pany’s incoming and outgoing cash flows. They therefore include all the • Financial costs (including interest on cash flows involved in the establishment capital paid during the construction of the operating cash surplus and all period); capital expenditure. • Repayment of loan principal; and Capital expenditure stems directly from the choice of the financial resources • Balance at end of period. needed to accumulate financial capital. The order of subordination of the loans It refers to equity and debt invested in must be clearly shown in the model. the company by capital providers (shareholders and lenders). In virtually all tax systems it is common to allow the deduction from income of Equity-related capital expenditure refers the financial charges of the SPC. These to increases in capital granted to the proj- financial charges represent the interest ect by shareholders on the one hand and paid by the company on the loans it a return paid on the invested capital on takes out. On the other hand, repay- the other. With regard to the latter, this is ment of the loan principal, relating to directly related to the dividend payment the project’s assets, which have already policy decided upon by the shareholders been depreciated in the operating prof- and accepted by the lenders. it/loss, is not a deductible expense. The most commonly used method for Profit and Loss Account (Income modelling dividends is the one that con- Statement) sists of distributing the maximum profit (after tax and any reserve obligations) The purpose of the profit and loss up to the value of the available cash. account is to determine the amount of

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corporation tax, the net profit/loss and to model dividend payments to shareholders. The main stages of the calculation enable the principal interim financial balances to be determined:

•Gross operating surplus;

•Operating profit/loss;

• Financial profit/loss;

• Current pre-tax profit/loss;

• Corporation tax; and

• Net profit/loss.

It should be stressed that an extraordinary profit/loss forecast is fairly exceptional in this type of operation. Balance Sheet

The SPC’s balance sheets enable the company, investors, and others to monitor the changes in the financial structure of the company throughout the life of the project.

It should be remembered that, unlike an accounting balance sheet, the items on the asset side of a financial balance sheet are shown at their gross value. The deduction of the accrued depreciation of these gross values appears under the liabilities of the SPC.

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REFERENCES

Publications

BENICHOU I. & CORCHIA D., Le Financement de projects, Editions ESKA, 1996

CLIFFORD CHANCE, Project Finance, Clifford Chance 1991

CASS S., Port Privatization: Process, players and progress, Cargo System IIR Publications Ltd, 1996

COHEN E. & HENRY C., Service public , Secteur public, Conseil d’Analyse Economique, La documentation Française, 1997

COURTOT H., La gestion des risques dans les projects, Economica, 1998

DENOIX DE SAINT MARC R., Le service public, Rapport au Premier Ministre, Collection des rapports officiels, La documentation Française, 1996

FLORA J. & HOLSTE S., Public/private partnerships: roadway concessions, The World Bank transport division (published informally), 1994

MARTINAND C., L’expérience française du Financement Privé des Equipements Publics, Economica

NEVITT P.K. & FABOZZI F., Project Financing (sixth edition), Euromoney Publications, 1995

PETERS H.J. & JUHEL M., Changing role and functions of ports: addressing the reform agenda, The World Bank, TWUTD

SHAW N., GWILLIAM K. & THOMPSON L.S., Concessions in transport, The World Bank, TWUTD, 1996

STOFFAËS C., Services publics, question d’avenir, Rapport de la commission du Commissariat Général du Plan, Editions Odile Jacob/ La Documentation Française, 1995

THE WORLD BANK GROUP, Procurement for Private Infrastructure Projects

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, Guidelines for Port Authorities and Governments on the privatization of port facilities, 1998 Reviews and articles

Dr BEHRENDT D.K. & THOMSON W., Port ownership: Public Responsibility or Private Enterprise, Ports and Harbors, October 1997

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CHAPON J, Réflexion pour une politique portuaire européenne, 1998

CHAPON J., Partenariats public/privé en matière portuaire, Conférence CIMER 98, Saint Denis de La Réunion, published in Transports No. 394, March-April 1999

JUHEL M.H., Global Challenges for Ports and Terminals in the New Era, Ports and Harbors, March 1999

MONPERT J.Y., Le contexte des privatization and les acteurs: motivations and attentes des opérateurs - le point de vue de SAGA / BOLLORE, AFD Conference, 19/10/98

MOUNTFORD R., Financing the Development of Ports, Ports and Harbors, November 1997

ORSINI J.A., L’appréciation des risques inhérents au projet, paper given at "Le mon- tage des Financements de Projects" seminar, Management Global Information, November 1995

RATHEAUX O., Options de gestion des ports maritimes, Cas des ports africains, AFD, 1996

REZENTHEL R., Les régimes portuaires dans le monde, NPI, 30 December 1996

REZENTHEL R., Les régimes portuaires and le droit de la concurrence, NPI, 30 December 1996

REZENTHEL R., La délégation de service public and les concessions portuaires - Doctrine, DMF 583, June 98

REZENTHEL R., Les concessions portuaires, Gazette du palais, September 1997

SMAGGHE J., L’évolution institutionnelle des ports, Colloque Africa Port 2000, Lomé, January 1999

APrivate Affair, Port Development International (PdI), privatization supplement, September 1994

Major issues in transport and communication: Concepts and Guidelines for the Implementation of the Commercialization and Privatization of Ports, Ports and Harbors, April 1996

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 1998

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Euro News, special edition, N° 27, PROJECT FINANCING, Engineering Consultants: where would Europe be without them ?, EFCA, September 1997

ENPC, « gestion and analyze financière, Suivi financier des contrats long terme » module

ENPC, « politiques de transport », C. MARTINAND module

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APPENDIX: RISK CHECKLIST

PRINCIPAL RISKS IN A PORT PROJECT

I.COUNTRY RISK

Government / administration

Stability Reputation (negotiations, administrative inefficiency) Links established Concessioning authority Reputation (negotiations, administrative inefficiency) Links established Political risk: low, medium, high Currency

Revenue in foreign currency? Revenue in local currency? Stability of local currency over last few years Convertibility of local currency => Exchange risk: low, medium, high Social

Does the operation induce a major reduction in personnel? If so, is a redundancy scheme planned?, funded?, by whom? Must a proportion of local personnel be taken on? Qualification of local labour? => Social risk: low, medium, high Taxation

Level of knowledge Profits tax? Sales tax? Withholding on dividends or intra-group transactions? Stability of fiscal system => Tax risk: low, medium, high

II.TRAFFIC RISK

A. MARKET

Activity Traffic established?: stable; sharp fluctuations; steady growth

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New traffic

Growth factor

General economic activity Sector/domain activity Acquisition of market share

Previous quality of service

Non-existant Poor/fair/good => Prediction reliability: poor/fair/good

Customers

Identified major customers "Atomised" market Competition/captive traffic Present situation Competitor terminal in port? Competitor terminal in country? Competitor corridors? Traffic volatile or stable? Future situation Contractual guarantee of exclusivity? Entry barriers? Risk of changes: low/medium/high Risk of competition: low/medium/high

B. OBLIGATIONS

Public service obligations Technical Minimum capacity Performance standards

Tariffs Free rates Price cap Escalation formulas Exemptions?

Fee payable to concessioning authority

Up-front fee ? Fixed annual part: fixed amount; judgement criterion? Variable annual part: fixed amount; judgement criterion? Concessioning authority subsidy

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Investment Fixed annual part: fixed amount? judgement criterion? Aariable annual part? Guaranteed traffic? cost + fee? C. GUARANTEES Extra-franchise port services

What port services do my customers require? Who is in charge? (me, public or private Port Authority, potential problem) Level of service guaranteed? Level of service satisfactory? Price levels satisfactory? pilot service berthing services haulage buoying maintenance of access maintenance of basins maintenance of protection structures other Operating hours for these services Degree of sensitivity to inspection customs veterinary and phyto sanitary other

Vessel waiting time

Priorities granted Land transport

What modes of transport are used for my traffic? For each mode: capacity of operators quality of service of operator(s) (time taken, security, etc.) obstacles to the work of these operators (regulatory, political, etc.)

III. PROJECT RISKS

Investment Amount Dredging Infrastructures Buildings Facilities

Missions Design

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Construction /installation Rehabilitation / repair Maintenance (infra, super, dredging) Operation Security

Obligations relating to investments Functional specifications Technical specifications Functional specifications related to a threshold (future subject)

Information supplied and technical specifications imposed Investigation campaigns Contractual information? Preliminary Design Detailed Design

Work and supply contracts Concessionaire-employer Approval of concessioning authority required? Call for tenders obligatory? Thresholds?

Maintenance standards imposed?

Construction period/Commissioning date Under-estimated reasonable comfortable Penalty level Operation Public suppliers (water, electricity, etc.) Safety rules Sub-contracting authorized/approval

IV. CONTRACTUAL RISKS

Status of project company State or concessioning authority has blocking minority interest? Proportion of capital reserved for local investors?

Contracts with third parties What contracts taken over by concessionaire? Concessioning authority's approval required for signature of new contracts?

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Bonds Nature of bonds Amount Call conditions

Consequences of legislative regulatory changes Borne by concessioning authority Borne by concessionaire or not specified Possibilities for recourse

Contract revision Instigation of concessioning authority Instigation of concessionaire No provision

Force majeure Causes Procedures

Early termination Concessioning authority's request: causes; procedures. Concessionaire's request: causes; procedures.

Disputes Possibilities for claim Contract law Arbitration clause

V. FINANCIAL ASPECTS

Franchise period Project IRR over this period Payback period VI.TENDER ASSESSMENT CRITERIA

Preselection Technical assessment Financial assessment

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

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

HE551.P757 2003 387.1'068—dc21

2003045093 42705_MOD6_COVER_AGS 5/27/03 8:29 AM Page 1

PORT REFORM TOOLKIT

MODULE 6 PORT REGULATION MODULE

THE WORLD BANK 42705_MOD6_TEXT_AGS 5/27/03 8:05 AM Page 1

MODULE 6 PORT REGULATION MODULE

INTRODUCTION ly. Excessive port costs or delays can prompt investors to locate new produc- There is a strong public interest in ensur- tion facilities in other countries or regions. ing that ports operate efficiently and safe- In many countries, high port costs have ly, that fair and competitive services are an economic impact similar to a general- provided, and that ports support and fos- ized import duty, increasing the cost of all ter economic development locally and imported goods. nationally. The public interest in ports stems from the vital role that ports play The public is also interested in having as gateways for economic trade and com- ports operate safely and with minimal merce of most nations. In 1998, interna- environmental impact. An oil spill within tional seaborne trade totaled approxi- a port's harbor can damage the coastal mately US$ 5.6 trillion worldwide and environment and devastate local fishing nearly 5.1 billion tons of international and tourism sectors for several years. Port commerce was shipped by sea1. With the operations involve the use of heavy globalization of the world economy, a machinery and handling of dangerous nation’s economic competitiveness is cargo that, without proper systems and linked increasingly to its ability to ship safeguards, can result in serious and raw materials, intermediate goods and sometimes fatal injury to port laborers or final products efficiently and economical- third persons present in the port.

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Ensuring the efficient and competitive contracts, health benefits and work- functioning of a port in a context of lim- ing conditions. ited or weak competition is the scope of economic regulation of ports. Economic In most instances, guidelines and proce- regulation typically involves interven- dures for oversight of these elements of tion in the functioning of markets in the public interest have already been terms of setting or controlling tariffs, established and their effectiveness is not revenues or profits; controlling market materially altered by port reforms, entry or exit; and overseeing that fair although they need regular adaptation and competitive behavior and practices and up-dating. are maintained within the sector. The Objectives of the Port Regulation determination of when economic regula- Module tion of ports is necessary and how to tailor the intervention to the particular This module is intended to assist public port competitive environment is a prin- officials to design an economic regulato- cipal focus of this module. ry framework that will keep ports cost- While not discussed at length in this effective and responsive to changing module, there are other public interest demand. The module provides guid- concerns regarding technical, environ- ance on how to: mental and social aspects of port opera- • Identify regulatory requirements and tions. These other areas include: issues to be considered when developing a port reform strategy;

• Technical oversight of port opera- • Design a port regulatory system; tions and services such as navigation and safety (e.g., licensing of pilots, • Formulate an institutional strategy berthing rules, emergency plans, etc.) for establishing the regulatory structure and capabilities to perform the • Environmental oversight of the dis- relevant regulatory functions; posal of dredging spoils; discarding of hazardous materials and liquids • Select appropriate regulatory tech- used in port operations and mainte- niques and instruments under a nance; contingency planning for spectrum of port reform options and environmental and safety incidents; competitive conditions; ensuring sound land use planning and coastal preservation; and moni- •Prepare a checklist of items that toring compliance with international need to be included in port reform standards for vessel wastes (e.g., concession or operating agreements; MARPOL conventions). and

• Social or administrative oversight of • Specify operational and financial the equitable and just treatment of information necessary for monitoring port workers, and review of labor performance of terminal operators.

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Public officials can use the module when costly, time-consuming and acrimonious initially formulating a port reform strat- process to rectify matters later. egy or for establishing an effective post- reform port regulatory system. The consideration of regulatory issues before the framework of the contract is formulated has a number of important REGULATORY CONCERNS WHEN purposes: FORMULATING A PORT REFORM STRATEGY •To avoid legal challenges to the privatization program or transaction; The decisions about reform strategy, industry structure and regulatory frame- •To identify any constraints in the law works are closely linked. Therefore, reg- that would limit the ability to trans- ulatory issues, options and their conse- fer services to private providers, or quences should be considered at the the range of options that might be early stages of the reform process, and available for the privatization not left until other key decisions about approach; reform strategy have been made. As demonstrated by the reform experience •To define the regulatory role of the in other sectors, to do so can increase the government in the reform and post- regulatory burden and cost, restrict the reform effort and related institutional range of options that may be available to framework; the regulator, and risk incongruity between regulatory requirements and •To anticipate the competitive envi- institutional capacity. ronment (the extent of competition) of the port sector and the need for Governments do not need to undertake competition monitoring or economic detailed design of the regulatory frame- regulation; work when they are first considering private sector participation. However, •To consider the potential for restruc- they should take regulatory needs and turing the port sector to make it costs–and their own regulatory capaci- more conducive to regulation by ty–into account when making choices competitive forces rather than gov- about private sector participation. And ernment oversight; when embarking on the first private sector participation in ports, it is important •To determine the range of strategies to consider whether the regulatory sys- that might be available to the regula- tem proposed for the first transaction tor to induce competition or discour- will preclude the regulatory options that age anti-competitive behavior; might be most appropriate as private sector arrangements become more com- •To identify the form of interventions mon. A government that fails to get the that the regulator may take when structural and regulatory package right anti-competitive behavior occurs; from the outset can face an immensely and

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•To determine what issues not specifi- al law gives responsibility for asset cally addressed in the existing or ownership and service provision to a proposed law need to be addressed level of government that has limited on a transaction-specific basis. capacity to regulate or is vulnerable to short-term political interests, con- All of these purposes are closely related. sider separating ownership from reg- For example, as was shown in the ulatory oversight and locate the reg- Malaysian experience at Port Klang, fail- ulatory body at a higher level of gov- ure to have an adequate legal frame- ernment. work in place prior to the privatization effort can impose substantial delays as Prior to undertaking port sector reform, legislators debate legislative actions to the public interest in ports has typically facilitate the privatization process. And been vested in a public port authority. Colombia's failure to properly define In a traditional port, the public port anti-competitive behavior beforehand authority was an operating port that led to the need for the regulator to con- provided all basic port services and stantly solicit legal opinions before inter- functions. There was no need for a sep- vening. arate regulatory agency as the public port authority was the institution In many countries, the broad regulatory charged with operating the port as a framework may not adequately support public monopoly consistent with the a private sector arrangement. Private public interest. sector ownership of port assets may be prohibitied by the legal system. Tariff Under port sector reforms, many ports setting responsibility may reside within have evolved into a landlord port an operating port authority that would authority where facilities are leased to compete with the private operator. But private operators, who in turn directly governments can still make private sec- provide their services to carriers and tor participation in ports work, by tak- shippers. In this situation, private oper- ing one or more of the following ators may provide services previously actions2: provided by the public port authority, such as pilotage, tug assist, vessel steve- • Choose a private sector arrangement doring, cargo handling, storage and that reduces the risks associated with yard services. Private operators will be deficiencies in the regulatory frame- motivated by profit maximization objec- work; for example, a fee-based man- tives. They may not necessarily provide agement contract may bring in tech- facilities or services that are of econom- nical capability and management ic, environmental or social value if expertise if investment risks rule out doing so would conflict with profit max- a private sector interest in a conces- imization. This creates the need for reg- sion. ulatory oversight to ensure that the public interest is upheld. •Develop appropriate regulatory capacities; for example, if the nation-

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How Ports Compete Kong and Singapore; Los Angeles, Long Beach and Oakland; Generally, port-related competition can Rotterdam, Hamburg, Bremerhaven, be defined as one of three types: inter- and Antwerp). Inter-port competi- port, intra-port, and intra-terminal. tion may be for origin-destination traffic or for transit traffic. • Inter-port competition arises when two or more ports or their terminals • Intra-port competition refers to a sit- are competing for the same trades uation where two or more different (e.g., New York and Halifax; Hong terminal operators within the same

Box 1

INTRA-PORT COMPETITION IN BUENOS AIRES, ARGENTINA

Following the Ports Law of 1993, the Argentine government decided to offer concessions for six terminals at the Puerto Nuevo Port Authority facilities. Bidders submitted separate technical and financial proposals linked to anticipated tonnage. Essentially, those guaranteeing the most traffic with the best technical proposal would win. Five concessions were awarded; but only two concession holders would control facilities capable of handling containers.

Single operators were charged with operating their respective terminals, controlling the entire berth-to-gate operation. Upon the takeover of the terminals by the successful bidders, the terminal operators had to plan, finance, and commission extensive civil structure improvements and undertake heavy equipment investments. Meanwhile, they became immediately liable for their payment obligations to the port authority. As part of their concession obligations, terminal operators had to pay the port authority concession payments based on $4 per ton for imports and $2 per ton for exports. They were also prohibited from pricing collusion, and would have to adhere to safety and environmental legislation. And, in an effort to mitigate the impacts on former port authority employees, the terminal operators had to agree to employ some of the former employees or, alter- nately, provide a severance payment program. As a result, the terminal operators all began operations with over staffed work forces.

The concession agreements contained performance guarantees; in the first year, 40 percent of established target volumes would have to be met before the port authority imposed financial penalties. This percentage would increase in stages to 60 percent and 80 percent in subsequent years. In return, the terminal operators would get the use of the public facilities, could provide whatever services they wanted, and could set tariffs as they saw fit as long as the tariff structure adhered to the one prescribed by the port authority.

While great attention was drawn to the terminals within the confines of the city, another port facility was being developed in South Dock, just outside the city under the jurisdiction of the Province of Buenos Aires. Bidders at Puerto Nuevo were aware of this site and had discounted the possibility that it could be converted to a full-fledged container terminal. However, a consortium of local and foreign investors was granted a 30-year concession for South Dock by Buenos Aires Province on terms far more favorable than those afforded the Puerto Nuevo operators by the federal government.

The Puerto Nuevo bidders were obviously concerned with the entry of another competitor. Container growth was projected to be somewhat modest given available capacity, so competition had already developed to a high level. Due to labor cost savings and lower wharfage fees, the South Dock facility had lower costs than Puerto Nuevo operators of $40 per move.3 In 1997 the South Dock terminal handled 366,000 TEUs, compared to 600,000 TEUS handled at Puerto Nuevo facilities.

The Puerto Nuevo bidders are currently attempting to renegotiate the obligations of their concession agreements. They argue that competition was never envisioned from any container facility outside Puerto Nuevo when the government structured the program, and that the obligations imposed on them were unfair because of the favorable concession terms given their competitor. Government has countered that the development of the South Dock facility has provided the inter-port competition envisioned by port reformers; therefore, the government would not entertain any effort to change the concession terms.

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port are vying for the same markets short run if demand temporarily out- (e.g., Stevedoring Services of strips supply, but only for as long as it America, Evergreen, and H.I.T. in takes to provide additional capacity. If Panama). In this case, the terminal the market is not competitive, however, operator has jurisdiction over an a port operator may be able to sustain entire terminal area, from berth to prices well in excess of marginal costs, if gate, and competes with other termi- politically or institutionally permitted to nal operators in the port. do so. The history of government regulation attests to the difficulties of deny- • Intra-terminal competition refers to ing that permission. companies competing to provide the same services within the same termi- Assessing Port Sector Competition nal (e.g., the stevedoring companies Estibadora Caribe and COOPEUNI- In this section we present a conceptual TRAP in Port Limon, Costa Rica). framework for assessing the extent of Where effective competition can be competition within a port sector. The established and maintained in the rele- conceptual framework may be used vant markets and activities, privatiza- when deciding the optimal form and tion has proven to have great potential scope of port modernization or in to reduce costs and improve service determing whether regulatory interven- quality; without competition, privatization may be warranted post modernization can still bring some improvements, tion. The framework is not intended to but the gains are relatively limited. determine definitively that a particular port or terminal operator is engaged in Competition also helps ensure that the anti-competitive behavior. Instead, it private sector passes savings on to users indicates conditions where anti-competi- and reduces opportunities for monopo- tive behavior may occur. When these listic abuses. A private terminal opera- indications exist, the framework serves tor can be presumed to be more tempted effectively as a red flag to indicate to the than a public port authority to exploit regulatory authority that the situation any market power that it may have. should be closely monitored. One should, however, not forget that Alternatively, the framework could be experience has shown that public sector applied when complaints are received to monopolies are often stronger, more determine if in fact there may exist suffi- authoritarian and non-compromising cient grounds for the complaint. Factors than private sector monopolies. indicative of the extent of market com- Moreover, they are often more difficult to fight as they are either claimed not to petitiveness include: exist or to be justified for the public •Transport options; good. As long as a market is competitive, private operators cannot price • Operational performance; much above their long-run marginal costs; they may be able to do so in the •Tariff comparisons; and

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• Financial performance. and direction (import or export). The number of options is defined according Box 2 presents an overview of the key to the technical capabilities of the ports elements of a conceptual framework for and their available inland connections. considering these factors. Each of the framework’s salient features is described For example, there may be situations in below. which one port has already captured a large share of the cargo market. One Transport options. The most important might, therefore, label this as a non-com- indicator of competition is the degree to petitive market. However, the market which a shipper has transport options power of this port (or its capability to (substitutes). The choices or options increase the price) would be limited if available to a shipper or consignee other ports could provide an attractive largely determine the extent of competi- alternative and keep competitive pres- tion within the port sector. In examin- sure on the other port’s prices. ing options, one should analyze a specific cargo flow as defined by cargo type, The availability of competitive options is shipping characteristics, inland point, based not just on the existence of a Box 2

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

INPUTS FOR Transport Berth Port THE MODEL Alternatives Performance Costs/Tariffs Profitability

EVALUATION Multiple Acceptable Reasonable Acceptable CRITERIA Options Performance Costs Levels

Only One Congested Very High or Negative RESULTS Option Port Low Costs Finan. Eval

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physical service alternative, but on over- tor is often the container storage capaci- all transport system costs (land and ty of the yard. Nevertheless, even in port). Thus, the first step in assessing container terminals, berth occupancy the competitiveness of the port and provides a good indicator for capacity transport system is to identify the lowest utilization. To provide a more telling cost option. Then, the competitiveness picture of a port’s operational perform- of each option is determined by compar- ance, berth occupancy should be coming it to the lowest cost option, defined plemented with the berth utilization here as cost proximity. A cargo flow that ratio, which compares the amount of moves through a system with many time ships are worked at berth to the options and possessing close cost prox- total time that the berth is occupied, and imity (small cost differentials) faces a with the berth productivity ratio, relat- highly competitive market setting. ing berth occupancy time and berth Conversely, if there are few options and throughput. the cost differentials among the options are large, the market setting is defined Ship waiting has a direct relationship as non-competitive. with berth occupancy. When occupancy is low, there is usually no (or minimal) Operational performance. Operational ship waiting. However, at a certain performance indicators can be used to occupancy level, waiting begins to assess the relationship between supply increase very rapidly. Thereafter, a and demand for port services in a par- small increase in the level of berth occu- ticular country. Presumably, a chronic pancy results in congestion and long shortage in supply indicates a possible waiting times for ships. Although these tendency towards monopolistic practices two indicators are closely related, both by a port or terminal operator. Using can be examined in order to obtain a the supply/demand relationship itself more comprehensive assessment of port as an indicator may be inadequate congestion. because of difficulties in direct estimation of these two market factors. The input data for berth occupancy are typically readily available from opera- Instead of the throughput/capacity tional reports generated by the ports or (supply/demand) ratio, two measures terminal operators. The occupancy indi- that can indicate a potential shortage in cator should be calculated separately for supply of port services can be used: container, general cargo, and bulk ships. berth occupancy and ship waiting for For vessel waiting time, the input data berth. Both measures are, in fact, two are also typically available from port different aspects of one phenomenon, (usually the harbor master’s office) or port congestion. Berth occupancy has a terminal operator operational reports. direct relationship to capacity utilization The ship waiting indicator is calculated in ports where the berthage is the limit- as the average waiting hours per ship, ing factor of terminal capacity. This, by type of commodity. Average waiting however, is usually not the case in con- time is also sometimes compared to tainer terminals, where the limiting fac- average time at berth to produce the

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ship-waiting rate. The various elements try’s ports that handle the same cargo contributing to the waiting time should (including the port under considera- be analyzed to allow the port authority tion). "Model port" costs measure the to precisely identify cases whereby it difference between the actual and theo- was the result of non-availability of port retical costs of a specific port based on a facilities or equipment. port cost model that generates the "model" costs for a country’s ports in Increasing trends in berth occupancy general. and utilization and wait time are strong indicators of under-capacity, which in Financial performance. A variety of turn may indicate the absence of signifi- financial performance measures can be cant competition. used to examine whether a port has been earning abnormally high profits. Tariff comparisons. The objective in The assumption here is that abnormal examining tariffs is to determine if the profits may indicate a non-competitive tariff level of a port is within a "reason- market setting and a possible tendency able" range. Presumably, abnormally for ports to be engaged in anti-competi- high tariff levels in a port indicates a tive behavior, taking advantage of their tendency to exert market power and dominant market power. Economic the- employ unfair trade practices. This ory maintains that suppliers possessing inflates total port costs, which include monopoly power tend to charge prices charges to shipping lines and cargo. that exceed marginal and average costs. The calculation of port costs should be based on a representative basket of Ideally, a competitive assessment should "basic services" and their respective be based on the comparison of price and charges. marginal cost. However, direct measurement of the difference between price An indication of whether tariff levels are and marginal cost is impractical. The within a reasonable range can be based financial profit (net income and earn- on three comparisons. The current rates of the port under consideration are com- ings) of a port is used as a proxy for the pared with: (1) historical rates of the difference between market price and same port; (2) rates (tariff differentials) marginal cost. Presumably, abnormally at other ports in the same country; and high profits indicate a non-competitive (3) theoretical rates based on "model setting that, in turn, suggests the possi- port" costs. bility of anti-competitive behavior. The level of profit is usually compared to Historic rates measure the difference in some measure of investment. Two com- port costs between the time of analysis mon indicators that relate profit to and the past, either in the previous year investment are return on equity and or before a recent rate increase. return on assets, and both are typically Differences in port costs (tariff differen- found in port financial statements or can tials) are examined by comparing a spe- be calculated from data readily available cific port with the average of the coun- from the port.4

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Costs of an Inadequate Regulatory Box 3 Framework Transferring a Public Monopoly to the Failure to provide an adequate economic Private Sector - Port of regulatory framework can be very costly St. Petersburg, Russia in terms of inefficient and high-cost port The port of St. Petersburg, then a government-owned serv- services. In many countries, excessive ice port, was partially privatized in 1992 as a joint stock port costs function like an additional company. In Russia, joint stock companies are entities import duty on all goods entering the whose shares are initially held by the employees of the country, and a tax on exports. Excessive predecessor port organization and the state. In this instance, employees held 51 percent and the government port costs reduce the competitiveness of held the remaining 49 percent. Two years later, in 1994, the a nation’s products in world markets government established the Port and Maritime and can stifle economic growth and Administrations (PMAs), which were given the traditional statutory duties of a public landlord port authority. In St development. In fact, shipping lines or Petersburg, the PMA then leased most of the port opera- conferences may further compound the tional areas to the port joint stock company, which became unfavorable effects inefficient ports have the dominant local port operator. on a nation’s economy by imposing Since the initial transformation to a joint stock company, the penalty surcharges to offset the carrier’s portion held by the employees has changed hands, ulti- operating costs and disruptions to its mately transferring 47 percent of the shares to several banks service rotation or itinerary. and other entities. Because there was such a wide dispersal in share ownership, and hence little organized influence of Unfortunately, the anticipated benefits these shareholders, the owners of the 47 percent stake of free trade associated with reduction established a consortium of banks with investments in the of import duties and removal of trade port (formally known as OBIP), which now consists of three financial institutions (Bank Saint Petersburg, Baltiskaya barriers may be offset by the inefficien- Finance Company, and Bank Petrovsky), the Petersburg cies of an improperly regulated and Information Bureau, the Seaport of St. Petersburg, and NAS- non-competitive port sector. DOR, an offshore company in Liechtenstein charged with promoting investment in the port.

In some instances, port reform efforts The government’s 49 percent stake in the port is held by the have transferred public ports to single St. Petersburg Property Committee and the Ministry of private operators, thereby creating pri- Transport, which hold 29 percent and 20 percent of the shares, respectively. Because the former is a non-voting vate monopolies for local port services. stake, the OBIP consortium effectively controls the port with This type of transfer does nothing to its 47 percent stake. lessen the vigilance governments must maintain if abuses of market dominance The joint stock company seeks investors on a purely joint venture basis. Any party having an investment interest must are to be avoided. Box 3 presents the agree to give a majority equity position to the joint stock experience of the Port of St. Petersburg, company. Thus, although there are now three stevedoring Russia, regarding the transfer of a public companies (terminal operators) in the container trades -- hence creating a perception of intra-port competition -- port monopoly to the private sector. majority control of these companies is held by the joint stock company. Therefore, decisions by these boards are Similarly, in Mexico terminal operations collusive in nature and are generally intended to keep at the ports of Veracruz and Manzanillo charges high for the captive markets. The regulatory framework necessary to mitigate this trend, however, was not set were transferred to private operators. up and implemented by the PMA at the outset of reform, However, due to the lack of inter-port or and still does not exist today. intra-port competition, port users have

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repeatedly complained about high tariffs Box 4 and have requested that a regulatory institution be established to limit the Potential Anti-Competitive Behavior in monopolistic position of terminal opera- the Port Sector tors.5 In the absence of economic regulatory oversight, a port Due to the nature of the sector, it is com- operator with a dominant or monopoly position could attempt to engage in the following anti-competitive prac- mon that, even when competition for tices, driving out potential competitors and increasing costs port services is strong, there may be to port users and the economy at-large: only two or three direct competitors. Thus, market shares and concentration • Price gouging - Using monopoly power to charge excessive tariffs for port services. ratios measured by traditional antitrust techniques would typically be high. In • Service bundling - Extending monopoly power in one most circumstances, a high industry area of port operations to another potentially competi- concentration indicates that conditions tive area. Also referred to as tying arrangement. For example, a terminal operator's extension of a monop- are such that they may encourage anti- oly position in the provision of cargo handling to competitive practices (see Box 4). For require use of their tug assist services rather than example, having few competitors invites obtaining those services from an independent pricing collusion, agreements to allocate provider. customers or geographic territories, or • Increasing entry barriers - Constructing hurdles to the establishment of cartels or boycotts, increase the share of the market needed to operate at all of which are typically prohibited in a maximum efficient scale, raising absolute costs of entry, country’s antitrust legislation. Having or by tending to foreclose competitors from needed one dominant firm may also encourage resources or outlets. predatory pricing, another practice that • Raising rival’s cost - Increasing the cost of services is typically prohibited. In Rotterdam the required by a rival to place him at a competitive disad- need for scale has pushed the Port vantage. Authority to favor the development of • Exclusive dealing - Requiring suppliers to sell only to ECT, a port service consortium, and to them and not to any potential competitor. An example offer it a quasi-monopoly position. This would be restricting a tugboat company from provid- has, however, not stopped Maersk and ing service to a rival terminal. P&O Nedlloyd from demanding and • Predatory pricing - Selling services below cost to obtaining a dedicated terminal in joint induce a rival's exit from the market, deter future entry venture with ECT. In Antwerp, competi- or dissuade a rival from future competition. An exam- tion between the three major container ple would be temporarily lowering container handling charges below long-run marginal costs to force a rival operators (Hessenatie, Noord Natie and out of business. Seaport/Katoennatie) has always existed; but, recently, because of the need to • Price discrimination - Similar to predatory pricing in gain in scope and scale the two main that selective price discrimination by a powerful seller can eliminate competition or otherwise entrench the operators have merged. As a result, the discriminating seller's monopoly power. Port Authority decided to award the concession of the newest container terminal to the third operator (P&0 Ports),

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which had bought out Seaport/ In an unregulated market, profit may be Katoennatie. sought through the creation of a stevedoring company cartel to exclude com- It is the growing scale of the users that petitors from access to facilities. makes larger scale operations in ports Controlling anti-competitive commercial imperative. With this pressure for behavior requires a regulatory institu- increased size, one might ask whether tion to prevent the acquisition and any regulatory framework can ensure exploitation of excessive market power. the continued existence of more than Even without cartelization, wherever one container terminal operator. One there is a financially strong incumbent should keep in mind here that the top in a market, there is a danger that anti- two Antwerp terminal operators men- competitive behavior will occur. tioned handle over 1,000,000 and over 2,000,000 TEU per year. Thus, the nomi- STRATEGIES TO ENHANCE PORT nal size of their throughput does not SECTOR COMPETITION explain the merger in itself. The previous sections presented the Box 5 important considerations for determin- Predatory Pricing and Service ing conditions in which anti-competitive Bundling in Cartagena, Colombia behavior may exist. The lack of transport options, congested facilities, rela- Law 1 of 1991 placed the responsibility for the direct tively high prices, and high profits alone administration of Colombia’s public ports in the hands or in combination may encourage termi- of regional port societies, which were private sector entities, with the state entitled to up to 30 percent of nal operators and other port service the total shares of the society. To induce investment in providers to breach the threshold of gantry cranes, the Cartagena Society received permis- what may be regarded as "acceptable" sion to provide cargo-handling services in addition to the provision of crane services. This would mean that competitive behavior. This section pro- not only would they compete with the already exist- vides a discussion of port sector restruc- ing stevedoring companies, but that also they had a turing strategies that can be used to clearly advantageous position: they could bundle their enhance competition within the port sec- service charges for an array of services offered from berth to gate, a strategy that could not be matched by tor. An overview of regulatory strate- the stevedoring companies since they could offer rela- gies and remedies to enforce port com- tively limited services by comparison. petition standards is then presented. The Cartagena Society felt compelled to offer steve- The section concludes with the introduc- doring services as their own business because that is tion of a decision framework for select- what its non-regional port society competition was ing port competition enhancement doing. For example, a private port in Cartagena (El Bosque) offered pilotage, tug assist, stevedoring, and strategies and remedies. storage services, and could thus price the services at one all-in price. It was later alleged that El Bosque was Port sector reformers have two general offering tug assist and pilotage at no cost to the carri- strategies to choose from when consider to attract their business. If true, this bundling could constitute a predatory pricing practice in Colombia, ering how to enhance port sector com- which the Port Superintendent would resolve by set- petition (Box 6), "structural" and "regulating the prices for all of the pilotage and tug compa- tory." Clearly, the preferred strategy is nies in Cartagena. the one that results in more competitors.

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In a perfect market, characterized by a Structural Strategies for Enhancing large number of buyers and sellers, the Competition extent of competition is optimized so prices reflect market efficiencies. Experience suggests that many of the Therefore, port sector reformers, in con- benefits from involving the private sec- templating port reform, should strive tor stem from competitive pressures, not towards structural enhancements that just the presence of a private owner.7 increase the number of competitors Competitive pressures also affect the before resorting to "regulatory" enhance- amount and appropriate form of sector ments. Regulatory enhancements (par- regulation needed: the more competitive ticularly economic regulation) are pressures are brought to bear on private intended to enhance efficiency by cor- operators, the less regulation may be recting various market imperfections; required. So governments-even those essentially, they are aimed at forcing with substantial regulatory ports to behave as if they were compet- capacity–stand to gain a great deal from ing in a competitive market. Due to introducing as much competition as the high market concentrations, some form port’s traffic and lay-out allow. of regulation is often appropriate regardless of the structural strategy.6 Box Competition becomes increasingly likely 6 shows how "structural" and "regulato- as an industry becomes more disaggre- ry" approaches give rise to potential gated. The more the system can be struc- competition enhancement strategies. tured to allow entry at different levels, the more competitive pressure can be introduced. And the more competitive Box 6

COMPETITION COMPETITIVE ENHANCEMENT ENHANCEMENT STRATEGY REMEDIES

"Structural" S1-introduce new berths/terminals S2-divide existing port into terminals S3-divide operation within the terminal S4-short-term operating agreement/ Competition lease/management contract Diagnosis

R1-file/monitor tariffs "Regulatory" R2-set tariffs/profitability limits

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pressure there is, the less the need for exploitation of economies of scope and regulatory intervention.8 As discussed eases coordination and efficiency among later, extensive unbundling may mean intermediate input suppliers and final sacrificing efficiencies the operator may service providers. An argument against gain through the bundling of services, restructuring also applies when a single particularly within the terminal area provider benefiting from economies of (defined as the area between the berth scale is split up to induce competition. and the gate). For this reason, "terminal- However, even in such cases, gains from ization," where a single operator con- economies of scope and scale need to be trols the berth-to-gate operation is fre- weighed against benefits of cost-mini- quently the preferred approach (with mization due to competitive pressures.9 the level of economic regulation depending on the competitive setting, Typically, the private sector would pre- either within the port itself or coming fer to engage in inter-port or intra-port from the outside). competition rather than intra-terminal competition, and this is understandable Establishing competition for port servic- because modern cargo-handling tech- es requires three steps. The first step is niques most often do not actually allow to examine closely the structure of the for efficient intra-terminal competition. sector, assessing market conditions and Even though the private sector invest- how the services may be restructured. ment would normally be greatest under The next step is to implement the port these competitive circumstances, the pri- sector restructuring, creating opportuni- vate sector also has the ability to capture ties for competition in one or more seg- a wider range of revenues. For example, ments of the port sector. If unfettered in inter-port competition, ports will competition is possible, the process compete for the entire handling charge ends. If only limited scope for competi- of perhaps $200 per container, which tion exists, the third step involves estab- captures revenues from the sea buoy to lishing regulatory oversight to maintain the gate. The value of the handling fair competition and to protect port charge when intra-port competition is users. The extent of restructuring, the present might decline to perhaps $150 exact nature of competition, and the per container (berth to gate), and even objectives of regulation depend upon the physical, institutional and market further to $100 per container when intra- characteristics of the sector. terminal competition (berth only) is present. Competitors in an inter-port Port restructuring involves trade-offs. context have a much greater span of Where economies of scope exist, it may pricing strategies for capturing their be cheaper for a single port operator to markets, meaning that at the lowest produce and deliver two or more port level (intra-terminal competition) rivals services jointly than for separate entities will have a much smaller range of pric- to provide services individually. A bun- ing flexibility when it comes to their dled sector, where all services are organ- ability to formulate strategies for captur- ized under one umbrella, allows ing the activity. In short, competition at

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this level is vying for a much "smaller sufficient volumes to justify capacity piece of the pie." expansion. Many ports do not have expansion possibilities adjacent or in Also from an efficiency standpoint, hav- close proximity to existing facilities ing a single operator per terminal tends for a variety of reasons, including to be preferable because of the direct limitations imposed by terrain or control the operator would have over urban encroachment, lack of suffi- the range of activities from berth to gate. cient land, etc. Alternative expan- Additionally, because of greater revenue sion possibilities may also be rela- capturing ability, a greater investment tively costly, requiring substantial can be leveraged from the operator cargo volumes for cost recovery. assuming a concession period adequate This is particularly true if the port for full investment cost recovery. expansion is done via land reclama- However, if cargo volume is sufficient to tion or if the new facility is "green- support only one operator, then govern- field," requiring additional investment has to weigh the trade-offs ments in land access and utility between granting a monopolistic posi- infrastructure. tion to the sole operator vs. the potential loss of efficiency resulting from intra-ter- 2. Divide existing port into competing minal competition. For the intra-termi- terminals (terminalization). nal competition option, mainly prevail- Terminalization involves dividing ing in the tool-port system (see Module existing port facilities into separate 3) for general cargo traffic, revenues are terminals, each leased or conces- collected only from vessel stevedoring. sioned to a different operator. The In France, intra-terminal competition facility’s configuration and structure was promoted and terminal areas were may limit the ability to pursue this dedicated to different operators. The option, particularly for purposes of result, however, was a very inefficient establishing gate access for each operation. Ultimately, because of com- operator, and building heavy load petition from more efficient European bearing structures10 and berths (Box ports, this arrangement was abandoned. 7). This measure, of course, generally assumes there is sufficient volume Structural Remedies to support more than one terminal handling the same cargo type (e.g., There are a number of actions govern- two dedicated container terminals). ments and/or port authorities can take Box 8 presents an example of how to enhance competition. Several key the terminalization may be imple- ones are described below. mented when traffic volumes do not justify two container terminals. Box 9 1. Introduce new berths/terminals. The discusses how subsidy bids may be availability of this option is largely used for management contracts dependent on the existence of a suit- when low cargo volumes would not able site for port expansion as well as otherwise generate bids.

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Box 7 Box 8 Dividing the Port into Terminals to Terminalization in Limited Volume Induce Competition Ports – The "Overlapping Competition" Strategy A port can be divided into terminals through the allocation of berths (e.g., one terminal per berth). Berth length Many ports may have facilities that are well suited for in older ports may not allow for this, however, depending pursuing the terminalization strategy. Whether this on the characteristics of vessels calling at the port. For strategy can be executed depends on the size of the example, assume that an older port consists of two market for a particular cargo type. Large container mar- berths, each having a berth length of 400 feet. The two kets, for example of 1.5 million TEUs, can typically justify berths together can accommodate 2400-TEU vessels, the 5 single-berth terminals served by two gantry cranes typical feeder vessel size today; but one berth alone can- each. But how can a port induce competition where not accommodate such vessels, thereby negating the the volume (e.g., 150,000 TEUs), can only justify one possibility of dividing the port into separate terminals. container terminal? One method is to use the "overlap- The anticipated future fleet characteristics, therefore, are ping competition" strategy.* important factors in deciding whether to divide a port into separate terminals. Here’s an example of how it can work. The port’s facilities can be divided into two single-berth terminals; one To overcome this limitation, the port can still be divided can be dedicated to container handling, and the other into terminals, say one for container, and the other for to break-bulk. Each terminal is concessioned to an break-bulk, where priority is given to one type of opera- operator. The concession agreements can be structured tion over another. For example, the break-bulk operator so that either operator can handle the other’s cargo. under the terms of its contract could be required to for- Certainly, each terminal’s cargo will be dominated by feit its rights to its berth area when a container vessel the type of cargo for which the terminal is dedicated. calls. Typically, container vessels are given first-berth Nevertheless, the break-bulk operator can attempt to rights in ports due to their relatively high cost of opera- compete for the container business as well. tion, the higher revenue impact on the port, and the sensitivity of delays on their remaining itineraries. Although most break-bulk facilities are not designed to accommodate gantry cranes, the break-bulk operator can encroach successfully on the container business. Why? Because, to reduce the cargo handling charges a 3. Divide port operations within the vessel with its own gear may prefer to call to a terminal not offering gantry services. Moreover, the load-bear- terminal. ing capacity of most break-bulk terminals can accommodate mobile cranes; many ports today have the This refers to the "intra-terminal" mobile cranes working alongside the ships’ gear. competition described earlier. There Though overall handling productivity is not as high as gantry services, it is sufficient to divert some cargo from are generally three approaches to fully dedicated container terminals for vessels not this: requiring the more expensive handling equipment. Though not commonly done, it is also possible for the • One approach is to privatize the ves- container terminal to encroach on the break-bulk business. If the container terminal has excess capacity/low sel stevedoring operation, with the berth utilization, it can fill the revenue void by handling port authority continuing to operate break-bulk cargoes as long as it does not interfere with the yard/storage areas. While the its core business. ______port authority would retain a *Note:This strategy was recommended as part of an monopoly position in yard/storage effort to induce competition at the Port of handling, the measure promotes Buenaventura, Colombia. See Asaf Ashar and Paul E. Kent, Diseño de Plan de Expansión Portuaria en competition on the waterfront, but at Buenaventura (Design of a Port Expansion Plan in the expense of unity of command Buenaventura), Sociedad Portuaria Regional de and control over the whole operation. Buenaventura, Buenaventura, Colombia, 1996.

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Box 9 the stevedores assigned cargo storage area. Stevedores are thus forced Subsidy Bids for Management to work against each other’s traffic Contracts in Low-Volume Ports patterns to move the cargoes to their assigned areas. Under certain circumstances, cargo volumes may be so low that solicitations will not generate any • The final approach is to allow the responses to tenders. Regulators in these circumstances can take a lesson from the approaches used stevedoring companies to control in the utility sector where the government awards a both the vessel stevedoring and concession for utility services in a low demand envi- yard/storage operation without any ronment (e.g., telephone services in rural areas) assigned areas; the port authority through what is called a "subsidy" bid. would normally "manage" the yard In the port sector, management contracts typically by assigning slots/areas in the yard obligate the port authority to pay a charge per unit for cargo storage, with the stevedor- cargo handled by the operator.The port authority bills the shipper and carrier, and these revenues ing companies moving the cargoes. would be used to offset the cost of paying the opera- Terminal efficiency is enhanced over tor. But in low-volume ports, the revenues derived the previous approach as slots in may not be sufficient for the operator’s full cost recovery plus profit. specified areas of the yard are assigned prior to cargo discharge. Under these circumstances, port authorities may have This is the formula often implement- received subsidies to cover the cost of their operation (particularly true of life-line service or cabotage/inter- ed in low-volume general cargo island service ports). Therefore, the solicitation may ports. consist of two bid items: the first setting out the charges the operator would impose on shippers/carri- 4. Short-term operating agreement/ ers on a per unit/volume basis; the second setting out lease/management contract. This the subsidy payment that the operator would expect from the port authority. Offers consisting of a combi- arrangement is typically used when nation of the lowest charge and subsidy would be cargo volumes are insufficient to awarded the contract. employ any of the terminalization options discussed above; when no • The second approach, in addition to investment is needed (from the oper- vessel stevedoring, involves assign- ator); or when the port authority ing areas within the terminal to each does not want to commit to a long- stevedoring company for cargo stor- term agreement. age as well as for storing the stevedoring company’s equipment. This Competition from the market occurs has the advantage of allowing the when private sector operators bid for a stevedoring companies to control the concession, lease, or management con- berth-to-gate operation for their pro- tract. The benefits of such competition prietary cargoes. The experience with are likely to be greatest if the contracts this arrangement, however, is mixed are re-bid frequently. This is because the in terms of overall terminal efficien- contractor is more inclined to behave cy. For example, if two ships are competitively under the threat of losing calling, it is possible that the vessels’ its contract in the relative near-term berths may not be directly in front of through the re-bidding process. Indeed,

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contracts typically contain minimum ing numbers of carriers are emerging as performance standards, which if terminal operating companies (e.g., breached, may result in contract termi- Maersk, P&O, and APL). Although nation or could bar the incumbent from these carriers may create subsidiaries to re-bidding at contract expiration. operate terminals, there is an inherent conflict of interest in their participation Where markets consist of large cargo in both shipping and terminal opera- volumes, countries will not encounter tions activities. They have the potential difficulty in generating interest in con- to engage in service or pricing discrimi- cessions by the international maritime nation; in the former, terminal operators community. While there is a relatively owned by carriers (or their holding com- small number of companies today panies) may offer preferential berthage engaged in operating terminals outside rights to their own carriers, while in the their native countries, there are also latter case they may offer discounts to instances of smaller companies within a their own carriers, as is the case with region that are seeking investment APL’s operation at the Karachi opportunities elsewhere. For example, International Container Terminal in smaller-scale companies from Argentina Pakistan. More importantly, a carrier- and Colombia are seeking port invest- operated terminal will have access to ment opportunities elsewhere in Latin proprietary data (e.g., cargo manifests) America. At the same time, both large that identify shippers (importers and international companies as well as their exporters) served by another carrier call- smaller regional counterparts will often ing at the terminal. Carriers are thus seek local joint venture partners due to reluctant to call at carrier-operated ter- political considerations as well as the minals if other options (e.g., other termi- local partner’s clearer understanding of nals) exist. Governments should be the peculiarities of the local law, culture, aware of such potential practices of car- and operating environment. rier-operated terminals, and can discourage such behavior in the concession Because of the mutual benefits accrued agreements (e.g., operator billings being from joint local-international partner- subjected to audits). Box 10 presents a ships, governments should encourage summary of some of the key issues and such partnerships by minimizing overly analyses that should be addressed when stringent pre-qualification criteria. For preparing a strategy for port sector example, some countries have in the restructuring. past imposed the same qualification criteria on all parties of a joint venture Even when structural strategies are when, in fact, it is only necessary for one employed to enhance competition in the of the partners to satisfy the minimum port sector, regulatory measures may qualification standard. still be required. Economic regulatory measures typically used within the port Countries should also be aware that ves- sector fall within two categories: sel operators might emerge as part of the responding bidders. Today, increas- •Tariff filing (or R1 in Box 6) would be

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required in the course of the regula- port planners to determine what regulator’s job to monitor for anti-competi- tory and operational measures are most tive behavior.11 appropriate given the port’s operational setting and market outlook. Establishing Box 10 a productive relationship between regulators and planners can be problematic Checklist for Port Sector given the sense of ownership that many Restructuring or Unbundling port authorities have over their facilities. The following are issues to consider when assessing the The port planner’s most efficient opera- suitability and potential benefits of port sector restruc- tional strategy may run counter to the turing: antitrust concerns of the regulator. At the same time, the port planner and • Is there current or potential inter-port competition? potential operators should be made aware of the regulatory environment • Is there a specialized private port facility near-by that they can expect after contract that could compete for public traffic if granted per- award. The ultimate strategy selected mission to handle general cargo/containers? would logically reflect a balance • Is the inland transport network adequate to pro- between the need to promote opera- vide competition from another regional port? tional efficiency (the planner’s perspective) and the need to avoid antitrust • Is port traffic sufficient to permit intra-port com- behavior (the regulator’s perspective). petition? Is any of terminal owned/operated by a This, in turn, reflects the conflict shipping line that might not provide universal service to other carriers? between the goal of efficiency gains from scale of economies (size) versus • Is there more than one firm capable of providing increasing the number of competitors by cargo handling services? dividing them into smaller units (e.g., single port operator vs. multiple termi- • Can licensed private operators provide vessel services such as pilotage, towing and berthing? nal operators).

• Can private providers compete for cargo handling Decision Framework for Selecting Port and storage contracts? Competition

• Is the port layout sufficient to support competing Enhancement Strategies and Remedies yard operations? Box 11 presents a decision framework for selecting port competition enhance- • For other operational settings, setting ment strategies for a variety of port con- tariffs12 (or R2 in Box 6) may be in ditions and competitive environments. order if there is a high risk of The decision framework includes three monopolistic behavior. major elements:

In contemplating the need for regula- • “Setting” refers to the operational tion, it should also be emphasized that environment in which the port exists, regulators should communicate with specifically regarding the port’s rela-

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tive size, number of berths, and vol- throughput and projected outlook for a ume. specific cargo type (e.g., containers). If there is significant excess capacity, and • “Diagnosis” refers to the criteria then cargo volume is "low" relative to described earlier in this module that the port’s capacity and is so described in serve as indicators for measuring the Box 11. If there are, or potentially could extent of competitiveness existing in be, capacity shortages, then cargo vol- the sector. These include transport ume is described as "high." options, berth utilization, tariff competitiveness, and profitability. Diagnosis. This identifies the most important criteria for assessing the • “Solutions” refer to the previously extent of competition that exists. Recall described structural and/or regula- from earlier in this module that the lack tory measures that should be under- of existing or potential transport taken given the port’s operational options, high berth utilization (as a environment and extent of competi- measure of congestion), high tariff levels tiveness. (relative to competitors), and high port profitability are conditions that may Each of the elements of the decision indicate or encourage anti-competitive framework is discussed in more detail behavior. below. Solutions. The diagnosis of the competi- Setting. This is the port’s operational tive environment in light of the port’s and physical environment as it pertains setting defines the potential operational to the port’s relative size, the scale of its and regulatory solutions for enhancing facilities, and the cargo volume handled. port sector competitiveness. This repre- The scale of facilities is presented in sents the course of action that the port terms of number of berths, but it should planner and regulator may take. be emphasized that this is intended to represent only an order of magnitude. Decision Framework Results That is, while a port with only 1-3 berths is certainly small, a 5-berth port could The decision framework can be used to be small as well. Similarly, a 22-berth select port competition enhancement port can be considered large, but so is a strategies and remedies. Referring to 50-berth port. The competitive condi- Box 11, consider a small port consisting tions encompassed in the three elements of three berths and high volume. This is are the same, be it a 22-berth port, or a the only port serving its particular hin- 50-berth one. terland; there is no potential for adding capacity, and there are no intermodal For example, in determining if the rela- options. Berth occupancy is high and tive volume of a port is low, the port profitability is high. Here, we have a planner will know the extent of excess classic monopolistic setting – high vol- capacity (if any) the port may have in ume, high berth occupancy, high prof- quantitative terms given the existing itability, and no competition. The pre-

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ferred strategy is to divide the port into capacity into reserve status reduces the terminals (indicated by solution S3) and port’s maintenance costs while at the to impose tariff filing requirements, with same time facilitating ease of entry as the possible need for tariff monitoring volumes increase. (solution R1). The situation changes in a scenario of a Looking at the other extreme, a one- medium-size port with a high-volume berth, low-volume setting, with low setting and inter-port or intermodal occupancy, no competition and low competition, excess capacity (as indicat- profitability, suggests entering into a ed by low berth utilization), competitive short-term operating/management con- rates, and medium profitability. Here, tract (solution S4), with the possibility the preferred solution is to divide the for a subsidy bid. port into competing terminals and impose tariff filing. For a medium-size port with low-volume setting, and a lack of existing or A large port with no competition, high potential transport options, low berth volume, low berth occupancy, and low occupancy, and low profitability point to profitability points to terminalization the need to divide the operation within (again, with possible berth closures) the terminals (solution S3) and, given without the need for tariff filing as the the apparent over-capacity situation, excess capacity allows for easy entry if some berths may even be closed and pricing becomes monopolistic. placed into reserve. Placing excess

Box 11

Setting Diagnosis Solutions Operational Environment Competitiveness Indicators Competitive Remedies Port Facility Transport Berth Relative tariff Port 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 S3 R1 port 2 berths high 3, 4 high N/A high S1 R1 3 berths high 1, 2 high N/A high S3 R1 S2 R2 3 berths medium 1 medium N/A medium S2 R1 12 berths low 1, 2 low N/A low S3 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, S3 R1 22 berths medium 5 medium similar rates medium S2 R1 22 berths low 5 low lower low S2, S3 N/A

Transport Option Codes: Structural Codes: Regulatory Codes: 1 - no other ports or intermodal options S1 - introduce new berths/terminals R1 - file/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 S3 - divide operation within the terminal 4 - possibility to construct a new port/terminal nearby S4 - short-term operating agreement/lease/ 5 - other port or intermodal options management contract

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A setting with medium volume, medi- tion and pricing policy is likely to put um berth occupancy, medium profitabil- greater demands on institutional capa- ity, and similar rates to competitors’ bilities in developing and transition offers the possibility to terminalize the economies than can be satisfied immedi- port with complementary tariff filing ately. In some cases, improving regula- requirements. tions is largely a matter of strengthening the existing monitoring and enforcement As demonstrated, the decision frame- capability. In other cases, it involves set- work can be a useful tool for the port ting up participatory development and sector reformer to optimize the design of appeal processes. In yet others, whether a competitive setting. It can also serve there is a need for transport-specific to curtail the government’s natural incli- institutions will depend on how these nation to tightly regulate in circum- issues are dealt with at an economy- stances where it is not needed. Over wide level.14 regulation would have the unintended consequence of constraining efficiency. Regulation, however, must not become a Indeed, as Box 11 shows, only rarely is it straight jacket that stifles initiative. This necessary to actually set tariffs or prof- would be a return to the past, where the itability limits (solution R2) because of port authorities were often so heavily the structural remedies that are avail- regulated by the supervising authority able. that they could not take any initiatives or soon lost their drive to innovate, DESIGNING A PORT REGULATORY SYSTEM invest, and improve efficiency. To help design an economic regulatory The shift in the role of the public sector policy and avoid the pitfalls of heavy from port services provider to landlord handed regulation, the following guide- and regulator will require that the pub- lines will be helpful: lic sector develop new skills, institutional capabilities and practices. These • Government should have a clear include regulating unfair or anti-com- understanding of the competitive petitive practices; designing and negoti- environment of the port sector. ating contracts with private providers of port services; monitoring performance •Adecision on economic regulation and enforcing compliance with general should be based on the risk of anti- standards; and creating processes for competitive behavior or on evidence wider participation in developing and that monopolistic behavior is occur- implementing transport policies and ring and that other methods of inter- programs.13 vention (e.g., cease and desist orders, sanctions and fines, etc.) are not fea- Changing the role of governments from sible, adequate, or appropriate. having direct control over state-owned and operated ports to exercising indirect • The regulator should clearly define guidance through appropriate regula- what form of economic regulation

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(e.g., rate of return or tariff setting) is • Any decisions made by the regulator to be applied and under what cir- should be enforceable with recourse cumstances. for appeal.

• Responsibilities for regulation of port In designing a port regulatory system to operations15 and competition should protect customers and the general public be formally separated. Because of interest, governments need to keep sev- the risk of "agency capture" and the eral broad principles in mind. First, it is potential conflict of interest between important to be realistic; a balance must the two forms of regulation, they be struck between what is ideal (i.e., as should be separated and assigned to close as possible to perfect competition) two different entities. and what is achievable. Second, regulation should not be too restrictive or con- • In the event that economic regulation trolling. Overly restrictive regulation is imposed, regulators will need to could deter private companies from pro- have a reasonable understanding of viding services or limit their ability to the cost structure of the operation; introduce innovative and efficient prac- this means that regulators will need tices. And, regulation that seeks to con- proprietary financial information and trol in detail how the private port opera- will have to weigh the tradeoffs tor runs its business risks defeating the between the need for information central purpose of private sector partici- and the burden of the reporting pation–improving service delivery at the requirements on the operators.16 lowest possible cost to the user. Third, a regulatory system must be consistent • Where a determination is made that with the institutional capabilities and economic regulation is not necessary, resources of regulators. but instead tariff monitoring and/or approval is warranted, then the regu- Designing a port regulatory system to lator will need to clearly set out the accommodate private sector participa- tariff reporting requirements, the tion can be broken down into eight basic review process, and impose a time steps17: limit on itself as to when an approval decision is to be made. Step 1. Specify the essential regulatory objectives and tasks • The entire competition regulation Step 2. Determine how far existing laws policy should be conveyed to the go toward assigning these tasks port and shipping community, as should the disposition of antitrust Step 3. Determine institutional arrange- cases and regulatory policy deci- ments for regulatory oversight sions. Step 4. Consider how much regulatory • Policy and case deliberations should discretion should be allowed include the opportunity for affected parties to present their views. Step 5. Consider what regulatory tools

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and mechanisms will be used behavior resulting from shortcomings of the marketplace. It should be distin- Step 6. Specify port operating and finan- guished from technical, safety, environ- cial performance indicators mental and other forms of regulation, although in practice these may often be Step 7. Establish an appeal process and intertwined.18 procedures Regulators typically have the power to Step 8. Incorporate regulatory details adjudicate disputes between port opera- into laws and private sector contracts tors or between port users and opera- Presented below is a discussion of issues tors. This may be the most important to be considered in completing these function of a regulator when a sector is steps, along with checklists and illustra- liberalized and an operator should tions to provide guidance for the design engage in anti-competitive behavior. of a port regulatory system. Competition regulators are normally in Step 1. Specify regulatory objectives charge of verifying and enforcing com- and tasks pliance with antitrust legislation. Monitoring compliance with concession Economic regulation of the port sector and lease terms and conditions is nor- may have multiple objectives. These mally assigned to the port authority as include: the lessor of the facilities (or land). The port authority is also given the power to •promotion of efficiency; enact general norms and regulations governing operational practices within • satisfaction of demand, notably by the port. promoting investment; The competition regulator’s enabling •protection of consumers and users, legislation typically authorizes the regu- in particular, against monopolistic or lator to require periodic submittals of other abuses by the operator(s); tariff, financial, operational, and any other data necessary to support the reg- •protection or even promotion of ulator’s industry monitoring responsi- competition, including protection of bilities; receive and issue complaints those competing against a dominant about alleged anti-competitive behavior; operator; compel operators to provide proprietary •prevention of pricing or service dis- and other data during investigative (discrimination; and covery) proceedings; deliberate over cases of alleged violations of antitrust •protection of investors against unfair legislation; and impose remedies in the or unreasonable government action. event that the regulator determines a violation occurred. The primary purpose of economic regulation is to control anti-competitive The objectives of regulation in most

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developing and transition countries, ernment agencies. These include: however, frequently are different. The level of profits earned by the private • The constitutional and legislative operator should be of secondary impor- division of responsibilities for service tance. The main challenge in many among national, regional and local underdeveloped markets is to meet governments; existing and latent demand for services. Hence, the primary objective of regula- •Responsibilities and relationships of tion should be to ensure that the opera- relevant government entities; tors (public or private) meet minimum •General legislation affecting private performance standards, thereby taking sector involvement, including by for- action to close the gap between supply eign companies; and demand. Consumers in most of these countries often prefer a high- • Issues relating to land use titling; priced service to no service at all. Furthermore, distributional objectives or • Competition law, and competition or concerns can, if needed, be addressed antitrust enforcement agencies; through subsidies or other mechanisms. • Environmental laws; Depending on the objectives to be met, regulation may focus on tariff policy; • Contract and concession law; and direct and indirect subsidies; access to • Labor law. congested facilities; investment levels; performance targets; service quality and The minimum requirement for effective continuity; and so on. Most countries regulation is a framework of law per- use a range of regulatory instruments taining to property rights, liability, con- (including specific stipulations in conflict resolution, and contracting. There cession agreements or licenses and gen- must also be capacity to enforce the laws eral rules) to govern the award of licens- and credible assurances that they will es, the oversight of the licensees, and not be changed by political whim. more generally, the rights and obligations of users, competitors, and other An overview of the review and revision parties.19 of port regulatory responsibilities in the state of Victoria, Australia, is presented Step 2: Conduct legal review of regula- in Box 12. tory system Further discussion of the legal aspects of In assessing how the broad regulatory the port regulatory system is presented framework will affect the design of a in Module 4 of this Toolkit. port reform regime and the attractiveness of that regime to the private sector, Step 3: Determine institutional arrange- governments need to consider a wide ments for regulatory oversight range of constitutional provisions, laws, rules, regulations and activities of gov- A key element in the design of a port

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Box 12

Reviewing Port Regulatory Responsibilities in Victoria, Australia20

In January 1995, the State of Victoria announced its intention to reform Victoria's ports. Until 1993, the chairmen of the port authority boards were also the chief executive officers of the port authorities. As a prelude to port reform, so called "reorganizing boards" were established for each port authority, and the positions of chairman and chief executive were separated under the State Owned Enterprises Act of 1992. The port authorities continued, however, to exercise their considerable statutory powers to regulate, administer and fund the operation of each port. In essence, while they remained under government control, the port authorities were regulating both their customers and themselves, and the Minister for Roads and Ports, to whom many of the statutory powers were deferred, was both the "regulator" and the "shareholder" of the businesses the port authorities conducted.

Examination of the statutes indicated that significant shifting of regulatory responsibilities was necessary to ensure that a framework for regulation of the ports was in place prior to their sale, out-sourcing, or reorganization. First, it was necessary to provide for the orderly retirement of the port authorities' existing functions and powers as these were supersed- ed by the new legislation. Second, new entities would have to be created to provide for the management of the Port of Melbourne, and also of the shipping channels, since it had been determined that the channels should remain under public management but with a commercial focus. Third, environmental and occupational health and safety issues would need to be devolved to the most appropriate government body. Fourth, land and planning statutes would need to be altered to make possible the definition of each of the ports as a saleable entity or an entity whose operation could be out-sourced. The revised responsibilities for regulation of the ports under the port reform regime are summarized below.

Revised Responsibilities Responsible Authority Regulatory powers relating to harbor masters, direction The Marine Board. Significant amendments to the Marine Act of shipping, maintenance of certain navigation aids, of 1988 enlarged the powers and responsibilities of the Marine promulgation of standards for the dredging of chan- Board, making it the principal point of reference for navigation- nels, and responsibility to coordinate compliance al safety 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 goods. The Victorian WorkCover Authority.The dangerous Goods Act 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.

Revocation of reservations, surrender of Crown The Governor-in-Council, on the recommendation of the land, issue of freehold title. Minister for Conservation and Lands to issue title to the relevant port authority.

Amendment of planning schemes. The Minister for Planning was given facilitative powers to prepare specified amendments to the planning schemes so far as they affected the port areas.

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regulatory system is determining the basis of the country’s general competi- appropriate institution or institutions tion rules. that should have primary responsibility Box 13 for competition oversight. Items that need to be considered include: Establishing a Port Sector Regulatory Agency in Colombia21 • Should the regulatory entity be multi-sectoral or specific to the port During its pre-reform days, Colombian ports were known for sector? low productivity and poor efficiency. Average length of stay for a vessel was twice that of other ports in the region. • Should it be centralized or decentral- Colombia’s institutional framework was typical of the pre- reform situations in Latin America. The port sector was highly ized? centralized in an organization known as COLPUERTOS, whose responsibility included the administration, operations, man- • How can the regulatory entity's inde- agement and planning of the country’s four primary ports: pendence be protected from short- Cartagena, Santa Marta, Barranquilla, and Buenaventura. Private terminals were permitted, but could not be offered as term political pressures and from the public use facilities. COLPUERTOS also controlled the tariffs undue influence of port operators for each of these ports. In addition to having separate admin- and service providers? istrations for each port, COLPUERTOS had a central administration office in Bogotá. The total number of public sector employees was nearly 11,000. • How can the regulatory entity best encourage direct participation or Law 1, passed in 1991, sought to liquidate COLPUERTOS and input from port users? create the Superintendencia General de Puertos (SGP) to (1) oversee COLPUERTO’s liquidation; (2) implement a new system of port societies and operating concessions; (3) prevent • How should the regulatory entity monopolistic abuses among the port societies and operators coordinate with other regulatory (primarily through tariff review, tariff setting, determining the institutions? number of concessions to be awarded and imposing fines and sanctions); and (4) establish technical norms for port • How can requirements for staffing operations. The SGP became part of the Ministry of Public Works and Transport as an independent entity with financial and technical capabilities be met? and administrative autonomy. Its costs are covered through the assessment of a supervision fee to be paid by the port societies and port operators. Should governments set up a regulatory In exercising its supervisory function, SGP established offices body for the port subsector, as has been at the regional port societies’ facilities.Total SGP employees done in Argentina, Colombia (Box 13) originally numbered just over 100, including employees and the United Kingdom; a single charged with monitoring operations at each port. By 2000, SGP employees had increased to more than 200. Regional agency for the transport sector as in U.S. port societies have the freedom to issue subcontracts for port Surface Transportation Board; or a services. For instance, in Cartagena, more than 25 private multi-sectoral agency for all or most stevedoring companies licensed by the SGP compete for con- infrastructure sectors, as in Australia? tracts with ship agents. On the other hand, perhaps there should The approach to port sector reform in Colombia created a be no special regulatory body at all, as competitive environment that goes beyond the competition in New Zealand, where the Commerce between stevedoring companies. Inter-port competition for container cargo was promoted among the Atlantic Coast Commission, the national competition ports of Cartagena, Santa Marta and Barranquilla. Law 1 also agency, is in charge of economic regula- permitted privately owned terminals to become public use tion of the infrastructure sectors on the facilities and to compete with the regional port societies.

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A strong case can be made for a multi- Mexico, for example, has the Federal sectoral regulatory agency. A multi-sec- Competition Commission as the agency toral agency should contribute to a with primary responsibility for competi- greater degree of coherence and consis- tion law. The Swedish and British coun- tency in the regulation of different sec- terparts are the Swedish Competition tors. It also allows lessons from one sec- Authority and the Office of the Director tor to be applied to others, creates General of Fair Trading, while in the administrative economies of scope, and United States it is the Federal Trade may limit the risk of corruption or Commission. undue influence by a particular enterprise or ministry. It is particularly well The non-sectoral emphasis of these suited for countries that lack the neces- countries assures uniform application of sary financial, human and administra- competition policy across all sectors and tive resources to equip separate agen- allows consideration of the impact of cies. Some argue that that it does not corrective or enforcement action within promote the development of in-depth one sector on another. Moreover, sector expertise, but this can be antitrust monitoring and enforcement is addressed by a degree of technical spe- distinctly separated from other sector- cialization within the agency. Basic specific regulatory aspects; this assures legal, economic, and financial skills and neutrality or objectivity and reduces the experience are, in fact, largely common possibilities of regulatory capture some- to various infrastructure sectors. times associated with sector-specific regulatory agencies. A new generation of transport agencies is being introduced, inspired by the inte- In spite of such advantages, having an grated U.S. model and led by Bolivia antitrust agency responsible for all sec- and Peru. Both countries have regulators is a significant burden on the tory agencies that are much more inde- agency, itself, because of the array of pendent from policy-makers. The agen- cases that it may need to pursue. cies cover all transport sectors and have Moreover, specialists assigned to partic- their own sources of funding. They also ular cases may not have specific indus- rely on this funding to subcontract for try expertise; specialists with back- skills that they do not have in-house. To grounds in commercial advertising prac- ensure good coordination between the tices, for example, may be assigned to agency monitoring competition and the pricing collusion cases related to the transport regulator in Peru, one of the automobile industry; individuals who members of the Transport Regulation are experts in grocery store pricing prac- Board is also a member of the tices may be assigned to maritime termi- Competition Commission.22 nal operator cases. This approach means that a cadre of specialists will not Atypical regulatory approach is one in be developed to the extent that assur- which countries monitor the port sector ances can be given that they will make a through an agency established to moni- decision based on analyses reflecting a tor and enforce antitrust law generally. thorough understanding of the sector.

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An alternative approach, therefore, tial for a user to sit in judgment over a could be to establish an antitrust prac- customer or another competitor, giving tices office within an agency already rise to conflicts of interest. responsible for planning, development, and regulation of the sector, but with Advisory bodies should be considered ratemaking independence seriously as sources of input to the port regulatory entity. They offer a degree of How can the regulatory entity best transparency and inject analysis and encourage direct participation or input debate in discussions that previously from port users? would have taken place in the secrecy of a ministerial cabinet. The advisory body Consumers, both individuals and busi- can see its role and influence increase nesses, are not typically heavily when the authority competent to make a involved in the port regulatory process, specific decision is not only forced to even though their input can be critical to seek its advice and take it into account, efficient service where the regulator has but also to justify any departure from only limited means of acquiring infor- such advice. Furthermore, for certain mation. Final consumers are often the matters, the competent authority may best monitors of service quality. Ways not be allowed to reach a decision going to obtain consumer feedback include against the opinion or advice received. establishing user advisory boards or having user representatives on port How can the regulatory entity's inde- authority boards. In Sri Lanka, input pendence be protected from short-term from port users and service providers political pressures and from the undue was a key element underlying the speci- influence of port operators and service fication of a proposed port regulatory providers? board (see Box 14). The independence of a regulatory body While providing a formal basis for user is worth little unless it is upheld against feedback can be useful to operational undue influence by the regulated indus- regulators, applying it to an antitrust try or by unreasonable political inter- regulator, as done in the Sri Lanka case, vention. Cases of regulatory capture by should be discouraged. User input, or the industry are not uncommon. The input by other interested parties, will problem is particularly acute where reg- often be sought by regulators during the ulatory agencies are set up as part of the investigation associated with an alleged civil service in countries where staff is violation. Under these circumstances, not adequately compensated. By alleged violators, complainants, and removing regulatory staff from civil other interested parties are typically service constraints, governments may given the opportunity to express their remunerate them in ways that better views and present evidence during the protect them from industry capture and case disposition process. If a port user that allow the agency to attract qualified sits as a regulator, as the Sri Lankan leg- candidates, hence enhancing the "profes- islation proposes, this creates the poten- sionalization" of the regulatory function.

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Box 14

A Simple Port Regulatory Structure for Sri Lanka

As part of the port modernization process undertaken in Sri Lanka in 1998-1999, a simple but effective proposal was formulated and embedded in the signed concession agreement for Queen Elizabeth Quay, which includes the establishment of a small regulatory Commission to resolve competitive issues concerning public and private port operations.The establishment of the commission in a period of 5 years (before 2003) will provide private port operators and private sector participants/investors with reassurance that a fair and transparent process would be available to resolve competitive issues. The objectives of the Commission are:

• To encourage and promote fair competition between all port operators, be it public or private, and to create an atmosphere of confidence for investors in port services and facilities:

• Upon complaint of any interested party, to judge disputes concerning these parties in an impartial and non-discriminatory maner taking into account the particular conditions of Sri Lanka, principles of equity and equal opportunity, revenue adequacy and common practices in the industry and other criteria the Commission shall deem appropriate;

• In response to complaints from interested parties, to regulate tariffs of port services based on transparent and objective criteria of rate reasonableness, in the event that specific tariffs are proven before the Commission to be incompatible with the principles of fair competition or with the common practice of the industry. The Commission would not interfere, at its own initiative, in the tariff setting of public or private commercial legal entities carrying out activities in any port area in Sri Lanka.

• To act upon complaints from users of Sri Lanka port facilities that carry out legal commercial activities related to shipping, transport of passengers and transport and/or storage of goods, regarding the way public services are being provided by SLPA and to direct under threat of penalty that SLPA correct the way it provides public services.

The Commission will consist of six regulators who will serve a single, six-year term. The terms of the regulators shall be staggered so two new regulators will be appointed every two years. The Minister for Ports, Rehabilitation and Construction will appoint the regulators based on nominations received. The Chairman and one regulator shall be appointed from lists nominated by the Sri Lanka Ports Authority; one regulator each from nominations by a representative organization of shipping agents, an organization of private terminal operators, the Sri Lanka Chamber of Commerce and the Arbitration Institute of Sri Lanka.

Proceedings will be advocative. Interested parties shall have an opportunity to present facts and arguments in support of their interests before regulators. Proceedings will be open to the public and transcripts of evidence presented and discussions held during proceedings will be maintained for public review. The decisions of the Commission will be reached by majority decision. Each decision will be accompanied by a set of findings that explain the basis of the ruling and clarify issues of administrative law and precedent.

Decisions are binding on parties to disputes. An appeal of the findings and directives may be submitted to the Chairman of the Commission; the sole basis for appeal shall be the failure of the Commission to uniformly and equally apply its principles of its own administrative law. The Commission shall have the power to apply civil sanctions and penalties which devolve from the power of the Minister for Ports, Rehabilitation and Reconstruction.

Rules need to be laid down concerning from undue industry influence is to be potential conflicts of interest among the achieved, then competition and opera- regulator’s staff (for example, by pro- tional regulation should be assigned to hibiting former staff of the regulatory two different entities. Traditionally, a agency from working for a regulated public port entity had full responsibility operator for a specified period after for administration and operation of the leaving the agency). If independence port sector. This included regulating

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operational practices applicable to navi- Box 15 gation and vessel calls as well as providing the full range of cargo handling and Safeguards for Creating an vessel services. In a privatized setting, 23 the port authority (landlord form) will Independent Regulatory Body retain operational regulation responsibility in a privatized setting, along with Creating an independent agency, no easy task in any setting, is even more challenging in countries with a limited other functions associated with its own- tradition of independent public institutions and limited ership of facilities (e.g., infrastructure regulatory experience and capacity. Measures that can maintenance, lease management and aid in establishing an independent agency include: monitoring for compliance, etc.). • Provide the regulator with a distinct legal mandate, Today’s modern port authorities have a free of ministerial control, with an independent board. certain degree of independence, many having the authority to engage in con- • Establish minimum professional criteria for appoint- tracting and leasing, setting their own ment. capital and operating budgets, tariff setting (for port authority charges), and • Involve both the executive and the legislative hiring and firing, all without the need branches in the appointment process for approval from other government entities. In the discharge of many of • Appoint regulators for fixed terms and protect them these duties, port authorities are in con- from arbitrary removal. tact with port operators on a frequent • Stagger terms so that they do not coincide with the basis. election cycle, and for a board or commission, stagger the terms of the members. Similar independence can be accorded the competition regulation agency. Box • Exempt the agency from civil service salary rules 15 enumerates a number of strategies that make it difficult to attract and retain well-quali- that can be used to ensure a more inde- fied staff. pendent agency culture. Two of the most critical factors are independence • Provide the agency with a reliable source of funding, usually earmarked levies on regulated firms or relative to budgeting and case disposi- consumers. tion. As Box 15 notes, it is imperative that the competition agency develop In addition, persons appointed to these positions must budget independence, as the power and have personal qualities to resist improper pressures and inducements. And they must exercise their authority independence of the agency can be lim- with skill to win the respect of key stakeholders, enhance ited by the budget process itself. the legitimacy of their role and decisions, and build a Agencies require funds to operate, and constituency for their independence. executive and legislative review can exert powerful influence over agency actions. Retribution, in the form of therefore, for the competition regulatory budget cuts, can be taken against regula- body to enhance its independence by tors if their decisions or functions are securing at least a portion of its budget politically unpopular. It is possible, from fees assessed on port operators.

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A critical aspect of regulatory independ- Box 16 ence is the ability to reach decisions on cases based on a fully developed public Reconciling Independence with record. Such decisions should not be Accountability24 affected by other than the evidence and Striking the proper balance between independence and data collected in the course of the accountability is notoriously difficult, but the following agency’s monitoring responsibilities and measures to do so have been adopted by a growing in investigating complaints, which may number of countries: include testimony as well as data collec- • Mandating rigorous transparency, including open tion and review of proprietary informa- decision making and publication of decisions and tion that may be requested of the the reasons for those decisions. alleged violator. This suggests also that the industry need not be informed of • Prohibiting conflicts of interest. which professionals within the agency are assigned to do the analysis of a par- • Providing effective arrangements to appeal the ticular case, although the agency would agency's decisions. assign a contact person during the course of case disposition. This • Providing for scrutiny of the agency's budget, usual- anonymity can contribute towards the ly by the legislature. independence of decisions related to a • Subjecting the regulator's conduct and efficiency to case and reduce the opportunity for scrutiny by external auditors or other public watch- industry and political forces to unduly dogs. influence them. • Permitting the regulator's removal from office in Independence needs to be reconciled cases of proven misconduct or incapacity. with measures to ensure that the regulator is accountable for its actions. Checks possible to recruit and retain better-qual- and balances are required to ensure that ified staff and to hire external consult- the regulator does not stray from its ants. mandate, engage in corrupt practices or become grossly inefficient (Box 16). Much of the work traditionally performed by regulators lends itself very How can requirements for staffing and well to contracting out to private technical capabilities be met? experts. Complex regulatory functions need to be performed professionally. Many developing countries confront a Where limited administrative capacity is challenge in assembling experienced a constraint, at least in the short and professionals to staff a regulatory medium term, contracting out of regula- agency. Regulatory agencies have limit- tory tasks should be considered. ed resources and are often unable to attract qualified people. The ability of Governments and regulators can, and independent agencies to sidestep civil often do, hire consultants, advisers and service salary restrictions and to have experts to assist them in all aspects of access to earmarked funding makes it their regulatory tasks. Such contracting

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out can be taken one step further and Step 4: Determine degree of regulatory formalized through, for example, per- discretion formance audits or certifications performed by independent verification A key question in designing a port regu- companies under contract with the regulatory system is to determine how much lator. Auditors could be asked to certify discretion should be granted to regula- that information provided by the regu- tors. lated port operators (including perform- Discretion helps regulators respond flex- ance targets) is fair and reliable. The ibly to changing conditions, but it also verification company will base this opin- creates regulatory risks for private part- ion on checks that they have performed ners and may, therefore, discourage their and on their assessment of the systems participation or raise the price of their the companies established to produce involvement. A delicate balance needs the required information. In addition, to be struck between allowing regulato- they could be asked to certify that the ry discretion and developing very tight- regulated company is in compliance ly specified contracts that will have to with the legislation in effect, and if not, be renegotiated when unexpected to determine the degree of noncompli- changes occur. ance and the factors that may have contributed to it. Their task could also Once a contract has been awarded to a include surveys of port user satisfaction. private company, it is that company’s job to run the business. This may seem Finally, verification companies could an obvious point. But, experience sug- measure the regulated companies' per- gests that great care is needed to ensure formance against key parameters, pre- that regulators do not interfere in the pare time series showing trends, and day-to-day management of the port. compare these results with international Regulations should focus on desirable norms. But, performance comparisons public interest outcomes, not on the spe- require highly knowledgeable experts to cific steps taken to achieve these out- do proper performance benchmarking. comes. For example, it is the regulator’s For example, to explain why a terminal task to monitor whether the stated per- achieving 20 container moves per hour formance standards are met. It is the may be a much better performer than a operator’s task to decide what technical terminal achieving 25 container moves measures and operating practices are per hour requires in-depth knowledge needed to meet the standard. When a of the business and full availability of all government specifies the regulator’s required information.25 None of these duties and decides on the appropriate functions implies any discretionary deci- staffing and skill mix for the regulatory sion-making on the part of the auditor. agency, it must have a clear understand- What such audits would do, however, is ing of the dividing line between regula- provide the decision-makers with a tion and operational management. sound analytical basis for their decisions. 26 When discretion is retained on tariffs or

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other issues of concern to investors, the er, this commitment needs to be credi- challenge is to manage it in a way that ble. Credibility could be enhanced by minimizes the risk of misuse. The exer- provisions in the privatization agree- cise of discretion needs to be insulated ments allowing the company to auto- from short-term political pressures and matically adjust its tariffs based on a other improper influences and to be given formula, or by an undertaking based on competent analysis. that the government will compensate the operator for any negative impact Entrusting regulatory discretion to min- that results from government rejection isters with broad authority often will not or delay of a contractually agreed tariff meet these tests, particularly when the increase. government continues to own other port enterprises. In this case, there will be no Step 5. Identify appropriate regulatory arm's-length relationship between the tools and mechanisms regulator and the government-controlled firm, and there may be concerns The pricing regime, particularly the tar- that, in exercising discretion, ministers iffs and their adjustment formula, is typ- will favor the state enterprise over rival ically a cornerstone of the economic reg- private firms. But even if the govern- ulatory system. It will determine the ment has no ownership role, ministers return investors can expect and the will still be subject to short-term politi- incentives they may receive to provide cal pressures, and changes in regulatory quality service. policy. Restrictive civil service rules in many countries also make it difficult for The chosen tariff formula must be one ministries to attract and retain well- that can be effectively applied by the qualified professional staff. What is competent authority. This presupposes, required is an agent at arm's length from in particular, that the information need- political authorities, regulated port ed by the authority to perform its func- firms, and consumers. Organizational tion is available, that the authority can autonomy helps to foster the requisite require the regulated enterprise to dis- expertise and preserve those arm's- close such information, and that it can length relationships.27 check its accuracy and reliability. The degree of complexity of the price adjust- Before they can calculate the price they ment mechanism thus should take are prepared to offer, investors will want account of the regulatory agency’s tech- to know the regulatory system under nical resources and capacity. In other which the company will operate. They words, the regulatory mechanism will also form a view on how this should be tailored to the specific charac- regime can be expected to evolve in the teristics and constraints of the country years ahead. To reassure investors, the and sector concerned. government may have to promise not to alter the regulatory system substantially, Traditionally, governments have relied or at least not to do so to the detriment on rate-of-return regulation as the pri- of the investors. To be effective, howev- mary instrument of economic regula-

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tion. In other words, governments have period minus a percentage that takes generally guaranteed to port operators into account expected productivity that they would recover their costs gains. Box 17 presents a comparison of (within very general guidelines) and get the benefits of price caps and rate-of- a mark-up to reward investors; thus, the return regulation. label cost-plus regime. These regimes, however, do not give strong incentives Box 17 to operators to cut costs. The introduction in the U.K. of price caps changed Price Cap vs. Rate-of-Return this by showing that the regulatory Regulation30 regime could be designed to minimize costs. Price caps allow the operators to In practice, price cap and rate-of-return regulation are less different than they might seem. First, a rule like RPI- keep a portion of the cost savings they X considers only how prices should be changed from realized, with part of these savings year to year; it doesn't tell a regulator how to set them in being shared with port users, and some- the first year. A regulator wanting to use price cap regulation for a new service would need to set the initial times governments. In many countries, price in some way, and one obvious option is to consider hybrid systems have been developed, the price the firm needs to charge to earn a satisfactory which result in some degree of immedi- rate of return. Second, a price cap needs to be periodically reviewed; a regulator cannot reliably predict what ate rent sharing at the beginning of the changes in productivity will be possible in say, ten years. period for private sector operations.28 In the United Kingdom, price caps typically are reviewed every five years. And during a review, the regulator natu- Rate of return regulation allows the reg- rally takes into account the regulated utility's rate of ulated company to charge prices that return. If it is too high, the price cap is likely to be reduced; if it is low, the price cap may be relaxed. would cover its operating costs and give it a fair return on the fair value of its But as long as price cap reviews are sufficiently infre- capital. While rate-of-return regulation quent (say, every five years), price cap and rate-of-return regulation should have different effects on the behavior gives operators little incentive to cut of regulated firms. In particular, a price cap regime sub- costs, it protects investors in risky envi- jects businesses to more risk. For example, under price ronments and may persuade some of cap regulation, if a firm's costs rise, its profits will fall because it cannot raise its prices to compensate for the them to bid for deals they would not cost increases at least until the next price review, which otherwise have considered. A problem may be several years away. Under rate-of-return regula- with this regime is its demanding infor- tion, however, the business would seek--and typically be mation requirements. To allow regula- granted within a year or so--a compensating price rise, so its profits would not change much. But if the firm's tors to determine reasonable rates of costs fall, the price cap regulation is more advantageous return, the regime places them in a posi- to the firm than rate-of-return regulation, because it tion to make decisions about the wis- would retain more of the resulting benefits as profits. Thus, under rate-of-return regulation, consumers bear dom of investments and operating pro- some of the risk that firms bear in price cap systems. The cedures, confusing the role of managers difference in impact means that firms subject to price and regulators.29 cap regulation have a stronger incentive to lower their costs because they keep more of the cost savings than they would if they were subject to rate-of-return regula- Price-basket controls such as the RPI-X tion. But the increased risk they bear tends to raise their formula used in the U.K. limits cost of capital. tariff/price increases to the increase in the retail price index (RPI) of a 12-month

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One difference between the RPI-X and growth of demand, and might adopt a the rate-of-return formula is that the price control that seems slightly gener- administrative burden of the former is ous on the base case, because otherwise lighter, because it is less dependent on the company would be in a difficult information supplied by the regulated position if the alternative assumption enterprise itself, requires less verifica- became true. Finally, if a company tion on the part of the regulator, and knows that a formula will be used in a allows the regulator's discretionary mechanistic manner, it will have an interventions to be spaced more widely. incentive to attempt to manipulate the Some argue, on the other hand, that the inputs to the formula. It may be that administrative burden of price caps giving some discretion to the regulator maybe higher rather than lower, because can reduce this incentive. This discre- in the end regulators need to perform tion should not be excessive, however, the same analysis as required for rate-of- because the company must remain con- return regulation, and they must fore- fident that it can recoup its investment, cast productivity improvements over the but is should also allow the regulator to next four or five years.31 use his judgment of what is fair under a particular set of circumstances, rather In many ways, the biggest difference than simply blindly following a set of between price controls and rate-of- rules.32 return regulation is one of emphasis. Regulators must not ignore the rate of Revenue-yield controls allow the regu- return when they reset a company's lated company to set tariffs as long as price cap, but the price cap is an indi- the total revenue or revenue per unit of activity stays within limits established rect, rather than a direct, control on the by the regulatory body. An advantage rate of return. Rate of return regulation of this approach is that the regulator has depended on formulae designed to does not have to specify or review indi- ensure that the regulated company vidual port tariffs. Disadvantages receives the right amount of revenue, include the possible fluctuation of tariffs and it has often been bogged down in as the regulated firm seeks to earn the legal arguments. The formulae are only maximum revenues permitted; the com- a guide to the level of the price control, plexity of setting the maximum allow- however, and still leave room for judg- able revenue per unit of activity; and the ment. The regulator must decide difficulty in forecasting demand, if the whether to set prices so that they equal upper limit is based on total revenues.33 the company's predicted costs at the end of the review period or over the period If several ports or companies within a as a whole. The regulator may look at port are regulated together, the regulator the company's cash flow, as well as the may be able to make "yardstick" com- discounted value of its costs and rev- parisons among them. If all entities face enues. The regulator may use formulae the same operating conditions, they to check the impact of alternative could, in theory, achieve similar levels of assumptions about factors such as the costs. The regulator, then, could calcu-

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late the average cost among them (either standards (or minimum thresholds) over the whole group or among the expected of the concession holder dur- most efficient companies) and set price ing the life of the agreement. These limits based on this level (although one thresholds may change in accord with should take into account that terminals the investment obligations scheduled have very different sizes and hence very during the term of the agreement. For different unit costs). Each company, example, when a facility is first turned then, has an incentive to reduce its costs, over to the operator, performance stan- since this will not affect its allowed rev- dards should consider the technology enues. available in the port at the time of the agreement. This effectively means that Step 6. Specify operating and financial the performance standards should be performance indicators regularly reconsidered and possibly In an ideal competitive setting, market revised. dynamics will force ports to offer effi- When considering the use of perform- cient services at the lowest possible ance standards, it is helpful to view port costs. But in many cases, port com- services as a production process. This petion may be insufficient to induce a process refers to the range of services positive effect on port performance. For provided to the vessel and cargo from reasons explained elsewhere in this the port’s entrance buoy to the berth Toolkit, a variety of factors, particularly and on to the gate, and then from the limited cargo volumes and the required gate to the berth and back out through levels of specialization (i.e., limited the port’s entrance buoy. Box 18 shows cargo volumes for the different termi- the "production" process for a typical nals/port facilities), will affect a coun- port. At the port’s buoy, the marine try’s options to encourage competition. pilot will board the vessel, which may Low cargo volumes generally will either or may not anchor, depending on berth greatly restrict the number of terminal operators providing services, or may availability. The vessel then proceeds to enable competition for vessel stevedor- the berth, where a tug will assist in the ing while retaining the public sector’s vessel’s berthing operation. Line han- monopoly over the yard or storage oper- dlers stand ready to tie the vessel to the ation. Therefore, in environments where berth, following which gangs will "ideal" levels of competition cannot be appear to provide the vessel with steve- established, regulators must seek ways doring and quay cargo-handling servic- to replicate the conditions that discipline es (stevedoring refers exclusively to the competitive behavior. One of these handling of the cargo on board of the ways is through regulation of service vessel). Once the loading/discharge performance. and lashing operations are complete, the line handlers will reappear to untie the Regulators, typically through provisions lines, the vessel will receive a tug assist in concession, operating, or lease agree- once again in the de-berthing operation, ments, will incorporate performance and a pilot will re-board the vessel to

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guide it to the entrance buoy for the ves- allowing for the calculation of a variety sel’s departure from the port. of parameters, also shown in Box 18, that the industry uses to calculate per- The vessel may be delayed at each step formance. in the production process, which in turn affects the total time (referred to as port There needs to be a clear nexus between time) a vessel spends in the port. For the parameters being measured and the example, on arrival at the entrance buoy, tasks being performed by and under the the vessel may have to wait for the control of the operator. The scope of pilot’s arrival, a berth may not be avail- services provided by the operator is dic- able for the vessel, a tug may not be tated by the concession agreement. For readily available for the berthing opera- example, some operators may be given a tion, stevedoring and cargo-handling concession covering all of the services gangs may not be standing ready at the between the entrance buoy and the gate. vessel’s assigned berth, a crane may not This means that the operator will pro- be available for the vessel’s hatch vide pilotage and tug assist as well as all removal, a crane may break down dur- of the services conducted within the ing the loading or discharge operation, confines of the terminal. This would and there may be non-operational times suggest that the regulator can reason- (i.e., times when work cannot proceed ably apply indicators that include these because gangs cannot be recruited as, services. The regulator, therefore, must for example, in ports where only one or be careful in its selection of performance two shifts per day are worked or where measures. The regulator should be sen- no work is carried out Sundays), and so sitive to what is "controllable" and what on. Each of these events is associated is not from an operator’s point of view. with times, which, when summed, will For example, the "port accessibility" result in the vessel’s total time in port. parameter may be affected by the gov- In addition to these, the vessel may be ernment’s efficiency for clearing ship’s vulnerable to a number of uncontrol- documentation. The time spent for this lable factors that may substantially purpose can greatly skew the perform- increase the vessel’s port time, such as ance of the operator, who is responsible having to wait for high tide at the for other elements that define port entrance channel, inclement weather, accessibility, such as pilotage and tug and labor disruptions.34 services. Therefore, what is "acceptable In the port planning process, analysts performance" from the regulator’s point will frequently assess the relative per- of view should consider only the factors formance of their ports against other that this operator can control. One ports in the region. They do this by should not lose sight of the fact that developing a series of standardized indi- indicators will only work if they have cators that reflect the degree of efficien- been set for specific tasks/operations cy at each step of the port operation. As and take into account the many factors Box 18 shows, the times at which each that can influence performance. On the step starts and stops are documented, other hand, the terminal operator may

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Box 18

port time (t8-t1)

gross berth time (t7-t4)

net berth time (t6-t5) buoy out

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

t1 t2 t3 t4t5 t6 t7 t8

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

t9 t10 t11 t12

labor time net-net gang time

net gang time (t11-t10)

gross gang time (t12-t9)

be given responsibility only for services period of time, usually referred to as rendered between berth and gate, mean- weekly, twice-weekly, biweekly, fort- ing that the regulator would exclude nightly, or ten-day services (in the case port accessibility as a parameter. of liner and feeder service trades). Increasingly, to maximize the utilization An important factor for a country’s ship- of their largest and most expensive ves- pers is vessel service availability, which sels, shipping lines use a system of feed- comprise connectivity and frequency. er vessels and transshipment ports to Connectivity refers to the number of sort and redirect cargo. From a ship- times a shipper’s cargo is transferred or per’s perspective, this may improve otherwise handled en route to its desti- (increased frequency) or degrade nation. Generally, the greater number of (increased transit time and damage) transshipment moves the cargo under- service. goes, the more time the cargo will take to reach its final destination. Frequency Assuming volumes justify it, a port may refers to the number of calls a vessel benefit from both connectivity and fre- makes to the port within a prescribed quency if it can minimize the vessel’s

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port time. If the carrier is subjected to should consider incorporating gross congestion or delays, then it may avoid berth productivity, which refers to the a call, minimize its calls, or impose number of moves (in the case of contain- penalty charges as part of its freight bill ers) or tons (in the case of bulk cargoes) to shippers. Therefore, performance handled in a unit of time, usually clauses within the concession agreement expressed in moves/hour or tons/hour. should focus on indicators that address In addition to the time in which the ves- the vessel’s time in port (or at the termi- sel and its cargo are actually worked, nal, depending on the operator’s gross berth time includes the time the responsibility). As earlier noted, the vessel waits for the gang, clauses should also recognize the lashing/unlashing time, and other times responsibility and span of control associated with the preparation required accorded to the operator in the conces- to perform each activity. sion agreement. For example, a terminal operator should not be penalized if port The technology used is an important time was less than desirable because of factor in determining what the number inefficiencies associated with pilotage moves/hour should be. For example, a (which the operator does not provide) terminal with no ship-to-shore crane and not the operation at the berth. must rely on the ship’s own gear to handle the cargo. In the container trades, Regulators should be concerned with a acceptable productivity levels may be on vessel’s time in port, regardless of the the order of 10-12 moves per gross hour operator’s responsibility, if for no other per crane for such operations. In a port reason than to have the ability to ascer- with mobile cranes, expected productivi- tain the causes of undue vessel time. In ty can be on the order of 15-18 moves terms of imposing performance stan- per gross hour per crane, while gantry dards on operators, however, the regula- cranes can operate at 20-30 moves per tor should focus on what occurs at the gross hour per crane. berth, as the vast majority of countries that have undertaken port privatization Establishing such thresholds for bulk have awarded concessions to operators handling facilities is more difficult. for activities at the berth and within the There is a plethora of technologies avail- terminal’s backup area. Indicators that able for solid bulk handling that offer a focus on berth performance also reflect wide productivity range. For this rea- what is happening on the vessel (while son, the regulator may consider regulat- at berth) as well as in the backup area of ing in accord with berth congestion fac- the terminal.35 Such measures should be tor or ship waiting rate, which compares general in that the regulator is con- the time a ship had to wait for a berth cerned with the operator’s overall pro- compared to the time it actually spent at ductivity, and not with the productivity berth. Simply put, berth occupancy of every sub-activity and the incremen- denotes the total time a berth is occu- tal times associated with them.36 pied as a function of total available berth hours. An accepted standard For concession agreements, the regulator would be that the waiting rate for a full

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container vessel should not exceed 5 certainty (which lead to denying appeals percent, should not exceed 10 percent against regulatory decisions or limiting for a general cargo/breakbulk vessel, the grounds and timeframe for filing and 10-20 percent for a bulk vessel. In such appeals) should be balanced the event an operator exceeds this against those of fairness toward regulat- threshold, the operator could be ed entities (and consumers) and required to invest in more productive accountability of the regulator.37 technology to reduce the time that vessel would have to wait for a berth. In situations where private port investors and operators are concerned The performance threshold used by the that local conditions may not provide a regulator should, therefore, take into competent, fair and impartial appeal, account the technology available at the the regulatory framework may specify port, or envisioned as part of the that such appeals will be adjudicated by required investment program incorpo- an agreed upon international arbiter rated into concession agreements. In (Box 20). this regard, it is conceivable that the same agreement may have different per- Step 8: Incorporate regulatory details formance thresholds by berth in accord into laws and contracts with the port’s capabilities at different Often, a concession agreement or man- stages of an investment program. This agement contract contains most of the is because a port may have different regulatory provisions governing the per- technologies available at different berths formance of the private sector partner to at different times during the concession the contract. In deciding what regula- period, or vessels may simply choose tory elements the contract should cover not to use gantry cranes, which are rela- and in what depth, two questions arise:38 tively costly for smaller vessels. Box 19 lists some of the more common indica- • Is it possible and desirable to encom- tors used to measure port performance, pass all the necessary regulatory pro- and which may be appropriate for inclu- visions within the contract? sion in concession agreements. • If so, what degree of regulatory dis- Step 7: Establish an Appeals Process cretion should be available? and Procedures Though it is sometimes argued that a The design of an appeals regime should tightly written contract can remove the be a function of the specific institutional need for direct regulation, this is rarely setup and legal traditions of a country; the case. Even for a short-term manage- courts may play a role where they have ment contract, someone needs to be able or can reasonably acquire the expertise, to monitor performance against the con- integrity, and efficiency needed to settle tract, have the authority to allow minor appeals on regulatory matters. More variations in contract specifications, and generally, in the design of a regulatory arbitrate disputes between the company framework, the interests of speed and and its customers and between the gov-

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Box 19

Some of the more common indicators of port operating and financial performance included in management contracts and concession agreements are presented below. Often separate values for indicators will need to be specified corresponding to different major categories of port traffic and vessel types (i.e., containers, break-bulk, 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-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 vessels 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 divid ed by cargo tons.

Ship productivity indicator Total number of moves (for containers) or tons handled (for break-bulk 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 total number of vessel days in port.

Financial Measures

Operating surplus per ton Net operating income from port operations divided by total tonnage of cargo handled. handled

Charge per TEU Total charges for container handling divided by total TEUs handled.

Collected charges per Total collected charges as a percent of accounts billed (with 30-day lag). billed charges

ernment and the contractor. And for therefore limiting the degree of uncer- longer-term concession and BOT con- tainty for investors, users, and govern- tracts, it is usually neither possible nor ments alike). desirable to have highly specified con- Detailed, unambiguous and very specif- tracts, especially in countries undergo- ic contract conditions do have advan- ing rapid social, political, or economic tages. In particular, they help protect change (although one should aim to the private company from politically have as much detailed specification in motivated and frequent changes in serv- the contract as reasonably possible, ice requirements. By reducing revenue

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Box 20 cost of capital, and help the government strike a more advantageous bargain. International Arbitration39 But rigid contract specification also has International arbitration is a form of dispute settlement important disadvantages. Most obvi- under which the disputing parties agree to abide by the ruling of independent arbitrators, who are typically ously, it inhibits timely and flexible selected for their technical expertise in particular areas responses to changing social, economic as well as their reputations for integrity. International and technical conditions. It makes it dif- arbitration has a long history in international trade and ficult to fine-tune or improve on the investment, where proceedings are typically held in a original arrangements--an important neutral third country. While the cornerstone of arbitration is consent of each party, to be effective the decision drawback, because it is rarely possible or award needs to be enforceable in the country where to get everything right at the outset. In the losing party holds assets. This is generally achieved addition, highly specific contracts nor- by treating the award as equivalent to a judgment of a mally lead to a need for frequent rene- local court. gotiation, where the contract holder typ- International arbitration is a potentially important part of ically has a strong bargaining position the legal and regulatory framework for infrastructure pri- due to its superior command of infor- vatization in three main contexts: mation about the state of its business and government’s fear of service disrup- • Foreign investors will typically feel more comfortable submitting contractual disputes to a neutral tions. and expert forum than to local courts, which may be perceived to be biased towards local parties, The experience generally has been that prone to political direction, slow, less expert, and weak regulatory bodies have been given sometimes corrupt. too much discretion without sufficient • In some limited circumstances, arbitration may be policy guidance to take decisions on an alternative to creating a separate regulatory matters left out of the contracts. In agency.The key requirements would include that (i) developing countries, the combination the dispute in question relates to the interpretation of weak regulatory bodies and poorly and enforcement of a specific obligation, rather written contracts have resulted in an than the need to exercise a broader regulatory discretion in the public interest; (ii) political acceptance extremely large percentage of contracts of the decision does not require participation by a being renegotiated. The losers in these broad range of interests in addition to the disputing negotiations have usually been the tax- parties; (iii) the dispute in question does not require payers, as governments often end up urgent attention; and (iv) compliance with the arbitrator's orders does not require ongoing supervi- granting the private parties significant sion. financial concessions.40

• In some circumstances, arbitration may be adopted One solution is to use rule-based con- as an appeal mechanism from decisions of regula- tracts, since they tend to make regulators. As in the previous case, a key requirement will tion easier in the face of significant be that there is some reasonably objective standard that can be applied in determining the appeal. uncertainty. The challenge is to develop and incorporate rules that are fair and have reasonable information require- risk, such protection may help attract ments. This is one of the advantages of more bidders for the contract, reduce the price cap regulation.

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Box 21

Checklist of Regulatory Items for Port Operating Contracts

• Are the rules for establishing the level and structure of tariffs clear?

• Does the contractor have the freedom within specified limits to vary the tariff structure and levels?

• What are the procedures for raising tariffs? What is the frequency of updating? Is there any requirement for operating efficiency gains?

• Is the operator responsible for collecting all tariffs and charges?

• Will the tariffs be remitted to the government or retained by the operator?

• How will depreciation and taxes be treated in the rate structure?

• If the tariff adjustment method inflates individual cost components, is a locally published index available for each component?

• What are the trigger events that will allow the operator to adjust the tariff? Typical trigger events include significant variations in reference volumes, a change in the concession area, significant inflation requiring more frequent adjustments, and changes in tax and depreciation laws.

• Are the guidelines for tariff appeals to the regulatory authority clear and unambiguous?

• Will the concessionaire provide information as may be reasonably required by the regulator? What is the definition of reasonable?

• What are the mechanisms for independent verification of financial data, data on the condition of assets, and the achievement of performance targets?

• What are the provisions for market testing when the contractor subcontracts tasks or purchases services from associated companies?

• What is the goal of contract information requirements?

• What access will the regulator have to assets and records?

• Who will pay for independent financial auditors and technical auditors and who will be responsible for their selection and training?

• What are the provisions for submission of regulatory accounts and performance data and for disaggregated accounts to aid comparative competition?

• What are the requirements for publication of financial information and performance standards?

• Will the regulator require audits by an independent auditor? What auditing procedures will be used to confirm the tariff cost components?

• What technical information is the concessionaire required to report?

• What financial information is the concessionaire required to report?

The control of prices charged by a regu- service provider in which the two play- lated firm is often characterized as a ers do not share the same information. contest between the regulator and the The asymmetry of information places

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the regulator at a disadvantage. Thus regulatory requirements and institution- the regulator must define its information al capacity. requirements and data processes early in the design of the concession contract Under port sector reforms, many ports and transaction. And it should take have evolved into a landlord port advantage of the government's leverage authority where facilities are leased to during bidding to extract information private operators, who in turn directly from concessionaires and commitments provide their services to carriers and from them to provide continued flows of shippers. In this situation, private opera- information to aid tariff reviews. tors may provide services previously provided by the public port authority, SUMMARY AND CONCLUSIONS such as pilotage, tug assist, vessel stevedoring, storage and yard services. There is a strong public interest in Private operators will be motivated by ensuring that ports operate efficiently profit maximization objectives. They and safely, that fair and competitive may not necessarily provide facilities or services are provided, and that the port services that are of economical, environ- support and foster economic develop- mental or social value that conflict with ment locally and nationally. profit maximization. This creates the need for regulatory oversight to ensure Ensuring the efficient and competitive that the public interest is upheld. The functioning of a port is the scope of eco- scope of regulation depends on the nomic regulation of ports. Economic extent of competition that exists. regulation typically involves intervention in the functioning of markets in Factors indicative of the extent of com- terms of setting or controlling tariffs, petitiveness within the port sector revenues or profits; controlling market include: entry or exit; and assuring that fair and competitive behavior and practices are •Transport options–the competitive- maintained within the sector. ness of a country's port/inland transport system in terms of total system Decisions about reform strategy, indus- costs and available options; try structure and regulatory frameworks •Operational performance–competi- are closely linked. Therefore, regulatory tiveness of each port in terms of issues, options and their consequences capacity and level of cargo handling should be considered at the early stages services; of the reform process, and not left until other key decisions about reform strate- •Tariff comparisons–competitiveness gy have been made. As demonstrated by of each port in terms of level of port the reform experience in port and other charges sectors, to do so can increase the regulatory burden and cost, restrict the range • Financial performance–competitive- of options that may be available to the ness of each port in terms of its over- regulator, and risk incongruity between all profitability

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The lack of transport options, congested control both the vessel stevedoring and facilities, relatively high prices, and high yard/storage operation without any profits alone or together may encourage assigned areas terminal operators and other port service providers to breach the threshold of • Entering into short-term operating what may be regarded as "acceptable" agreement/lease/management con- competitive behavior. tract

Port sector reformers have two general Regulatory remedies include strategies to choose from in order to enhance port sector competition includ- • tariff filing and ing structural remedies and regulatory • setting of tariffs and rate of return remedies. Clearly, the preferred strategy thresholds is the one that results in more competitors. Therefore, port sector reformers, in To help design an economic regulatory contemplating port privatization, should policy for the port sector, the following strive towards structural enhancements principles should be considered: that increase the number of competitors before resorting to regulatory enhance- • Government should have a clear ments. Regulatory enhancements (par- understanding of the competitive ticularly economic regulation) are environment of the port sector. intended to enhance efficiency by cor- recting various market imperfections; • The regulator should clearly define essentially, they are aimed at forcing what form of economic regulation ports to behave as if they were compet- (e.g. rate of return or tariff setting) is ing in a perfect market. to be applied and under what circumstances. Structural remedies include: • Responsibilities for port operational • Introduction of new berths/termi- and competition regulation should nals be formally separated. Because of the risk of agency capture and the •Division of the existing port into ter- potential conflict of interest between minals the two forms of regulation, they •Division of port operations within should be separated by assigning the terminal by them to two different entities.

- privatizing the vessel stevedoring • Policy and case deliberations should operation, include the opportunity for affected parties to present their views. - assigning areas within the terminal to each stevedoring company, or • Decisions made by the regulator should be enforceable with recourse - allowing stevedoring companies to for appeal.

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Annex A. Port Tariffs: General Structure, Items, and Flow of Charges

As mentioned earlier in this module, tariff control is the most commonly used method for economic regulation of ports. Tariffs differ from port to port, as they tend to be a reflection of the services offered (e.g., container handling, tug assist, pilotage) the facilities being provided (e.g., gantry cranes, storage yard, sheds), the party that incurs the tariff charge (e.g., the carrier or ship’s agent, the shipper), and the basis on which a tariff item is calculated (e.g., pilotage charges based on the vessel’s gross registered tons, or vessel draught). Because of these differences, tariffs may seem highly fragmented and complex. But there is a core set of essential services required for handling ships and cargoes that all ports typically offer. These can be referred to as "basic" services. Regulators tend to focus on these services because they represent the bulk of the total charges and are commonly offered by all ports. Table A-1 shows the ranges of the per- centages of total port charges represented by a core set of services.

Table A-1. Relative weights of different port charges

Item Percent of total charges

Port tariffs on the use of infrastructure 5% - 15% Berthing services 2% - 5% Cargo handling 70% - 90% Freight forwarding 3% - 6%

Such services can be broken down into two categories:

1) Services to vessels. Basic ship services encompass the activities and related charges for ships entering/exiting the harbor and for berthing/de-berthing. These include: pilotage, pilot boat, tug assist (berthing/deberthing), line handling, and use of channel and navigation aids (harbor fee). The basic ship services also include the use of the related port facilities (e.g., dockage/berth occupancy) and of the general port infrastructure, usually covered by the port dues.

2) Services to cargo. The basic cargo services include three related activities: (a) transfer of cargo between ship and dock or storage; (b) transfer of cargo between storage and outside the gate; and (c) intermediate storage in the yard (in the case of containers) between the ship and yard transfers for a specified number of work days ("free time"). The related charges are for the use of labor, shore handling equipment, yard machines ("rental"), and port facilities ("use of installations" and "wharfage").

Figure A-1 shows the relationship of these charges to where they are applied within the typical container terminal.

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Figure A-1: Relationship Between Port Charge and the Location Where the Charge Is Incurred

In determining if tariff regulation is necessary, the regulator first has to identify the specific service and the service provider. In the traditional port, the public port authority was typically an operating port, meaning that the public entity provided virtually all of the basic services noted above. From a regulator’s point of view, this was a simple matter because of the public entity’s monopoly position over all basic services. Generally, one service provider would be regulated.

Today, many ports have evolved into a landlord port authority where facilities are leased by private operators, who in turn directly provide their services to carriers and shippers. In this situation, private operators may provide services previously under the domain of the public port authority, such as pilotage, tug assist, vessel stevedoring, storage and yard services. Because of this shift in service provider responsibility, the entire tariff system as well as the transaction process has changed. The port authority (or other government entity) will likely continue collecting a navigation charge or port due, and may also charge for dockage and gate service fees, depending on the structure of the lease with the operator as well as the port’s facility configuration.41 The port authority will also have a lease arrangement with the operator, who generally charges fees for the range of services provided from berth to gate (e.g., vessel stevedoring, yard handling/storage, etc.). Thus, the regulator has gone from single-entity regulation to potentially regulating a full range of services provided by a number of operators.42

Figure A-2 shows the evolving complexity that privatization has introduced from a transaction point of view. Under the public operating port, the transaction process was quite clear, as ports assessed charges to only two parties – shipping lines and ship-

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pers. Under a privatized port arrangement, charges are applied to operators, lines, and shippers by the port. In potential antitrust settings, therefore, the regulator needs to be concerned not only with the port authority’s charges, but also the many private operators providing the basic services, dramatically increasing the potentially regulated population. Figure A-2: Transaction Complexities Pre- and Post-privatization

Public Operating Port

Line

Port

Shipper

Privatized Port

Line

Port Operator

Shipper

Figure A-3 shows an actual case of the interrelationships of port charges in the port of Miami for containerized cargoes. The port is established as a landlord authority under local government jurisdiction (Miami/Dade County). At the time of writing, ship charges in Miami, like in all U.S. ports, include a special fee, called the Harbor Maintenance Fee, collected by the U.S. Federal government to cover dredging and aids to navigation. The charge is 0.125% of the cargo value, or about $63 per average box of $50,000 value. There is, however, a second charge called harbor fee applied by the

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local port authority, which is based on the ship's Gross Registered Tons (GRT). Dockage in Miami is also charged on the basis of GRT. Dockage charges are equivalent to about $20 per Load on Arrival (length of vessel x 24 hr).

Cargo charges in Miami include wharfage, at $1.70 per ton or the equivalent of $25.15 per 14-ton box. Cargo wharfage is billed directly to the line (carrier) which, in turn, incorporates the wharfage charge with the freight bill. There are two separate handling charges, ship handling (stevedoring) and terminal or gate handling. Ship handling is performed by private stevedores, collecting an average of $35 per move, excluding crane services. Terminal handling is performed by POMTOC, a private sector joint venture of all four local stevedores. POMTOC charges $49.87 per move, for any type of container, including empties. The charge for gantry cranes is based on an hourly rate of $450 per hour (straight time). The cranes are owned by the port authority, but operated by the private stevedores.

The port has no direct charging relationship with shippers, only with shipping lines (carriers) and operators. Shippers pay directly only the Federal Harbor Maintenance Fee.

Figure A-3: Port Charges in Miami, Florida43 (Average charge per container movement)

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

Gate/Yard Handling ($61)

Ship Stevedore ($66) Port Operator POMTOC 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 directly billed to shippers

=Charges for Auxillary Services Note: Amounts in parenthesis represent average charges per full domestic move for an APL ship.

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Figure A-4 shows how the flow of charges may differ from port to port. The Figure illustrates the flow of port charges for the Port Society of Cartagena, whose tariff reflects the operating arrangement in that port. In Miami, the facilities are administered by the local port authority. In Cartagena, as elsewhere in Colombia, the facilities are administered by a private sector company referred to in Colombian law as a port society. The port society’s primary responsibility is to operate the backup area (the area behind the berth), while private stevedoring companies handle the loading/discharge operation.44 Additionally, other private operators provide pilotage and tug services. These operators, along with the stevedoring companies, are charged an installation user charge by the port society. Unlike the Miami case, the Port Society has a direct charging relationship with the shippers and also charges the port operators (stevedoring companies) directly for berth and yard wharfage. Shippers are also charged directly for yard handling by the stevedoring companies.

The emerging complexities in privatized settings suggest that regulators will need to be more cognizant of how port services are provided and what party is charged by whom. It is conceivable that one country can have a variety of charge flow configurations depending on the operating arrangements in a particular port. As is shown in these two figures, depending on the extent of competition, it is possible that regulators will need to monitor the pricing practices of not only the port authorities, but also the various private parties engaged in port operations. Figure A-4: Port Charges in Cartagena, Colombia (Estimated Average Charge per Container Movement)

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

Cranage ($46) Port Wharfage Operator Berth Wfg. ($18) Ship Stevedore ($128) Yard Wharfage ($2) 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 Auxillary Services Note: Amounts in parenthesis represent average charges per full domestic move for an APL ship.

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Footnotes

1Source: Estimated values for 1998 based on data presented in UNCTAD, Review of Maritime Transport (UNCTAD RMT 98/1), 1998.

2The World Bank, Toolkits for Private Participation in Water and Sanitation, Module 1: Selecting an Option for Private Sector Participation, 1997, p. 20.

3"Terminal velocity", Containerization International, June 1997, p. 95.

4Return on Equity (ROE) = Net Income/Shareholders Equity; Return on Assets (ROA) = Net Income/Total Assets.

5Trujillo and Nimbela, Privatization and Regulation of the Seaport Industry, December 1998, p. 21.

6Perfect competition is a noble goal, but rarely achievable. While there are cases of markets with large numbers of sellers and buyers, these sellers and buyers are seldom fully informed about their alternatives; the information available to them may be of questionable reliability or costly to acquire, while at the same time there may be artificial restraints (e.g., government regulation of prices or resource mobility) that affect the competitive environment. Many might argue that the U.S. port sector represents a perfectly competitive market given excess capacity and a plethora of intermodal and port options. Many of these assets, however, either directly (e.g., construction grants) or indirectly (e.g., tax-exempt status on the interest on bonds issued to finance construction) are subsidized, thereby distorting the market supply in response to demand.

7But there are a number of cases where the mere presence of a private owner changed the efficiency of the port or the terminal because he introduced a very different company culture (e.g., Klang Container Terminal in Malaysia).

8The World Bank, Toolkits for Private Sector Participation in Water and Sanitation, Toolkit 1: Selecting an Option for Private Sector Participation, Annex 1, 1997.

9Economic Development Institute of the World Bank, Infrastructure Delivery: Private Initiative and the Public Good, 1996.pp xxi-xxii and pp. 54-61.

10In many ports, load-bearing capacities may be different at each berth. For example, one berth may be designed to handle the weight of gantry cranes on the berth’s apron, while other berths are designed to handle lower weight break-bulk cargoes. There are, of course, engineering solutions to expanding an apron’s capacity, requiring substantial investment. This investment may be justified with anticipated cargo volumes.

11Regulators differentiate between tariff filing and tariff monitoring. Tariff filing normally is required each time a service provider adjusts its tariff. The filing is a means of

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informing port users about generally available prices for services. This allows port customers to detect any abnormalities in pricing behavior (e.g., unjustified pricing discrimination) and, in the event such abnormalities exist to register a complaint with the regulator. In the event a complaint is received, usually for alleged discriminatory, collusive, or predatory pricing practices, the tariff filing requirement gives the regulator a pricing history to support its investigative efforts. Where the regulator perceives a relatively high risk of anti-competitive behavior, or if there is a history of violations on the part of one or more operators, then the regulator may monitor the tariffs that are filed, assessing for itself the anti-competitive impact of the new tariff at each filing.

12In some countries, setting the tariffs is distinct from approving tariffs. For example, in Nicaragua the operator (or cargo handling company) submits a tariff for approval through the Empresa Nacional de Puertos (the national ports authority), which reviews the tariff and forwards it for final approval from the Ministry of Transport and Infrastructure. EPN may attach comments regarding its assessment of the "fairness" and "reasonableness" of the tariff, but its role is not to assess the proposed tariff’s relationship or effect on industry competitiveness (this responsibility does not yet exist for any sector in Nicaragua). In Colombia, prior to its tariff liberalization in 1995, the Superintendente General de Puertos (SGP – the General Port Superintendent) set the tariffs (initially both minimum and maximum charges and eventually only maximum tariffs). In practice, the effect is the same, as the regulator "sets" the tariff by either dictat- ing one or approving one.

13The World Bank, Sustainable Transport: Priorities for Policy Reform, 1996, p.104.

14The World Bank, Sustainable Transport: Priorities for Policy Reform, 1996, pp. 86-87.

15Many port authorities, as part of their published tariffs, will impose operational regulations relevant to both carriers and terminal operators. Operational regulations can refer to a variety of topics, such as vessel reporting requirements, navigation rules within the port’ s jurisdiction, invoicing rules for port dues, information access rules (e.g., anchorage, vessel lighting, speed, etc.), port working hours, reporting procedures for environmental incidents within the port area, detainment rights for vessel damage to facilities, etc.

16This is an important point. There are basically only two ways for determining the basis on which tariffs should be set. The first is tariff benchmarking with other ports (or their operators) that operate in similar conditions. The second is to require the operator to provide audited financial data with careful consideration of the debt service obligations from investments. In this sense, the regulator would have to make certain assumptions about what the rate of return is and what rate is considered "reasonable." What the regulator considers reasonable may not adequately consider the initial investment risk that the operator made. A complicating factor concerns those operators that may offer bundled services, only one of which the regulator intends to regulate. The complexity here

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is derived from the ability to assign costs to each of these bundled services. Finally, operators always have a monopoly on their financial information. What they report will not necessarily be an accurate reflection of reality. Indeed, some operators may keep separate accounting books, one for reporting purposes and one for proprietary purposes. Because of the uncertainty and questions of reliability of data, regulators will often establish a min-max or max tariff that reflects the range of uncertainties associated with defining an operator’s cost structure.

17The steps, while presented in a logical order, do not necessarily need to be implemented in the sequence presented.

18Pierre Guislain, The World Bank, The Privatization Challenge: A Strategic, Legal and Institutional Analysis of International Experience, 1997, p 258.

19The World Bank, The Privatization Challenge: A Strategic, Legal and Institutional Analysis of International Experience, 1997, p 258.

20Elizabeth McCallum,"Privatising Ports: A Legal Perspective,"Privatisation International, November 1999, pp. 53-55

21For a more complete description see Kent and Hochstein, Port Reform and Privatization in Limited Competition, Maritime Policy and Management, 1998 Vol.25, No. 4, pp. 313-333.

22Antonio Eustache, The World Bank, Privatization and Regulation of Transport Infrastructure in the 1990s: Successes… and Bugs to Fix for the Next Millennium, 1999, p. 28.

23Warrick Smith, Utility Regulators-The Independence Debate, in The World Bank Group, The Private Sector on Infrastructure: Strategy, Regulation, and Risk, September 1997, p.23.

24Warrick Smith, Utility Regulators-The Independence Debate, in The World Bank Group, The Private Sector on Infrastructure: Strategy, Regulation, and Risk, September 1997, p.23.

25(See in this respect Module C.63. of the International Labour Organization’s ‘Portworker Development Program’ - PDP).

26Pierre Guislain, The World Bank, The Privatization Challenge: A Strategic, Legal and Institutional Analysis of International Experience, 1997, pp. 280-281.

27Source: Warrick Smith, Utility Regulators-The Independence Debate, in The World Bank Group, The Private Sector on Infrastructure: Strategy, Regulation, and Risk, September 1997, p.22.

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28Source: Antonio Eustache, The World Bank, Privatization and Regulation of Transport Infrastructure in the 1990s: Successes… and Bugs to Fix for the Next Millennium, 1999, p. 24-25.

29Phil Burns and Antonio Estache, Infrastructure Concessions, Information Flows, and Regulatory Risk, The World Bank Group.

30Ian Alexander and Timothy Irwin, Price Caps, Rate-of-Return Regulation, Risk and the Cost of Capital, in The World Bank Group, The Private Sector on Infrastructure: Strategy, Regulation, and Risk, September 1997, pp.33-34.

31The World Bank, The Privatization Challenge: A Strategic, Legal and Institutional Analysis of International Experience, 1997, p 268.

32Richard Green and Martin Rodriguez Pardina, Resetting Price Controls for Privatized Utilities: Manual for Regulators, Economic Development Institute of The World Bank, 1999, pp. 11-12.

33Richard Green and Martin Rodriguez Pardina, Resetting Price Controls for Privatized Utilities: Manual for Regulators, Economic Development Institute of The World Bank, 1999, p. 64.

34The operator, itself, may also be affected by factors outside its control, such as ship size, number of moves for loading/discharge, type and number of hatch covers, vessel dimensions (width and depth determine the path of the container’s movement), and stowage plan.

35Berth performance is a reflection of both efficiency at the berth as well as efficiency for the operations behind it. Yard congestion itself can cause delays in vessel loading and discharge.

36Operators, on the other hand, should be concerned with these incremental measures because they point to underlying causes for overall productivity performance.

37The World Bank, The Privatization Challenge: A Strategic, Legal and Institutional Analysis of International Experience, 1997, p 280.

38The World Bank, Toolkits for Private Sector Participation in Water and Sanitation, Toolkit 1: Selecting an Option for Private Sector Participation, Annex 2, 1997, p.33.

39Michel Kerf and Warrick Smith, World Bank Technical Paper No. 337, Privatizing Africa's Infrastructure: Promise and Challenge, 1996, p.44.

40Source: Antonio Eustache, The World Bank, Privatization and Regulation of Transport Infrastructure in the 1990s: Successes… and Bugs to Fix for the Next Millennium, 1999, p. 29.

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41For example, the port authority may have a general perimeter gate in which initial access is cleared by port authority personnel. An "interior" terminal gate is under the control of the operator that leases the facility.

42The extent to which regulation is necessary, of course, is dependent on the risk of monopolistic or oligopolistic behavior on the part of both the port authority as well as the firms. Even in a post-privatization environment, the port authority may still be considered a monopoly by virtue of facility ownership (e.g., the landlord model in an environment where there is no interport competition) and in terms of its charges for navigation, wharfage, and dockage (assuming it charges these). Additionally, as suggested elsewhere in this chapter, even in non-monopolistic settings there may still be a need for antitrust concerns for specific services in light of the highly concentrated markets that have resulted post-privatization.

43Note that the figure distinguishes between charges for basic services and "auxiliary" services. The latter refers to a numer of services that are considered ancillary to the basic business of the port, which is handling domestic cargoes and the vessels that carry them.

44This arrangement is changing, however, as the Society is now providing vessel stevedoring services for vessels calling to berths where the Society’s gantry cranes are located.

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

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

HE551.P757 2003 387.1'068—dc21

2003045093 42705_MOD7_COVER_AGS 5/27/03 8:30 AM Page I

PORT REFORM TOOLKIT

MODULE 7 LABOR REFORM AND RELATED SOCIAL ISSUES

THE WORLD BANK 42705_MOD7_TEXT_AGS 5/27/03 8:06 AM Page 1

MODULE 7 LABOR REFORM

OBJECTIVE OF THE LABOR REFORM ment, evaluate alternative ways of MODULE approaching labor reform, and how to pursue reform in a way that maximizes This Labor Reform Module is one of eight efficiency and minimizes labor dislocation modules comprising the Port Reform and risks to potential port investors and Toolkit. The Toolkit is designed to help operators. government officials and private interests, alike, navigate the process of port reform CONTEXT FOR LABOR REFORM to achieve more modern, efficient, and financially viable seaports and related Port labor – from crane and equipment intermodal facilities and services. operators to stevedores to harbor pilots – is a key to success or failure in today’s The Labor Reform Module deals with one competitive port and international trade of the most critical elements of port environment. Too often, port labor is reform – the many labor-related issues blamed for a port’s failure to play an associated with port ownership and oper- appropriate and productive role in port ations. It is designed to help government operations and, beyond that, in a nation‘s decision makers identify the key forces economic development. Over-staffing, affecting port labor today, understand the outdated and inefficient work rules, poor need for reform in a competitive environ- skills and training, inflated pay scales,

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and unreliability are among the most equipment. In developing countries, prominently cited problems contributing where ports were operated for the most to high costs and inefficient operations part by the public sector, a combination in many ports. To be fair, outdated of factors such as surplus labor, strict management practices can sometimes appliance of union discipline, limited add to these problems by overlooking resources to acquire modern cargo han- the benefits of a more participatory dling equipment, poor training, and approach to port management. government policies to maintain or create employment contributed to over- Ports and port labor do not exist in iso- manning in ports. lation. They are an integral part of, and in turn are affected by, national econom- In the 1990s, private interests have made ic and trade policies, changes in markets significant capital investments in ports and services, and technological around the world. Continued imposi- advances. Box 1 illustrates how changes tion of large work crews and rigid work in economic policies occurring over the rules in many ports, however, have last decades have affected port labor. undermined the value of these investments, and, hence, the commercial feasi- These changes in economic policies have bility of ports and terminals, both in been accompanied by other develop- developing and developed countries. ments in technology, logistics and trans- For example, until April 1998, in various portation that led to further reductions Australian ports there were typically 11 in the demand for dock-workers. The or 12 workers per shift per gantry crane. shift from "port-to-port" to "door-to- With the new enterprise agreement, this door" cargo delivery systems, for exam- number was reduced to six workers per ple, and the use of inland container shift per crane, and substantial produc- facilities has led to many containers tivity gains were achieved (see Box 2). being stuffed and stripped by con- In the Port of Santos, Brazil, in 1997, signors’ or consignees’ employees on labor and management reached an their own premises, often distant from agreement reducing from 12 to 10 the the port. Handling systems have been number of workers per shift per crane. extensively mechanized and are now As a general matter, port terminal oper- also increasingly automated. ators would rather employ a smaller number of workers per shift while com- Box 2 shows how the size of work gangs plying with safety and health regula- in a number of ports has changed, or tions, and pay higher wages for a highly not, in response to changing economic efficient, lean team. and competitive environments. In many of the ports shown in Box 2, the number Port labor reform presents a difficult of workers per gang was very large, and challenge for government decision-mak- remained mostly unchanged between ers and is unlikely to take place unless a 1970s and 1980s despite the fact that car- variety of action-forcing conditions exist. goes increasingly were being transport- As a result, the port labor reform ed in containers with the use of modern process is typically initiated only when

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Box 1

CHANGES IN ECONOMIC POLICIES: IMPACT ON PORT LABOR Economic policies Characteristics End result

SEMI AUTONOMOUS INTERNATIONAL TRADE LABOR-INTENSIVE TECHNOLOGIES ECONOMIC POLICIES •Fredom in the selction of inputs, fin- • Limited degree of specialization (Until mid 1980's) ished goods, services, fund and labor, required to operate single func- usually ona domestic or local basis. tions lifting equipment.

•National markets were reserved for •Cargo-handling and warehous- domestic producers, inefficient pro- ing monopolies. duction methods trade barriers, currency exchange restriction, blas •Direct and cross subsidies. against exports. • Increasing wages, avoidance of new technologies and low productivity all were institution- alized as measures 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.

GLOBAL TRADE EXPORT-ORIENTED CAPITAL-INTENSIVE TECHNOLOGIES ECONOMIC POLICIES •Ecomonic activities restrucutured, (From mid-1980’s onwards) customs duties reduced, competition •Ports can provide services that intensified, domestic producers meet are competitive and commercial- the demands of international mar- ly attractive. kets locally. •Productivity increased and costs •Freedom in the selection of inputs, reduced by exposing port labor finished goods, services, funds and to market mechanisms. labor, usually on a worldwide basis. •Workforce reduction, more cargo, •Vigorous worldwide competition for less direct port workers.Training goods and services requires labor to and retraing programs to respond to the needs of port cus- enhance skills of workers and tomers. safe working conditions.

•New techniques and work organizations introduced to 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.

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Box 2

TRENDS IN GANG STRENGTHS AT VARIOUS PORTS, 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 Cochin 1973/74 Ashore 8-18 1982/83 Ashore 12 On board 10 On board 10 (average) 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 Sweden 1970 11 1982 9 -2 Norway 1979 7-9 1982 5-7 -2 North Africa 1971 17 1981 17 Nil Australia 1970 11-15 1982 6-15 -3 Taiwan, China 1970 22 1982 12 -10

Source: New cargo-handling techniques: Implications for port employment and skills, A. D. Couper, ILO, 1986.

(1)However, according to figures provided by the Rotterdam Port Employers Association the number of port workers in the container and conventional cargo sections together declined from 7600 in 1982 to 5500 in 1991, a reduction of 28%, while in the same period the two sections of the port have seen an increase in loaded and unloaded cargo from 32.8m ton to 52.5m ton, an increase of 62%.

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at least one, and more likely, a combina- authority, or proposed by a candi- tion of the following three influences are date for public office as part of a present. political platform. The intent is to reform port labor regimes to make the port more efficient and cost effec- Figure 1: Factors Prompting tive and, thus, improve competitive- Port Labor Reform ness while reducing the fiscal burden of the public sector.

Competition is the principal motivating force behind labor reform. In cases Commmunitym where ports serving the same hinterland Competiitioni PPrressure already face competition, the propensity to undertake reform is usually higher. For example, the fact that Western India's newest port, Jawaharlal Nehru, Political located within Mumbai Bay, uses gangs Commitment of four workers for container handling, while the Port of Mumbai uses gangs of 15 workers to perform the same task, might prompt the latter to undertake labor reform sooner than the Eastern • Competition. Challenges a port or a Indian Port of Calcutta, which uses terminal face from competing termi- gangs of 28 workers and has no compet- nals, either within the same port or ing port in the vicinity. Likewise, com- from other ports in local or regional petition arising due to the proximity of markets, often lead public officials, the Port of Sepetiba to the Port of Rio de port users, and shippers to press for Janeiro, Brazil, has encouraged the latter reforms to improve efficiency and to negotiate more flexible labor arrange- lower costs. ments and tariffs than the Brazilian Port of Santos, which has no nearby compet- • Community Pressure. As a result of ing port (although the container termi- competitive challenges, the port and nals have now been privatized and two trade community can be expected to competing terminals exist in the same object to restrictive port labor work port). practices, agreements and regulations, all of which lead to high labor Regardless of whether there is direct costs, low productivity and high port or terminal competition, global prices for port services. competition in its broadest sense com- pels port stakeholders, including labor, • Political Commitment. When the to assess their organizational and opera- two foregoing factors exist, they can tional cost structures, work methods and galvanize remedial action in the form procedures. From this perspective, ports of a plan undertaken by a public may be viewed as just one of several fac-

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tors that contribute to a country’s or a KEY LABOR ISSUES TO BE ADDRESSED region’s competitiveness. As such, it is in a country’s overall economic interests Aspects of Port Labor Potentially to improve port efficiency through labor Affected by Reform reform and other measures. In numerous developing countries, as The port and trade community -- which well as in some industrialized ones, includes manufactures, exporters, existing port labor regimes, collective importers, and land and ocean carriers -- agreements, and management and labor because of its close business relationship practices are inflexible, outdated, and with the port, can sometimes press gov- inefficient. Consequently, they hinder ernments to modify restrictive labor reg- the development of the type of commer- ulations that govern work practices in cial and operating environments that ports. Transforming these requirements ports require to respond to the increas- into effective modernization plans may ing demands of customers and competi- depend on other factors, but presenting tive markets. Governments, as a result, a common voice can constitute an must appraise, in consultation with important force to initiate the labor other port stakeholders, the extent to reform process. which labor regimes, collective agreements, and labor and management prac- Finally, political commitment is essential tices serve as a barrier to the achieve- to initiate labor reform. Without strong ment of the port’s commercial goals. support and reassurance from government decision makers to labor reform, In conducting this appraisal, many the chances for labor reform to succeed issues have to be addressed, including are slim. Similarly, promises from aspir- but not limited to: ing political leaders could fall short after an election is won. Moreover, the need •restrictions on which entities can to reduce government subsidies or the offer cargo-handling and other serv- desire to obtain a one-off cash injection ices in the port; by tendering concessions, have in the recent past been common incentives for •reducing over-staffing by adapting privatization and port labor reform. gang sizes and other staffing to generally accepted levels; While a port labor reform process may be instigated by any one of these three • rigid and outdated job descriptions factors, the most favorable condition and duties; occurs when all three forces are present simultaneously (the shaded area in • limitations on working hours and Figure 1). days; • inefficient overtime allocation at excessive wage rates;

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•hiring of port labor exclusively inflexible and exclusive dock labor through the unions; boards or union labor pools runs counter to the desire to increase management •restrictions on output; discretion over the recruitment, qualification and use of specific employees. • unsettled and combative workplace culture; Many government-owned and operated ports face not just one of these issues, • insufficient training and retraining but a combination of them. And solving opportunities; these issues, to the extent they exist, •lack of clear and meaningful produc- must be a critical element in any suc- tivity objectives; and cessful port reform strategy. Simply shifting the burden of addressing these • inadequate occupational health and issues from a public authority to the pri- safety procedures. vate sector, however, will do little or nothing to resolve them. Opening labor markets to competition is an approach some port reformers have Box 3 shows how certain port reforms taken as a means of addressing these can affect employment conditions and issues. In this context, the existence of labor-management relations. Box 3

POSSIBLE EFFECTS OF PRIVATIZATION ON EMPLOYMENT Employment effects Employment conditions Management-labor relations •Re-classification of posts •Greater job mobility •Greater emphasis on professionalism •New job patterns •Diminished guarantee of •More discretionary power in taking tenure and job security management decisions and formulating enterprise policies • Labor retrenchment and •Need for retraining and skill •More emphasis on strict implemen- direct job losses upgrading tation of these decisions and policies •Marginalization of unions’ influence •Gender-based employ- •Longer working hours and bargaining power ment policies and/or increased work load •More tedious wage bargaining with •Discrimination against •Payment by results schemes preferences for individual rather shop stewards and other and pay freezes than collective agreements labor representatives •Tougher stance of management on •Medium- and long-term •Loss of seniority and service workers performance and work dis- employment gains due to grades cipline increased investment, growth and privatized firms and diversification of services •Efficiency arguments and profit mak- •Wider wage differentials ing gain importance over social with greater incentive com- objectives. ponents •Loss of pension rights •Loss of social benefits (e.g. housing, transport, child care, health insurance schemes) •Abolition of prohibition to undertake strikes and industrial actions

Source: Comparative Experiences with Privatization: Policy Insights and Lessons Learned, UNCTAD, 1995.

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Securing Constructive Involvement of taking reform, must recognize this legiti- Labor in Port Reform mate and important role and should not view port reform predominantly as an At the same time, a realistic and respon- opportunity to break trade unions or sible port reform initiative must recog- otherwise undermine their role in pro- nize and deal with the possible adverse tecting workers’ interests. human and social effects that may result. To ensure that dock-workers’ Despite the critical role that labor plays rights and interests are properly taken in ports, many countries have designed into account, the International Transport and implemented port reform adjust- Workers’ Federation (ITF) recommends ment programs without the involvement that policy makers should involve labor of workers’ representatives and unions. at all stages of port reform. Failure of governments to secure con- The principal areas of interest for port structive labor involvement in port labor include but are not limited to: reforms can typically be traced to:

• stable and fulfilling employment; • mistrust stemming from historic disputes and the recurring conflicts •reasonable incomes; between capital-labor trade-offs;

• decent working conditions; •inadequate and untimely preparation of port reform proposals, making it •social security and pension provi- difficult for labor to take part in con- sion; sultations and negotiations; and

• education and vocational training; • financial resources too limited to cover training needs created by port • health, safety, and the environment; reform.

• workplace democracy; Governments, however, have much to •freedom from discrimination on the gain from involving labor early and basis of race, religion, social status, effectively in the port reform process. or gender; and Labor’s contribution stems from its important role as: •freedom from corruption and coer- • one of the port’s most valuable cion. assets, trained personnel; Historically, trade unions have worked •a source of practical knowledge of to advance these interests. And trade and experience in port operations; unions can be expected to continue to play an important role in the port com- •problem solvers; and munity during and after the period when reforms are implemented. •a source of ideas to add value to the Government authorities, when under- goods and services of customers.

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On the other hand, labor unions them- thoroughly knowledgeable about selves must face a number of crucial shipping, ports and international challenges in order to adjust and opti- trade, and to commit significant mize their own effectiveness when deal- human resources to the reform ing with reform. As listed by one ITF process. Additionally, trade union official, the main challenges include: structure must allow for the internal exchange of information and debate. •Acommitment from trade union In some cases this know-how needs leadership. The participation of to be developed, as it has been with- trade unions in a reform process is a in those unions more experienced in big challenge for the trade union reform processes. There are several movement and its officials, as it ways to develop this expertise within requires a commitment from trade a union, training for trade unionists union leaders. Negotiation implies being one method. compromise and this may not always be to the liking of all affected trade • The introduction of new trade union union members. Union leaders must structures. A serious obstacle to suc- accept that it is their responsibility, cessful port reform could lie in out- once they believe they have achieved dated union structures that divide the best deal available, to defend it workers into many small, different strongly to their members. unions, that sometimes compete among themselves for membership. • The ability to unify workers’ short- Efficient trade union structures, cov- and long-term interests. The issues ering the whole industry, should be confronting labor during the transi- created to enable union officials to tion period to privatization versus exchange information within the the period following the introduction union, to organize the necessary of privatization are different. In the internal debate, and to present a con- transition period, the challenge for sistent approach in their dialogue trade unions is primarily to defend with public authorities. the short-term interests of workers. At the same time, trade unions have •Finding solutions to social problems to look to the future and to defend caused by privatizations. The main the workers’ long-term interests. This source of port workers’ opposition to means that they have to understand privatization is uncertainty. Faced longer term trends affecting the port with the fear of unemployment industry and to be able to develop and/or major cuts in income, labor’s appropriate policy and a strategy for first reaction is always to say no. the future. Unless they can be given an interest in the results of the reform, they will • The need to improve expertise with- resist any change. Employment and in the union. Participating actively income guarantees for port workers and effectively in a reform process affected by privatization are, there- requires trade unions to become fore, essential in creating the climate

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required for successful and lasting tion thoroughly to again find a bal- port reforms. The costs of severance ance between what is presented as pay, unemployment benefits, pen- necessary and what is recognized as sions, cash payments for early retire- socially acceptable. ment or other measures must be considered a legitimate part of the over- •Understanding the need for new all cost of reform. The challenge for labour relations. Privatization brings the trade unions, which comes prior with it a complete realignment of to solving social problems, is to labor relations. In the case of state- develop their own policy on those owned ports and related companies, issues and to reach common ground the relationship is between only two with public authorities and private parties: government and labor. employers. Privatization means that a third party is introduced: the private • The acceptance of privatization. entrepreneur/employer. For many Unions increasingly recognize the trade union officials this change need for a differentiation of their requires a complete overhaul of the policies on reforms and privatiza- way they used to think about labor tion. Resolutions adopted at ITF’s relations. Moreover, it also requires Latin American and Caribbean and from managers a completely differ- African Regional Dockers’ ent attitude and approach. Trade Conferences in Lima (November unions, employers and would-be 1996) and Mombasa (December 1996) entrepreneurs can no longer rely on indicated for the first time that governments or other authorities unions acknowledged that there is when decisions need to be made. In no standard model for port restruc- many instances, entrepreneurs have turing and that increased involve- to make their own decisions, in some ment of the private sector is an cases in consultation with labor rep- option that cannot be discarded. The resentatives and in some cases in basis for this changing attitude consultation with authorities. towards privatization was the Authorities must learn that the state, increased awareness that it is not pri- on many occasions, should no longer vatization as such that threatens take the lead, but should provide the working conditions, but the process environment in which entrepreneurs through which it is implemented. are encouraged to make their own decisions and in which trade unions • Dealing with the new culture of com- and employers are encouraged to petition. A major consequence of develop joint approaches to address- privatization is an increase in compe- ing labor issues. tition. This usually calls for new flexibility in working practices. There are Box 4 describes one country’s approach many forms of flexibility, and trade for addressing a number of these issues. unions should understand this aspect of privatization and competi-

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ORGANIZING TO ADDRESS LABOR Box 4 REFORM: A TASK FORCE APPROACH Working with Labor Unions: Successful port labor reform requires The Ghana Case governments, labor, and private interests to grapple with a wide range of eco- As a strategic option to achieve its development objectives, nomic, operational, social, safety, and the Government of Ghana designed in 1998 the Ghana Trade and Investment Gateway Project (GHATIG) with the cultural issues. To come to grips with support of the World Bank.The primary objective of GHATIG this myriad of issues, some governments is to create an environment conductive to economic growth have established a labor reform task and development led by private sector initiatives. force, often headed by the Ministry of Within this context, the Government of Ghana has approved Labor, to consult with port stakeholders a policy to further improve the operation of the ports, which regarding any changes that might be will reduce the cost of operations and shorten the turnaround time of ships.The policy entails increased private made in government policies and prac- sector participation in the management of ports.The Ghana tices to improve port productivity and Ports and Harbours Authority (GPHA) will be converted into cost-effectiveness. a "Landlord" Port Authority while the private sector will participate in port operations particularly container handling Composition of the Task Force operations, dockyards, sites maintenance and services. The port reforms that are aimed at through the implemen- The labor reform task force should tation of the GHATIG Project constitute a major change in include representatives of all government the port sector of Ghana.The most critical issue in managing change (i.e. making change work) is overcoming the agencies and private sector stakeholders resistance to change from many of the stakeholders in the affected by port reform, including: port industry. However, in the case of the proposed port reforms in Ghana, due to the proper, professional and time- •Ministries of transport, labor, ly/proactive actions of the Government of Ghana (particularly the initiatives of the Minister of Roads and Transport) finance, economics, planning; and the GPHA Management, the strength of the resistance to change has been minimised.The avoidance of any auto- • Port authorities; cratic approach and the consultative, persuasive and partici- pative style that has been adopted by the Government of • Main port customers and users, Ghana in promoting the port reform process has resulted in including exporters, importers, carri- a very positive atmosphere among the port community as regards to the implementation of the port component of ers and agents, freight forwarders the GHATIG Project.The public consultation through a and multi-modal transport operators; national workshop on the acceptability of the government’s policies pertinent to port reforms and the personal site visits • Private investors, terminal operators, of the Minister of Road and Transport to the ports in order to speak and more importantly listen to the port workforce cargo-handling and stevedoring and the port labour unions, coupled with the constructive companies; and work that has been undertaken by the GPHA Management, has secured the collaboration of the majority of the stake- • Port labor representatives. holders in the port sector. It is interesting to note that representatives of the Maritime and Port Workers Union (MDU) Scope of Work of the Task Force have accepted to join forces with the GPHA Management in its effort to address the port rationalisation issues in relation to the port reform process. MDU representatives are now The labor reform task force should con- members of the organisational restructuring and labor duct its activities in an open and trans- rationalisation-working team of the Project Implementation Committee and attend its meetings on a regular basis. parent manner. Its main areas of activi-

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ty would typically include: safety - can help resolve on-the-dock problems and disputes without for- •Undertaking studies or commission- mal government intervention. ing them. Various governments prefer to be assisted and guided by • Defining government’s role with expert professionals, retaining con- respect to ports. Governments sultancy services to work closely should play an active and focused with management and workers and role in regulating and monitoring other port stakeholders in assessing companies that operate in the port the weaknesses and strengths of system to ensure that safety and labor regimes, collective agreements, health laws and regulations are fol- and work practices. lowed. Governments can assume an active and effective role in promoting •Organizing seminars and workshops. the use of ports for the benefit of the These help to build consensus by entire community and economy. allowing all port stakeholders to share their views and concerns on • Developing a workforce rationaliza- various issues. These events also tion plan. The task force should permit employers to explain to work- draw up and explain programs for ers what sort of competition they staff restructuring and rationaliza- face, their firms' financial perform- tion. In developing these programs, ance, and the need to address com- the task force should evaluate a petitive challenges. range of measures including incentive schemes for early retirement, •Informing the community and con- voluntary separation, provision of sumers. Making use of media to dis- training and retraining, career devel- seminate the results of studies and opment as well as assistance in job workshops helps to keep the com- search and out-placement. munity and consumers at large informed, making it easier to gain For the task force to be in a position to their support for necessary changes. work effectively, sufficient budget must The community and consumers need be allocated by all participants’ organi- to be enlightened as to why port zations to make it possible for the team labor reform is needed, what is to complete its tasks and work schedule. involved, how the main difficulties Box 5 describes one country’s approach will be mitigated, and what are the to creating a port reform task force. expected benefits to the entire economy or country. THE INSTITUTIONAL FRAMEWORK FOR LABOR REFORM •Fostering the creation of joint committees between unions and private Port labor reform is a balancing act tak- terminal operators. Such joint coming into consideration workers’ rights mittees – which might address issues and social equity, port users’ and opera- affecting operating efficiency and tors’ commercial needs, the need to fos-

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ter competition, and the interaction Box 5 between governments and port interests. THE PRODUCTIVITY Meeting Commercial Needs COMMISSION OF AUSTRALIA

Establishing inter-port, intra-port, inter- The Productivity Commission, an independent union, intra-union, and non-union com- Commonwealth agency, is the Government’s principal petition is a key to addressing shipping review and advisory body on microeconomic policy and port companies’ needs for improved and regulation. It conducts public inquiries and research into a broad range of economic and social productivity and cost effectiveness. This issues affecting the welfare of Australians. usually requires: The Commission’s work covers all sectors of the econ- • Economic regulatory reform, includ- omy. It extends to the public and private sectors and focuses on areas of Commonwealth as well as State ing the elimination of bureaucratic and Territory responsibility. obstacles to the free interplay of market mechanisms affecting the supply The Commission performs its role through the follow- and demand of dock-workers. ing key activities: holding public inquiries and reporting on a variety of matters referred to it initiating research on industry and productivity issues and • Decentralization, including the reporting annually on industry and productivity per- assurance that labor responds to formance generally, and on assistance and regulation local market signals without cross- promoting public understanding of matters related to industry and productivity providing secretariat and subsidies among related labor organ- research services to government bodies, including izations in competing ports. developing performance indicators for government provided or sponsored services reviewing and advis- Labor’s possible role in this area would ing on regulation through the Office of Regulation Review investigating and reporting on complaints be to negotiate with port employers to about the implementation of the Commonwealth establish job education and experience Government’s competitive neutrality arrangements. requirements, and provide training courses that address local market needs. be to negotiate on a transparent basis without political manipulation; suggest Defining the Relationship between measures to improve productivity, facili- Governments, Ports, and Labor tate the work and reduce costs; and To avoid pressures to modify market share decision authority at the opera- outcomes, governments should remove tional level. themselves from direct involvement in Fostering Competition port-labor relations, collective negotiations, and informal dispute resolution. Antimonopoly laws must be applied to Aproper commercial setting should be terminal operators and dock labor alike able to function without political influ- to ensure that market mechanisms do ence, although the government has a not result in the creation of cartels. major role to play in making labor rationalization possible and in funding Labor’s possible role in the area should it. be to make sure that market mechanisms are used to compete fairly and Labor’s possible role in this area would

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Box 6 that port operators do not abuse their INSTITUTIONAL FRAMEWORK FOR LABOR market power. REFORM Redefining the Concept of Social Equity KEY FINDINGS

Productivity Commission 1998,Work Arrangement in The current concept of social equity (i.e., Container Stevedoring, Research Report, AusInfo, Canberra, Australia. job and wage security) was developed at a time when governments believed they • Flexibility in the allocation and use of labour is critical to stevedore workplace performance, given the highly vari- could insulate their economies from the able demand for stevedoring services at Australian ports. rigors of fierce international competition. Developing countries, in particu- • The container stevedoring industry is characterised by a system of complex, inflexible and prescriptive work lar, often pursued policies designed to arrangements which constrain workplace performance. reserve domestic markets for national They impede productivity, reduce timeliness and reliability, and increase labour costs. entrepreneurs while seeking to create broader export markets through the • The most significant of these work arrangements are the receipt of preferential treatment under order of engagement (specifying the order in which different types of employees are engaged for a shift), shift multilateral trade agreements. In this premiums and penalty rates, and redundancy provisions. environment, dock-workers (and other labor) were sheltered from the full force • The order of engagement, in combination with relatively high shift premiums and penalty rates, add significantly to and effect of international competition, total labour costs for a given level of activity.They detract or so it may have seemed. from productivity by creating incentives for permanent operational employees to seek overtime and lead to poor timeliness and reliability.They can also have deleterious Similarly, governments were temporari- effects on the lives of operational employees. ly spared having to make difficult deci- • The high cost of redundancies restricts the ability of sions associated with adjusting labor stevedores to adjust manning levels of permanent conditions and relationships to conform employees.The redundancy agreements also foster skill to global market forces. Governments, mismatches and reduce the ability of management to allocate the best person for the job. therefore, guaranteed dock workers’ jobs, purchasing power, and benefits. At • There are a number of factors which impede change, including an adversarial workplace culture, strong union the same time, they failed to make bargaining power, limited competition in the labour mar- investments in new technology or to ket for operational stevedoring employees, and limitations take steps to reduce costs and improve on competition in the industry. productivity. The unfortunate truth is • The Workplace Relations Act 1996 facilitates change by that this interpretation of social equity enabling work arrangements to be determined primarily at the workplace level.Together with the secondary boy- raised the costs and prices of imported cott revisions to the Trade Practices Act, it has also and domestic products in national mar- reduced some sources of union bargaining power. kets and contributed to a downward • Responsibility for better outcomes ultimately rests with spiral of non-competitiveness. As such, managers and their employees. Greater competition in this concept of social equity was unsus- container stevedoring would increase the pressures on both sides to change work arrangements and improve tainable. performance. The concept of social equity has today Source: Productivity Commission 1998,Work Arrangement in Container Stevedoring, Research Report, AusInfo, Canberra, Australia. shifted to a commercial opportunity-oriented approach. Under this approach,

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job security, which ultimately depends tutional structure that ensures that bene- on expansion of trade and transport fits and privileges given up by these activities, is not achieved through gov- workers will not be appropriated by ernment guarantees of work, but some other group within the port or through education, training, and retrain- trade community. Box 8 describes one ing programs. By this means, the country’s approach to funding labor enhancement of workforce skills and rationalization initiatives. abilities, together with greater participation in workplace decisions, lead to bet- Labor’s possible role in this area would ter job opportunities and improved pro- be to ensure that training programs ductivity. Box 7 compares past and become an integral component of the present aspects of job security. modernization process, promote occupational health and safety, and establish a For workers displaced as a result of collaborative process for the selection reforms, fair compensation should be and introduction of new equipment. granted for the relinquishment of their acquired rights and privileges. To facili- Timeframe for the Port Labor Reform tate their early re-entry into the national workforce, displaced workers should be Port labor reform is an economically and offered retraining programs and job politically challenging undertaking. As search assistance, and above all, an insti- such, it can be expected to elicit strong Box 7 JOB SECURITY IN PORTS In the Past In the Future

Jobs security obtained by avoiding Job security obtained by responding to market mechanisms. Political alliances market mechanisms. This creates a were utilized. The results were often not need for formal training programs, desired and reduced the need for: multi-skilling, willingness to accept new technologies and commonality of • Knowledge of and experience with goals among port customers, international port practices. employers and dock labor. The usual impact is: • Labor participation in management committees. • Collective agreements negociated so as to promote trade. • Acceptance of new cargo-handling technology. • Dock labor generates ideas which lead to progressive gains in • Training programs to increase the productivity and efficiency. skills of the labor force. • Employers willing to train port workers.

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political emotions both for and against. process from one administration to the Consequently, the port labor reform next often results in significant delays or process should be begun and completed even the discontinuation of the entire within the term of a single public reform process. administration. The reason for this is that the changes to existing labor Further, if port reform includes inviting regimes that are considered "objective" potential investors to operate state- by one administration could be judged owned port facilities, it would be advan- to be "biased" by succeeding administra- tageous to conclude the labor reform tions. Trying to carry over this reform component before the project is market- Box 8

PORT OF SANTOS, BRAZIL: THE SPECIAL LABOR FUND

A special port workers' fund is being set up in Santos which should resolve years of bitter confrontations between stevedores and port operators at Brazil's leading port. According to Antonio Carlos Branco, president of the Santos port operators' union (Sopesp), and a key figure behind the scheme, it might also ease the over-reliance of the traditional port city on purely port-related jobs.

The Reais 80 (US$47.73) million fund would be used to soften the impact of cutting the labor pool in Santos to around 4,500 dock workers from a current total of 11,500 employees. Money from the fund will be used to retrain port laborers employed by the administrator of the casual labor pool, known as OGMO (Orgao Gestor de Mao-de-Obra), for alternative work, within new high-tech and light industries that will be encouraged to locate to Santos.

The project is also backed by the Sao Paulo state Federation of Industry (FIESP), the Santos Port Council, local importers/exporters, state and municipal governments and national governmental bodies dealing with dock labor, according to Branco. He said: "The fund would be a unique way of resolving the problem of high port labor costs impeding the growth of Brazilian trade''.

He continued: "Once we get the money into a fund we will reduce the numbers in the OGMO to 5,000 workers immediately. Rules for dismissals and claims will be carefully worked out and we think that within 90 days we will have a final draft for the fund and its operation… The local and central governments will help bring hi-tech and small businesses to Santos within three years or so. The technical side is finished and is now being presented to the unions for discussions. Once they have agreed to it we will present it to Grupo Executivo para a Modernizacao dos Portos (GEMPO - a national body co-ordinating the modernization and privatization of Brazil's ports) and to the government in Brasilia''.

At Sopesp, Branco has set up a taskforce split into three units, respectively specializing in containers, bulk cargoes and breakbulk cargoes. He added: ‘We have contacts with the stevedores at the moment but the elections for the stevedores' unions are to be held in November 1999 so they are not willing to make paper agreements for fear of being accused of giving up some rights, etc. But we keep negotiating and after November we expect them to make a general agreement for labor rules, gangs, everything. We just have to wait.'

Sopesp already has an agreement with coopers/watchmen/port administration staff which runs until February 29, 2000. The stevedores/tallymen/port workers are having their agreement plans examined at the Regional Labor Tribunal, of Sao Paulo state.

Branco said it was important there were no more strikes. He told Containerisation International: ‘It is not just a problem of direct financial losses to port operators and shippers but also it presents a bad image for foreign trade, importers abroad would conclude they cannot trust us and yet we have a desperate need to increase our foreign trade.’

Source: Containerisation International, October 1999.

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ed and a request for bids is tendered. terms; This will clarify the potential investors’ future labor relations and costs, thereby • Estimates of required activity levels reducing the degree of uncertainty and (throughput forecasts); risk and, with the right labor reforms, • Demographic information about the making the offering more attractive to current port workforce including reputable investors and operators. data on employee age, marital status, Nevertheless, one can expect that labor number of dependents, level of edu- reform will be a continuing process that cation, length of service and accumu- will involve adjustments to respond to lated benefits (e.g., employer’s pen- changing market conditions. sion fund contributions, life insurance benefits, accumulated holidays); DEVELOPING THE WORKFORCE RATIONALIZATION PLAN • Current staffing levels broken out by operational, administrative, and An effective workforce rationalization management categories, and descrip- plan must be built on accurate and rele- tions of job requirements; vant information and must consider the •Estimates of minimum staffing levels full range of rationalization alternatives similarly broken out by operational, -- and not just dismissals. administrative, and management cat- Gathering the Information Needed to egories, and descriptions of new or Draw Up the Plan modified job requirements; • National and local laws, regulations, The design of a port labor rationaliza- and policies relating to labor ration- tion plan and program is one the most alization; important phases of the overall port reform process. To be done correctly, • All relevant collective bargaining the plan and associated programs and employment agreements that should be based on detailed reliable describe work rules, compensation, information on the port enterprise, the benefits, training, contracting out workforce, and local markets. In this rules, exclusive staffing provisions, respect, it is useful to review the lessons etc.; learned from previous government labor rationalization programs. •Training needs and skills of workers who will be seeking alternative Before undertaking to develop a employment; and rationalization plan, the labor reform task force team should assemble the fol- • Existing government and private sec- lowing types of information: tor organizations capable of assisting with retraining and job searches, and • Port master plans and strategic their capacity to provide training to goals for the short, medium and long the required levels.

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In developing a realistic labor rationali- involving flexible work arrangements zation plan, appraising the local labor that preserve jobs or reduce the work- market situation and conditions will be force through means other than involun- as important as assessing the specific tary dismissals. enterprise being restructured. Displaced workers will need to be re-integrated Some of these arrangements and meas- into local and regional markets. To facil- ures include: itate their re-entry, the labor reform task force will also have to gather informa- • Normal attrition of the workforce as tion about and carefully consider the fol- a result of retirements, deaths, or res- lowing factors: ignations;

• The overall macroeconomic situation • Part-time employment, flexible of the country and, more specifically, working hours, reduction in working the economic and social condition of hours, variable workweeks, job shar- the area or region in which the port ing, and overtime restrictions; is located; • General or job category-specific hir- • Existing employment and unemploy- ing freezes; ment patterns, job creation schemes, • Absorbing cost reductions across the and growth of sectors within regions; organization by sharing reductions • The labor absorption capacity and in hours of work and pay; and growth potential of different sectors •Work rotation among other govern- of the economy; and ment departments in cases where the • The skills and experience of the port is the main employer of the city workforce. and jobs in the surrounding areas are very scarce. This information should be available to all parties affected by port reform since Each of these alternatives merits careful it will become the basis on which many consideration in the development of a decisions will be made. labor rationalization plan. Box 9 describes one company’s approach to Alternatives to Dismissals labor rationalization.

Too often, labor rationalization has been Elements of a Staff Retrenchment equated to wholesale dismissals. Labor Program forces can be rationalized in a number of ways, however, not all of them involve Measures such as the flexible work the immediate dismissal of employees. arrangements described above may prove insufficient to attain workforce In a climate of cooperation and mutual reductions needed to make the port respect, labor and management have enterprise commercially feasible or been able to implement agreements attractive to new investors. In such

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Box 9 cases, policymakers have to adopt other measures. A staff retrenchment pro- SOCIAL PLANS AT MOULINEX gram is an option that permits governments to reduce large numbers of work- Social plans can be described as agreements reached ers in an operationally rational and between labor and management to develop an organ- socially responsible manner. To be ized set of measures seeking alternatives to dismissal, assistance in arranging re-employment elsewhere and viable, this kind of solution should be compensation, in an effort to limit the number of the result of negotiations with trade planned redundancies and minimize the impact on unions, or with representatives of the workers and communities.The social planning process workforce. Such programs typically typically begins after an organization has announced that it intends to scale back the size of its workforce or include various measures aimed at cush- even shut down operations entirely. Following such an ioning the adverse affects workers may announcement, the social partners meet to find work- suffer as a result of dislocations. able alternatives to mass redundancies.These alternatives tend to involve such initiatives as early retirement schemes, incentives for voluntary redundancies, natural The main components of a staff attrition, conversion from full-time to part-time status, retrenchment program normally reduction in working hours, wage moderation or cuts in include: compensation, relocation to another work site within the organization, and worker retraining. If redundancies cannot be avoided, the social plans address such mat- • Compensation, with incentives for ters as an orderly process for lay-offs, redundancy pay- early retirement and voluntary sepa- ments, job counselling, job search assistance and train- ration. Retrenchment programs ing for new and expanding occupations. In France, for example, companies employing more than 50 workers often permit employees to retire with are legally required to draw up a social plan to limit the either full or reduced pension bene- number of redundancies. Such was the case recently fits at an earlier age than normal. with Moulinex, a major household equipment manufac- Numerous public enterprises have turer in France.The company announced its intentions in June 1996 to make 2,100 workers redundant over either reduced the minimum retire- three years, close two sites in Normandy and transfer ment age by five years or added five the head office west of Paris. It then signed an agree- years to length of service. Financial ment with its five trade unions in January 1997 which reduced the number of planned job cuts from 2,100 to incentives are normally calculated 1,468 through a combination of reductions in working based on the number of years of time and early retirement.Working time will be service, each year of service entitling reduced by 15 per cent for 750 workers, from 39 hours to 33 hours and 15 minutes per week, paid at 97.2 per the separated employee to one cent of the base salary and organized on a voluntary month’s salary, with a ceiling of, say, basis. Early retirement will be offered to 718 employees 24 months of wages. from age 56.To prevent the loss of 600 more jobs, Moulinex will offer a relocation package of Frs. 80,000 to encourage workers to move to other locations with- • Compensation for involuntary sepa- in the company.The primary objectives of social plans ration. When the targeted workforce such as that concluded at Moulinex are to maintain reduction is not reached through employment levels wherever possible, reduce disrup- volumtary programs, and workers tion and facilitate re-employment when lay-offs are unavoidable. have to be dismissed or laid off, they normally receive a lower severance Source:Technical Paper for the ILO's High-Level Tripartite Meeting on Social Responses to the Financial Crisis in East and South-East Asian payment, for example, 80% of the Countries, Bangkok,Thailand, 22-24 April 1998. amount received by workers who left voluntarily. Dismissed workers are

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also entitled to training and out- opportunities; sharing information placement assistance. Criteria to on how to start ones own business; decide who should be dismissed establishing cooperatives; and other could be based on: workers’ records measures. of attendance; frequency of penalties or suspensions; overall performance Pitfalls in Designing and Implementing evaluations by his/her immediate Severance Packages supervisor; and family situation (e.g., marital status, number of depend- Retrenchment efforts involving signifi- ents). In some countries the stan- cant staff reductions often face consider- dard is still first-in-last out when able political opposition. As noted workers become redundant. above, to overcome opposition and to treat fairly public employees who lose • Provision of training and retraining. their jobs, governments often offer sev- The training and retraining compo- erance pay to those workers forced to nent of the retrenchment program is leave public employment. But, problems aimed at facilitating the return of dis- in the design and implementation of placed workers to gainful employ- these compensation schemes often ment. Experiences in various coun- reduce their efficiency and may not tries, however, have revealed that in achieve their objectives. many cases only 20% of the displaced workers take advantage of Potential problems include: retraining programs being offered. The main reasons for this low level • Paying too much. Workers are paid of particitpation include: timing more than would have been neces- delays, weak institutional capacity of sary to induce them to leave. These the local public sector, and low edu- increased costs may bring a retrench- cational level. To have a greater ment program to a halt because chance of success, retraining pro- funds run out grams should be demand-driven, not supply-driven. • Adverse selection. Severance pay packages do a poor job at targeting • Guidance and assistance in job redundant workers; often the best searching and outplacement. This workers tend to accept the buyout component is closely linked to because they have readily available retraining and is aimed at assisting alternatives, while the worst tend to displaced personnel who will be remain. seeking employment. However, displaced personnel should be able to • The revolving door. Workers accept take advantage of this service regard- severance pay but are later re-hired less of whether they have been when it is determined that their skills retrained. Services could include: are needed. As a result, the severance preparation of resumes; disseminat- package is wasted and downsizing is ing information about employment not achieved.

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Ways to Shrink Smartly agency. When wages are higher in the public sector than in the private sector, What, then, are the best mechanisms for governments tend to overestimate shedding redundant public sector work- redundancies. Cuts are also exaggerated ers? If severance packages are offered to when employment in a given govern- induce voluntary departures, how ment agency affects the earnings of should they be designed to minimize the those it does not employ; for instance, in total cost? And are there ways to struc- communities where the government ture such packages to induce to least agency being reformed is the primary productive employees to depart while source of direct and indirect employ- encouraging to most valuable employment. However, agencies tend to under- ees to stay? estimate the number of necessary redundancies when heavily subsidized by the From a financial point of view, shrinking general budget. bloated governments appears to be a very profitable undertaking, even when Although each port’s situation is employees get substantial severance pay. unique, applying certain rules of thumb Practice shows that, if employees are can help ports and governments identify given two to three years of salary to where they may be overstaffed or where leave, for example, then in a mere two their productivity significantly trails years the money spent is recovered other ports. Box 10 identifies a number through cost savings and productivity of these benchmarks. improvements. However, research has found that governments must take care How does one decide which employees to avoid losing the best employees, only should leave? Too often, severance pay finding a need to rehire them later. is offered indiscriminately, without an overall plan for continued operations. Ironically, severance packages often Some public sector employees take the have the adverse effect of inducing the package, others stay, and only later do most productive people to leave. Quite governments know which personnel often, the best public employees have to and skills remain. The sequence should be rehired, an expensive way of getting be reversed, first identifying the services back to "square one." World Bank to be cut or transferred to the private research has found substantial rehiring sector; second, identifying the specific in about a quarter of the surveyed overstaffed jobs; and meanwhile enforc- retrenchment programs. ing work hours and attendance record- keeping to chase away "ghost" workers. How does one measure accurately the Only then should those specifically tar- portion of the labor force that is exces- geted to leave be offered a severance sive? Typically, a government or state- package. owned enterprise, allowed to restructure on its own, may cut more workers than Tailoring severance packages to observ- is socially optimal, particularly if the able characteristics, such as age, educa- cost of downsizing is borne by another tion, number of dependents and the like,

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BOX 10 PORT STAFFING BENCHMARKS SIZE OF THE PORT AUTHORITY RECOMMENDED STAFFING LEVEL Small authority: a few million tons: About 50 Average port authority: 10 to 20 M tons: From 150 to 250 Large ports: example: 100 to 300 M tons: 1,000 More generally, and indicative ration would be: 100,000 ton 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 1000 TEUs of staff per year

(including operational, administrative and manage- (for a large array of yearly throughput, from ment staff) 150,000 up to 600,000 TEUs). comment: also Source: Drewry Shipping Consultants:World here there are economics of scale-150,000 TWU Container Terminals 1997. = 150 people / 600,000 TEU = 500 people

BREAK BULK CARGO 40 ton per hour 2.5 ton / h / docker Boxes on 2-ton pallets built in the hold (fruits, frozen goods, etc.): Gang: 15 to 17 dockers (excluding transfer and storage crew, crane driver, maintenance staff)

Pre-palletized boxes, handled with cages 160 ton per hour 14 ton / h / docker Gang: about 13, including transfer (excluding storage crew / crane driver / maintenance staff)

Exotic wood in logs, handled with slings 80 ton per hour 6 ton / h / docker Gang: 12 to 15 dockers (excluding transfer and storage crew / crane driver / maintenance staff)

Exotic wood in logs, handled with hydraulic clamps: 140 ton per hour 14 ton / h / dockerr Gang: 10 dockers (excluding transfer and storage crew / crane driver / maintenance staff)

may substantially reduce the costs of related to seniority. But, these packages downsizing. Care must be taken, how- tend to over-compensate the people who ever, not to discriminate against particu- accept them. World Bank research esti- lar categories of personnel in a manner mates over-compensation in selected contrary to human rights and labor law. countries at about 20 percent.

Usually, the packages involve a multiple To keep the best employees, the research of the separated worker’s current salary findings suggest developing a menu of in the public sector, the multiple being alternatives to the standard severance

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package. For instance, public employees • Reduces uncertainty and certain could be given the following choices: (a) risks associated with the project, per- keep their jobs; (b) leave and get sever- mitting the government to get the ance pay; or (c) keep their jobs, but with best price for the concession; a higher salary and on a fixed-term contract. This last option would help retain •Places the expense of rationalization the more productive public employees on the government, which in most who have good outside alterna- cases is the entity that contributed tives and are not afraid of losing BOX 11 their jobs. Without Option C, those employees would tend to A Downsizing Decision Tree take the severance pay and leave. IS Box 11 depicts a decision tree IS PRIVATIZATION IS ADVERSE NO ADVISABLE? YES OVERSTAFFING that can help port reformers SELECTION A AN OBSTACLE carefully think through the SERIOUS ? TO CONCERN? PRIVATIZATION? process of workforce rationaliza- ? YES ? tion. NO YES NO Rationalizing the Workforce: When and By Whom? Using targeting Assess Privatize and menus to percentage of without identify redundant prior Workforce rationalization can redundancies workers downsizing take place at a number of points along the path to port reform

and, depending on when it takes IS Predict loss PREDICTED LOSS of place, can be implemented by HIGHER THAN redundant LEGAL either the government or by the workers NO private sector. There are pros Set COMPENSATION? compensation ? and cons to each of the various based on predicted loss YES approaches. YES

Set up training IS Pre-reform/privatization. FULL and other Settle COMPENSATION Having the government under- redeployment old-age OF WORKERS services pension take workforce rationalization NEEDED? liabilities prior to reforming other ele- ? ments of port ownership and NO

operation in most cases has sev- Assess eral advantages: Let workers economic Pay choose their mix returns to legal of cash and downsizing compensation •Presents potential conces- services sionaires and investors with a "cleaner" business decision; Source: Martin Rama, Public Sector Downsizing: An Introduction,The World Bank Economic Review,Vol. 13, Num. 1, January 1999.

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most heavily to over-staffing, rigid ment workforce reform can significantly work rules, and other conditions that increase the uncertainty and risk associ- reduce efficiency; ated with the reform initiative. This, in turn, can scare away potential bidders • May result in less disruption to port and result in a lower concession or sell- operations as a result of work stop- ing price for the government. pages, sick-outs, slow downs and Additionally, port labor might be other actions. inclined to pursue work actions against a private employer more readily than At the same time, having the govern- against a government employer. ment undertake workforce rationaliza- Indeed, in some countries it is illegal for tion prior to reforming other elements of public employees to engage in work port ownership and operation can have stoppages and other disruptive work drawbacks including: actions. • Governments may cut too few from In cases where overstaffing is not an the workforce in response to political issue and significant downsizing is not pressure, leaving potential conces- required, it is generally preferable for sionaires and investors with an over the new operator and investor to supply of labor; assume the task of rationalizing the • May not structure cutbacks, sever- workforce. This situation would be ance packages, and incentives to unlikely to occur in seaports, however, retain the best personnel and critical especially those in developing countries. skills. Indeed, seaports have served for many years as natural shelters to avert unem- Post-reform/privatization rationaliza- ployment and as a source of political tion. Delaying workforce rationaliza- patronage for various public administration until after other port reforms have tions. been implemented also has strengths and drawbacks. Thus, the question for policymakers is: what is the maximum number of work- On the positive side, delaying workforce ers the prospective concessionaire can be rationalization until after other port asked to employ without undermining reforms have been implemented means the entire port reform initiative? If too that decisions in this area will be made many workers are imposed on the new by private sector concessionaires and concessionaire, the business proposition investors who are efficiency-minded and will be less attractive. As a result, few profit-oriented. This, in turn, suggests competing bids may be submitted and that their decisions about workforce the sales price or the concession fee restructuring will be more attuned to most probably will be significantly dis- operating needs and customer demands. counted.

On the negative side, forcing the new A new terminal operator typically concessionaires and investors to imple- prefers to have the freedom to deter-

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mine the firm’s required number of staff salaries and extended periods of vaca- and skill mix. The government will nor- tion compared to new private sector mally have an interest in the new termi- hires. In addition, at an average age of nal operator absorbing the highest pos- 50 years, most of the transferred public sible number of workers. In many sector workers were "worn out" as a instances a compromise is reached result of having worked in the old port between the two, but the new terminal under difficult and, in some cases, haz- operator should be given the option to ardous working conditions. further adjust the workforce size and composition, which may lead to further Who Should Pay for Offsetting Dislocation Expenses Associated with dislocations post-reform. Port Labor Rationalization? For example, in Argentina in 1991, concessionaires of the five terminals at The expenses associated with downsiz- Puerto Nuevo, Buenos Aires, were ing could amount to millions of dollars required to employ 1,350 workers from depending on the number of workers, the public agencies previously operating level of set compensation, and safety net at the port, or to negotiate an equivalent components such as training and out- number of redundancy agreements. The placement assistance. Many countries number of workers assigned to each have recognized the convenience of concessionaire was based on the busi- reducing the workforce prior to private ness plan submitted in the bid. For sector participation in state-owned example, 130 workers were assigned to enterprises, but offsetting the expenses Terminal Five, but most of them were related to labor reduction has been a dif- offered and accepted severance pack- ficult task for many governments, espe- ages only a few months after the new cially in view of pressing budgetary confirm started operating. Out of the 218 straints. workers assigned to Terminal Three, 119 of them were offered and accepted sev- For the Government of Mozambique, for erance packages. Of the 900 workers example, the staff rationalization com- assigned to Terminals One and Two, in ponent -- which included staff reduc- May 1999 only 419 remained with the tions of approximately 14,000 employ- firm. Severance payments ranged from ees, pension fund payments, staff rede- US$15,000 to 20,000 per worker. ployment, and social mitigation as part of the Mozambique-Rail and Port The terminal operators at the Port of Restructuring Project in 1999 -- is esti- Buenos Aires preferred the compensated mated to cost the government US$50 dismissal option to retaining an over million. Compensation paid to workers supply of workers. In part, this was due laid off in Chilean ports as a result of the to the distorting gaps in wages and deregulation of dock labor in 1981 length of vacation among workers per- amounted to a total of US$30 million. forming the same tasks. Because of their Payments per worker averaged longer length of service, former public US$14,300 and ranged between sector workers were entitled to higher US$10,000 and US$200,000. In 1991 the

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Government of Colombia provided operations around the world. The main US$50 million to compensate 8,000 elements of Bank support have includ- Colombian dock-workers for the loss of ed: acquired rights. The restructuring of Venezuelan ports in 1991 led to the lay- •Technical assistance to governments off of 10,279 dock-workers and 2,000 to help: officials in the National Ports Institute. • Develop staff inventories and All received double compensation from profiles; the Government of Venezuela, amounting to US$182 million overall, or •Identify staffing needs; US$14,822 per person. • Develop severance and retire When considering whether and how to ment packages; pay such sums, governments have to contrast these expenditures with broad- • Analyze labor market characteris er long-term goals of port reform, which tics and needs; is to make ports more efficient and cost •Re-deploy workers through effective in support of the overall econo- active labor market programs; my. Therefore governments, as former employers, and the private sector, as •Design employee share owner- new employers, both have an important ship schemes; role to play in the financing of the expenses associated with port labor • Establish consultative mech- reductions. Actually it could also be anisms; possible, in view of the benefits to be expected from a quick resolution of the •Prepare communications pro- issue, to ask port customers (shipping grams. lines, for instance) to contribute to the • Direct financing for severance pay- modernization costs through a tempo- ments, provided that such financing rary levy on tariffs. results in improved productivity of INTERNATIONAL SUPPORT FOR LABOR the sector and related enterprises ADJUSTMENT and that social mitigation measures are put in place. (The first example A number of programs and funding of this type of support was the sources can be used to support port reform of Brazil Railways, where a labor reform, several of which are Bank project financed half the costs described below. of the severance program. For a list of other examples, see Annex 1.) World Bank Support • Poverty alleviation programs such as Since 1990, the World Bank has support- social funds to provide compensa- ed labor adjustment in privatization and tory assistance, advice and training, enterprise restructuring in about fifty placement services, and credit for

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self-employment. Such funds are tion of ports in the intermodal transport typically targeted to the poor, but system and its dependency on the other they have been used for state enter- modes of transport, and improve their prise workers in cases of extreme understanding of the forces shaping the economic distress or where large- competitive environment. scale redundancies occur in concentrated areas (as in the case of mining The objective of the International Labour in Bolivia and Peru). Office (ILO) Portworker Development Program (PDP) is to enable governments Training Support and port authorities of developing countries to establish effective and systematic Education and vocational training is port worker training schemes. This vital to the change process. It should training is designed to improve contain- include not only general education and er handling performance, working con- broad industry-focused vocational train- ditions and practices, safety and the sta- ing, but also specific job instruction, tus and welfare of port workers. communication and social skills courses, and health, safety and environmental The following port training centres or training. Sufficient and continuing funds organizations have acquired the PDP are necessary to finance the education training materials: and training infrastructure. The need for lifelong training to enable workers to • TEMPO, Port of Rotterdam cope with the permanent changes taking Consulting, Rotterdam, Netherlands; place in the industry is recognized in the 1989 EU charter of Fundamental Social •Shipping and Transport College, Rights of Workers, which states that: Rotterdam, Netherlands; “...every worker of the European • Hong Kong International Terminals, Community must be able to have access Hong Kong (HIT); to vocational training and benefit therefrom throughout his or her working • PORTNET Academy, South African life.” Ports Organisation, Ports of Durban, Cape Town and Port Elizabeth, South Moreover, good education and vocational training are increasingly recognized Africa; and used as an instrument to improve • Port Louis, Mauritius; and the quality of the products and services of businesses and thus enhance their • Sri Lanka Ports Authority, Colombo, competitiveness. Therefore, education Sri Lanka. and vocational training is in the interest of the port community as a whole. The translation into Spanish of PDP is Furthermore, a lack of education and being undertaken under a German training means a lack of opportunities to Technical Cooperation Agency (GTZ) teach the workers the essence of trans- project in Latin America. PDP will be port economics and policies, the posi- implemented in selected Latin American

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countries on completion of the transla- pletely financed or subsidized by public tion of the PDP training materials into funds. Spanish. PDP is also being translated in Chinese. The two networks in South America (Argentina, Brazil, Chile, Peru, Dissemination of training programs has Uruguay) and the Caribbean (Cuba, also been improved through the estab- Colombia, Guadeloupe, Jamaica, lishment and/or strengthening of train- Mexico, Panama and Trinidad and ing centers and cooperation networks Tobago) consist mainly of private man- associated with the international agement training institutes and universi- TRAINMAR Programme of UNCTAD ties, and provide training on a commer- (United Nations Conference on Trade cial and competitive basis for the private and Development) in Central and South and public port, shipping and multi- America and the Caribbean. This was modal transport sector. They receive no achieved through the upgrading of local financial support from UNCTAD, and regional training capabilities and UNDP or the World Bank, but do benefit the application of the systematic from technical cooperation for the devel- TRAINMAR methodology for the development of new or upgraded training opment and exchange of standard train- programs, courses and seminars. ing materials as part of cooperation projects financed by UNDP (United Nations In 1998, the three networks delivered Development Programme), the successfully about 260 training courses, European Commission, Germany and seminars and workshops for managers, France. technicians, professionals and workers of the port, shipping and multimodal Since 1988, the three TRAINMAR net- transport industry of the region. works in Latin America and the Caribbean have regularly and success- Further information on the PDP may be fully developed and delivered courses obtained from: directed at management and superviso- Chief, Maritime Industries Branch ry levels of the port and transport indus- Sectoral Activities Department try. However, they differ considerably International Labour Office with regard to their approach, philoso- 4 route des Morillons phy, concept, strategy and target popu- CH-1211 Geneva 22 lation: Switzerland The network in Central America (Costa Telephone: (41.22) 799-7466 Rica, El Salvador, Guatemala, Honduras, Fax: (41.22) 799-7050 Nicaragua, Panama) continues to com- E-Mail: [email protected] prise only public port training centers POST-REFORM LABOR-MANAGEMENT and to deliver mainly in-country courses RELATIONS limited to participants of the public port sector. All its activities are coordinated Once port reform is implemented, port by a regional public entity and are com- labor and management must continue to

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cooperate if reform is to achieve its objectives.

Successful labor reform can only be achieved when the commercial goals (efficiency and growth) of the employers are balanced with the social goals (equity and fairness) of their employees.

As mentioned earlier, one of the important duties of the port reform task force is to assess the roadblocks that prevent ports from achieving their commercial goals. The proposed changes in labor regimes, collective agreements, and work practices to improve productivity and curtail cost will stand a better chance of success if they are reached with the agreement of all stakeholders.

For mutual gains, labor and management have to concentrate on building stronger relationships through better communication and more cooperation. In that respect, it appears appropriate to foster the establishment of joint committees between port workers and terminal operators to resolve operational problems and disputes without having to resort to official intervention.

Participation of workers in workplace decisions has an enormous potential to motivate port workers and to enhance customerssatisfaction. The combination of better communication and working toward agreed objectives can set the stage for improved labor-management relations in ports that have undergone reform.

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Annex 1 Examples of World Bank Support for Labor Reform

WORLD BANK SUPPORT FOR LABOR ADJUSTMENT 1990-1997 World Bank Support for Labor Adjustment in State Enterprise Restructuring and Privatization 1990-1997 Loan Region Country FY Project name Number Type of Assistance to Displaced Labor

Africa Cape verde 92 Privatization TA C2377 Financing retraining costs of former PE workers incurred by private firms Chad 91 Social Development C2156 Assistance to employees laid of in the Program restructuring of the cotton sector Côte d’Ivoire 94 Labor Force Training C2637 Training support for retrenched workers from PEs Ghana 96 Public Enterprise and C2877 Arrangements to address labor redun- Privatization dancies cost by divestiture Guinea 92 PE Reform C2398 Development of reorientation programs for redundant PE workers Kenya 93 Parastatal Reform & C2440 Compensation packages and social safe- Privatization TA ty net for displaced workers in telecoms, railways, and ports Malawi 95 Railways Restructuring C2696 Compensation for retrenched staff, as well as counseling, retraining, housing support, and equity participation in new railway company Mozambique 93 Maputo Corridor C2454 Labor redeployment strategy and plan Revitalization TA for redeployment of surplus staff from railways company Zambia 92 Privatization & C2405 Training and counseling to retrenched Industrial Reform workers

Asia Bangladesh 94 Jute Sector C2567 Workforce reduction, employees Adjustment retrenchment, mandatory retirement age, training and retraining program for workers in affected mills China 95 Enterprise Housing L2642 Strategy to help municipalities develop and Social Security market-based housing system and social Reform safety net to free enterprise of direct wellfare responsibilities China 95 Labor Market L3967 Policy reform on coverage and pulling of Development social insurance at municipal level, reduction of surplus labor in SOEs, and monetization of social benefits by employers; employment services, including unemployment insurance and labor merket information China 95 Shenyang Industrial L3788 Change term of employment of munici- Reform pal-controlled enterprises (MCES) to contract status, corporatizing MCES, establishing labor market information system India 92 SAL I C2316 Program for re-deployment and retraining and appropriate compensation where necessary India 95 Social Safety Net C2448 Establishment of temporary social safety Sector Adjustment net to cover costs of compensation, retraining, and employment/ redeployment schemes in areas affected by PE reform

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Annex 1-continued Examples of World Bank Support for Labor Reform

Loan Region Country FY Project name number Type of assistance to displaced labor

Europe and Pakistan 94 Power Sector L3764 Development of a manpower transition Central Asia Development program that would allow adequate management flexibility to the private sector while addressing the concern of labor Albania 94 Labor Market C2544 Income support and redeployment assis- Development tance to unemployed, and creation of small enterprises Armenia 93 Institution Building L3585 Training and retraining program for unemployed Armenia 96 Social Investment C2784 Labor intensive works for the unemployed, Fund including public sector workers Kazakstan 95 Social Protection L3896 Employment service component and Project social services component to transer services from restructuring PEs to local governments Kyrgyz 94 Social Safety Net C2643 Employment services component, counsel- Republic ing and retraining. Pilot program to facilitate transfer of social assets from restructured PEs to local authorities Latvia 93 Rehabilitation L3525 Retraining of redundant labor, development of local social assistance officers and reform of cash benefits programs Restructuring of large loss-makers includ- Macedonia, 94 Economic Recovery C2564 ing removal of legal impediments to Former Credit downsizing, strategy for labor adjustment Republic of and active labor market programs Yougoslovia Employment service component to deal Poland 91 Employment L3338 with mass layoffs, counseling, and training; Promotion & Services microenterprise development help local NGOs provide services to unemployed Generating private sector employment Romania 93 Transport L3593 among public sector workers previously employed by government road agencies Employment and training component, and Romania 96 Employment & Social L3849 social protection components to restruc- Protection ture and improve institutional capacity of social insurance agency Developing capacity of Federal Russian 93 Employment Services L3532 Employment Service to register and pay Federation & Social Protection unemployment benefits, organize job training, and develop modern social security system Support for the social protection system, Russian 96 Coal Sector L4059 including unemployment benefits, retrain- Federation Adjustment ing, and job placement services Labor adjustment program, including Turkey 94 Privatization L3728 retraining, and incubator programs for SOI Implementation redundant workers Assistance and Social Safety Net Project Training and technical support in system Ukraine 97 Social Protection L4097 operations to computerize administrative Support offices

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Annex 1-continued Examples of World Bank Support for Labor Reform

Loan Region Country FY Project name number Type of assistance to displaced labor

Latin Argentina 91 Public Enterprise L3291 Includes assistance to reduce PE workforce, America and Reform Adjustment financing severance pay and retraining the (PERAL) Caribbean Argentina 91 Public Enterprise L3292 Improvment in labor productivity through Reform Exec (PEREL) revision of labor contracts and design of labor reduction mechanism Brazil 96 Federal Railways L4046 Financing of severance pay, retraining, litera- Restructuring and cy programs Privatization Project Costa Rica 93 SAL III L3594 Programs to retrain displaced public sector employees Guyana 94 Sugar Industry C2545 Production incentive and profit sharing Restructuring and scheme for employees, including employee Privatization Project stock ownership plan. Mexico 93 Labor Market and L3542 Employment services and training for dis- Productivity placed workers Enhancement Peru 93 Privatization TA L3540 Information and re-orientation programs to assist laid-off PE workers Peru 94 Social Development L3684 Retraining and credit to a small-scale entre- Fund preneurs for employment generation Peru 94 Privatization L3595 Promoting Human resource development Adjustment Loan Peru 94 Transport L3717 Reducing staff redundancy, technical and Rehabilitation training assistance to strengthen management capacity Venezuela 90 Public Enterprise L3223 Retraining and employment adjustment Reform assistance programs, and effective mechanism for severance and retrenchment of labor

Middle-east Egypt 96 Social Fund C2865 Active labor market support to workers made and North redundant by privatization and liberalization Africa reforms Tunisia 90 Public Enterprise I L3109 Redeployment program for redundant staff Tunisia 96 Training and L4036 Employment services for workers affected by Employment II economic restructuring Tunisia 97 Economic L4069 Revision of labor legislation to provide sever- Competitiveness ance for workers of bankrupt enterprises Adjustment Loan Study on severance and redeployment Yemen 96 Economic Recovery C2840 option for redundant workers. Credit

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

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

HE551.P757 2003 387.1'068—dc21

2003045093 42705_MOD8_COVER_AGS 5/27/03 8:31 AM Page I

PORT REFORM TOOLKIT

MODULE 8 IMPLEMENTING PORT REFORM

THE WORLD BANK 42705_MOD8_TEXT_AGS 5/27/03 8:08 AM Page 1

MODULE 8 IMPLEMENTING PORT REFORM

INTRODUCTION Legal adaptation, which establishes the sectoral legal framework based Shifting the boundary between the pub- on the principles agreed upon as a lic and private sectors entails four kinds result of the strategic analysis and of preparations: the redefinition of institutional rules; and Strategic preparation, which results in the considered adoption of a par- Transaction preparation, which ticular institutional model and serv- results in the development of tender- ice ensemble that best matches a ing processes that are transparent, port’s competitive environment and open and competitive. its growth prospects; This module describes how to undertake Redefinition of authorities and pow- this series of tasks in a practical and effective way. ers, which results in regulations, rules, tariffs and procedures that STRATEGIC PREPARATION ensure that the provision of all port services is fully coordinated and that Because of the wide-ranging implica- the proper incentives to spur effi- tions for the national economy of port ciency are in place; reform, deciding to embark on the path

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to reform must be an initiative fully sup- competence. While the IWG may, and ported at the highest levels of should, consult with all interested stake- Government. Once the principle is holders and representatives of the pro- agreed upon by the Cabinet, an effective fessional port and maritime community, way to overcome the traditional difficul- it must be able to view the reform ties inherent with working across sever- process from a broader economic peral ministerial departments is to set up an spective, focusing on the overall public Interministerial Working Group (IWG) interest of the country. under the chairmanship of a high level public official, and give it an explicit Hiring Advisers. Designing and imple- mandate. Drafting and getting this menting a port sector reform program mandate approved will be the first step involving increased private sector par- to set the reform process in motion. ticipation in port services requires substantial economic, financial, technical Mandate of the IWG. The and legal expertise, and the coordination Interministerial Working Group will of this expertise. The process requires have to define the objectives of port detailed work, first refining the institu- reform, have them approved by the tional option to be implemented, then Government, and will then have to pre- preparing the legal and regulatory pare, based on those objectives, a Port measures required to support it, and Sector Policy Paper that will propose the finally drafting many complex docu- new institutional framework within ments, such as the necessary enabling which the sector will develop. In partic- laws, the bidding documents for private ular, this Policy Paper will propose a sector applicants, and the draft contracts preferred choice for the new port man- with private port operators. Preparing agement model to be implemented. these documents often involves several iterations, as preliminary versions are Composition of the IWG. The skills of distributed to the national professional the people appointed to the community and to prospective private Interministerial Working Group will be partners for comment, and then amend- critical. First, IWG members must rep- ed in accordance with those comments resent the various ministerial depart- and with the Government’s policy con- ments directly interested in port sector cerns. activities, i.e., Transport, External Trade, Finance, Labor, Environment, and possi- Governments often lack the full range of bly Agriculture, Industry, etc. Second, expertise within the civil service to carry they must collectively gather the out these tasks. Some countries may required competence in terms of eco- have few of the necessary skills avail- nomic, financial, technical, and social able locally and will need international aspects of the port industry both domes- advisers. All Governments will need to tically and regionally. Third, they must contract out at least some of these tasks be seen as independent from any inter- to external advisers. Managing these est group, and the key staff must have a advisers then becomes a primary task of recognized reputation in their field of the IWG.

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Various kinds of advisers may be help- concession contracts. Environmental ful. Economic and regulatory consult- consultants can prepare environmental ants can advise on how the market for studies, baseline surveys of existing con- port services can be structured and how ditions at the outset of the reform competition can be promoted, depend- process, and environmental impact ing on domestic and regional contexts; assessments of specific development they can also help devise adequate regu- options. Finally, investment bankers latory and monitoring mechanisms and financial consultants can help pre- when needed. Legal consultants can pare financial projections for both the help prepare draft legislation and regu- sector as a whole and for specific invest- lations, bidding documents and contrac- ment options, determining the bankabil- tual agreements. Technical consultants ity of potential development projects can undertake technical assessments of from a private investor’s perspective. port facilities and help prepare technical For more information on how best to specifications and requirements for both select and hire advisers, see Box 1 on the general regulatory purposes and specific separate Toolkit for Hiring and

Box 1

Hiring and Managing Advisers

The Public Private Infrastructure Advisory Facility (PPIAF) has funded the Toolkit for Hiring and Managing Advisors for Private Participation in Infrastructure. This Toolkit will assist governments to hire and manage economic consultants, financial advisors and legal experts, as well as other specialists required to increase the role of the private sector in all infrastructure services. The main components of the Toolkit include a CD-ROM overview of the material as well as an Executive Summary and three volumes of publications which contain nine modules as follows:

Volume 1: What is PPI and how can advisors help?

Module 1: Principles of selection for advisory services to support PPI Module 2: Identifying the stages of PPI Module 3: The role of advisors Module 4: Defining the project and the contract Module 5: Use of advisors for small-scale projects

Volume 2: Donor agencies and the funding of PPI advisory services

Module 6: Funding agency requirements

Volume 3: How to select and manage PPI advisors

Module 7: Selecting advisors

Module 8: Paying advisors for their advice

Module 9: Managing the PPI advisory services

It is expected to be available in 2001. Information for ordering the PPI Advisory Toolkit as well as a self-guided tour of the Toolkit's main themes will be available on PPIAF's homepage: www.ppiaf.org. For specific questions on the Toolkit, please email Jordan Schwartz of the World Bank's Private Sector Advisory Services Department at jschwartz3@world- bank.org.

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Managing Advisors for Private strategic situation of the port sector, and Participation in Infrastructure. to review the operational and economic strengths and weaknesses of the domes- Time Frame. For the sake of efficiency, it tic port and maritime industry. is advisable to give explicit deadlines to Organizing effective communications the work of the IWG. The time frame with the national port and maritime for conceptualizing and implementing community as well as with important reform, however, must be realistic. Time stakeholders (e.g., the requirements obviously will vary coun- importers/exporters association, cham- try by country, depending on the local bers of commerce, inland transport car- economic context and on the physical riers), and maintaining this interaction magnitude of the sector; however, a six- throughout the reform design and month period is likely to be the mini- implementation process, will be a major mum time required to establish a sector responsibility of the IWG. The IWG reform strategy and secure agreement review should include: on it from various stakeholders. This phase may extend up to twelve months • market conditions, competition con- in more complex institutional and oper- ditions (both domestic and regional) ational environments. Implementing the and demand forecasts; reform itself -- including transforming public port authorities, setting up regu- • domestic legal and regulatory condi- latory bodies as needed, preparing tions; transactions with private partners, and • domestic institutional arrangements; closing contracts -- may require between and one to two years, assuming no political disruptions occur. Altogether, a two to • national strategic objectives for the three-year time frame between the port sector in support of overall inception of the reform process and the national economic development time when the new sector organization goals. is up and running would seem a reasonable reference. The IWG must then decide on the port sector institutional and management Reporting Relationship. Due to its model that would best suit the national interministerial nature, and to the fact conditions and strategic economic objec- that most of its proposed decisions will tives. Information included in Modules have a far-reaching impact across a 2 and 3 may help in this regard. Once number of ministerial departments, a the main organizational principles of the logical proposition would be for the sector are agreed upon within the IWG, IWG to report directly to the Head of the Government must firmly endorse Government, Prime Minister or equiva- and adopt them so that all parties can be lent. assured that the reform program will be seen through to completion. IWG Workplan. The first element of the IWG workplan should be to consider the

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REDEFINITION OF AUTHORITIES AND tively, should be defined precisely, POWERS together with the appropriate implementation guidelines. In doing so, par- As the next step in its workplan, the ticular attention should be paid to the IWG should define the regulatory prin- establishment of official consultation ciples applicable to the sector and the procedures between the private port and methods to be employed in implement- maritime community and the local pub- ing reform. This work is complementa- lic monitoring bodies (e.g., the public ry to the organizational arrangements, port authorities). These consultation and usually has a bearing on the legal procedures will be important in making provisions to be developed as part of the certain that customers’ concerns and new sectoral legislative framework. On suggestions about the functioning of the the basis on the institutional and man- ports can be timely and regularly chan- agement framework decided upon as neled to the ports’ management boards part of the Strategic Preparation phase, or to the sector regulatory body. the IWG can then turn its attention to the establishment of the public entities Public Infrastructure Pricing. The prin- that will be in charge of monitoring the ciples for port public infrastructure pric- sector and the definition of their man- ing will also have to be agreed upon at dates. this stage. Recently, a great deal of attention has been devoted to this very Regulatory Principles. Following the issue within the European Union, result- assessment of the competitive situation ing in the publication of two papers of in the sector (from both a national and significant interest (Green Paper on Sea regional perspective), the IWG should Ports and Maritime Infrastructure, 1997; assess the need for an economic regula- and White Paper on Fair Payment for tory mechanism. If such a mechanism is Infrastructure Use: A Phased Approach determined to be necessary, the man- to a Common Transport Infrastructure date, operating rules and composition of Charging Framework in the EU, 1998). the regulatory body should be estab- Those papers, following the conclusions lished (see Module 6 for guidance in this of an earlier study (European Sea Port regard). In all cases, regulatory princi- Policy, 1993), basically endorse the view ples will have to be drafted or updated that there is no fundamental difference to take into account the consequences of between investments in port infrastruc- the new operational framework and of ture and other capital intensive invest- technological changes. ments in industrial complexes. Therefore, there should be no reason for Port Authorities and Consultations. As adopting a completely different part of the reform process, the status approach to port investments, and con- and mandates of the public port authori- sequently no reason why direct users ties will be redefined, along with their should not bear the costs of such invest- missions and responsibilities. Reporting ments. The study went on to suggest and monitoring relationships with line that the introduction of market princi- Ministries and private operators, respec-

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ples in infrastructure pricing would be in cases where strong competition exists the most effective remedy to avoid the for the services to be concessioned, and risk of creating wasteful overcapacity predominantly on minimizing the cost and possible distortions of trade flows for the customer in cases where compe- (except in the case of pricing maritime tition is deemed weak or non-existent.) access and protection infrastructure). Pricing of basic port infrastructure This distinction made between port (mostly access and protection assets like access and protection infrastructure channels, breakwaters, and navigation (which can take the form of basic infra- aids) presents a different challenge. structure and operational infrastructure) Most of these assets have unusually and other forms of port-related invest- lengthy depreciation periods. It is comments relates well to the new sharing of mon in official depreciation schedules responsibilities between public authori- for financially autonomous port authorities (as owners and developers of basic ties to find breakwaters being depreciat- infrastructure) and private service ed on a 80-year, sometimes 100-year providers (as operators and/or conces- basis. This feature of basic port infra- sionaires, licensees and/or investors in structure raises two issues. First, these operational infrastructure). depreciation periods are, in the best of cases, about 5 to 6 times longer than any The result is that operational infrastruc- available commercial financing in the ture (e.g., berths) increasingly is being market (when there is a market for priced on commercial terms. The com- financing long-term infrastructure). mercial transaction may be structured as And second, technical obsolescence (e.g., a BOT concession contract, where the insufficient access draft) may occur well operator/investor will include its capital before the end of these depreciation cost in the cargo handling charges it will periods, effectively rendering worthless levy on its customers. Or, the transac- the original investment. tion may be structured as an operating concession (where the operational infra- The EU documents referenced above list structure already exists), where the Port three well-known pricing options for Authority includes in the concession fee basic infrastructure: the amount required to cover the full depreciation of its previous investment, • average cost pricing, which would a cost that the concessionaire will again guarantee full recovery including of transfer to its own customers through its past infrastructure investments; charges for services. The key to getting • charging for operating costs only, a fair tariff for the customer hinges on which would leave capital costs out, the competitive conditions prevailing for in particular for new investments; awarding the contact, and, sometimes, and on the award criteria themselves. (Generally, award criteria should rely • marginal cost pricing, which is predominantly on maximizing total dis- deemed to best meet economic effi- counted revenues to the Port Authority ciency requirements.

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The research recommends an infrastruc- settings, some ports may face higher ture charging policy based on long-term than average access and protection marginal social costs, which would infrastructure costs (e.g., periodic main- cover the cost of new capital, operating tenance of a long entrance channel). and external costs of infrastructure use. In other words, port basic infrastructure The level of cost recovery required for charges should be set in line with mar- basic infrastructure is contingent not ginal costs, which would also take into only on the amount invested, but also account the continuing need for new on the terms under which it is financed. investments and the existence of exter- Because balanced budgets are now a nalities relating to environment, conges- must for port authorities, financing tion and accidents. schemes will heavily drive the depreciation schedule built into infrastructure Public landlord port authorities increas- charges (i.e., amortization schedules will ingly are organized as autonomous supersede technical or economic life financial entities required to recover depreciation formulas). Since commer- their full costs to the largest possible cial financing of infrastructure, when extent. As a consequence, these authori- available, offers much shorter maturities ties have been confronted with the ques- than the economic life of the port assets tion of whether full cost recovery of to be financed, this would tend to drive basic infrastructure investments through up port charges significantly. To miti- user charges would weaken their com- gate this phenomenon, governments petitiveness in the market to the point of sometimes agree to finance part of the seriously undermining their contribu- access and protection costs of ports as tion to the attainment of public policy part of the national budget, which effec- objectives. Government authorities, tively splits basic infrastructure costs from their perspective, while eager to between the user and the taxpayer. One curtail budget contributions to port approach is typified by that of the infrastructure investments, sometimes United States, where dredging of access worry that increased port user charges to ports from the high seas is carried out may divert traffic flows to other routes, by the U.S. Corps of Engineers and is which might prove less economically funded through the federal budget efficient for the country as a whole. (while dredging of port basins are left to Competitiveness issues in relation to the port authorities). Another example port infrastructure charges are certainly is the approach taken in France, where worthy of attention, but must also be the 1965 Law on Autonomous Port seen in perspective -- on average, they Authorities split port infrastructure costs amount to only 10% of the costs between the port authority and the state incurred during a port transit. This may budget, the latter bearing 100% of access be critical for ports facing strong compe- dredging costs and 80% of protection tition (in particular when competing for costs (breakwaters). From an account- transshipment traffic), but relatively ing standpoint, French port authorities minor in other circumstances. Of register the government’s contribution course, because of specific geographic in their balance sheets as a subsidy,

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which is renewable, and, consequently, the freight rates. Indeed, there is some not depreciated. However, scarcity of rationale for the port to assess charges budget resources in many countries is only against vessels, the physical charac- making these arrangements increasingly teristics of which largely determine the difficult to sustain, and while infrastruc- size and cost of the basic infrastructure ture subsidies of this kind may still required to accommodate them. There exist, more often than not there is no is, therefore, some logic in establishing a guarantee that such subsidies will con- schedule of infrastructure dues based on tinue. Consequently, port authorities those physical characteristics rather than must fully depreciate the investment, on the characteristics of the cargo. subsidies included. These port authorities still benefit from the subsidy Labor Redeployment. More often than scheme, though, since their tariffs can not, port sector reform will entail a sig- reflect the depreciation of assets over nificant adjustment in the number and their full economic lives. qualifications of port workers, both dockworkers and clerical staff. Module Finally, the question of allocating these 7 provides a detailed overview of how infrastructure charges between the ship to address this issue effectively. and the cargo must be addressed. In the Authorities should organize interactions past 50 years a number of port authori- with the unions early on in the reform ties and government have attempted to process to give reform the best chance to rationalize this allocation through ana- succeed. Areas that need to be dis- lytical methods (e.g., the Freas Formula cussed with unions include staff rede- in the United States) , and later through ployment, retraining, and procedures cost accounting techniques. Historically, and compensation principles in case when infrastructure charges were actual- redundancies prove unavoidable. ly split between ship dues and cargo dues, the cargo ended up paying a much Contract Management Principles and higher proportion of the total cost than Procedures. Once the mandates of all the ship. Beside any formula-embedded public entities are clearly defined, rationale, this situation may also have explicit procedures and regulations gov- had to do with the respective bargaining erning the award, management, and power of the shipowners on one side monitoring of contracts with private sec- (usually well organized) vis-à-vis the tor partners will have to be drafted. shippers on the other (typically not well These procedures should be widely pub- organized and often much less able to licized through workshops organized negotiate effectively with port authori- with all domestic stakeholders, and be ties). open to interested foreign investors and operators so that the rules of the game This debate tends to become somewhat are unambiguously known to all poten- academic today, since in well-function- tial players. ing shipping markets infrastructure charges assessed against vessels ultimately transfer back to shippers through

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LEGAL ADAPTATION • Draft legislation governing contractual arrangements between public If the organizational changes contem- authorities and private commercial plated should require changes in legisla- partners (e.g., licenses, leases, and tion, any necessary legal work should concessions); get underway very early in the reform process. Often, port-related entities • Draft standard bidding documents enter into commercial arrangements and standard contractual documents; ahead of the legislative changes that are and necessary to fully reform and liberalize •Prepare all necessary briefing docu- the sector. Subsequent legal changes mentation to present the new legisla- may complicate the contractual relation- tive package for Government and ships for these initial deals. Or, these parliamentary approval. early investors may try to slow down the broader reform process so that they TRANSACTION PREPARATION can enjoy as long as possible a competitive edge stemming in part from an There are myriad details that must be advantageous legal situation. attended to as any port reform initiative moves into its final stages. Dozens of Once the strategic choices for the reform documents and analyses must be pre- process have been made, the main prior- pared and made available to the public ity of the IWG will be to translate them and prospective investors and port oper- into national legislation. This will gen- ators, the key among them being erally include, without being limited to, described below. the following elements: Financial Model. Establishing the via- • Conduct legal due diligence, identi- bility of any given reform package will fying the pieces of legislation in need involve testing its overall financial sus- of being updated, changed, or tainability, as well as its sensitivity to a scrapped altogether, and the missing few critical variables. Financial model- pieces to be added; ing should help the public authorities • Conduct legal review of all aspects identify the transactions that will prove associated with port labor reform, attractive to private sector partners, which can have significant conse- while providing them with the revenue quences when it comes to funding streams they need to meet their own the required transition measures; financial obligations. The Project Financial Model included in Module 5, • Draft new port sector legislative with a number of adjustable parameters, framework; should help those responsible for port reform develop a financial picture • Draft by-laws of reorganized and/or reflecting the particular conditions of the restructured public entities, port transactions under consideration, there- authorities, and regulatory authori- by further helping decision-makers ties; select feasible packages to offer for bid-

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ding by private investors and develop- Due Diligence. Public authorities, possi- ers. bly with help from specialized financial advisors, will next have to prepare the The Project Financial Model will be fed required due diligence reports to certify with data resulting from the following the financial status of the assets and tasks: activities to be tendered.

•preparation of project cost estimates Preparation of Contractual Documents. (capital, operations, maintenance); Public authorities should next draft the contractual documents defining the •establishment of tariff principles, operational and financial relationships structure and levels; between and among the contracting • estimation of market demand and of authority, the regulatory authority and corresponding revenues; the private operators. These should include, in particular, all required opera- •determination of the prospective cap- tional and financial covenants that may ital structure (debt/equity ratio); be deemed necessary. The details of concession contracts are treated in •identification of the level of govern- Module 4. ment support (guarantees, investment contribution); and Preparation of Bidding Documents. In addition to the proposed draft contract, • assessment of tax, dividend, and for- the tendering documentation should eign exchange requirements and include all documents pertaining to the their cash flow implications. organization and rules governing the bidding process, with enough informa- Assessment of staff restructuring costs tion provided to guarantee its trans- stemming from the review of labor prac- parency and fairness, thereby ensuring tices and needs must be built into the the widest participation by potential overall cost estimate of the reform pro- interested investors/operators as possi- gram at this stage. Any redeployment ble. All documents and information rel- of labor necessitated by port reform evant to the proposed transaction will should preferably be carried out under then have to be displayed for review by the auspices of public authorities. potential bidders in a dedicated Data Similarly, the attendant cost associated Room. For more detailed advice on how with any such redeployment should be to structure and manage the bidding borne by public authorities as well, process, please see M. Kerf, R. David before the formal launch of the reform Gray, T. Irwin, C. Levesque, R. Taylor. process. However, if all or part of these 1998. Concessions for Infrastructure - A staff restructuring costs are left to the Guide to Their Design and Award. private sector, they should be factored World Bank Technical Paper No. 399. into the financial model used to assess Order from World Bank Publications. the feasibility of the reforms.

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Box 2 and 2a depicts in detail a typical sequence of actions associated with port reform, with rough timeframes associated with each action. This information should be useful in guiding reform decision-makers through the entire process – from conceptualization through implementation.

Box 2

The Critical Path Preparation Phase Implementation Phase

Strategic Preparation Setting up of the Interministerial Working Group (IWG) and definition of 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 Determination of technical and economic regulatory needs Establishment of 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 authorities statutes and mandates Organize interactions with unions on ports 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

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Box 2a

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 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

Transactions 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

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APPENDIX GLOSSARY PORT AND SHIPPING TERMS 42705_MOD8_TEXT_AGS 5/27/03 8:08 AM Page 1

APPENDIX GLOSSARY PORT AND SHIPPING TERMS

Backhaul Beam

To haul a shipment back over part of a route that The width of a ship. it has already traveled; return movement of cargo, usually opposite from the direction of its primary Belt line cargo destination. A switching railroad operating within a port or Ballast keel other commercial area.

A heavy keel fitted to sailing vessels to lower the Berth center of gravity and improve stability. Aplace in which a vessel is moored or secured; Ballast tanks place alongside a quay where a ship loads or dis- charges cargo. Compartments at the bottom of a ship that are filled with liquids for stability and to make the Berth term ship seaworthy. Shipped under a rate that does not include the cost of loading or unloading.

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Berthage Build-own-operate (BOO)

Charges for the use of a berth. A form of project wherein a private party or consortium agrees to finance, construct, operate, Bill of lading and maintain a facility previously owned A document that establishes the terms of con- and/or operated by a public authority. The contract between a shipper and a transportation cessionaire retains ownership of the facility. The company. It serves as a document of title, a con- concessionaire bears the commercial risk of tract of carriage, and a receipt for goods. operating the facility.

Bogie Bulkhead

A set of wheels built specifically as rear wheels A structure to resist water; a partition separating under a sea container. one part of a ship from another part.

Bond port Bulk vessel

Port of a vessel’s initial customs entry to any All vessels designed to carry bulk cargo such as country; also known as first port of call. grain, fertilizers, ore, and oil.

Bonded warehouse Bunkers

A warehouse authorized by customs authorities Fuel used aboard ships. for storage of goods on which payment of duties is deferred until the goods are removed. Cabotage

Break bulk Shipments between ports of a single nation, frequently reserved to national flag vessels of that Loose, non-containerized cargo stowed directly nation. into a ship’s hold; to unload and distribute a portion or all of the contents of a container. Carfloat

Broker A barge equipped with tracks on which railroad cars are moved by water. A person who arranges for transportation of loads for a percentage of the revenue from the Cargo tonnage load. Ocean freight is frequently billed on the basis of Build-operate-transfer (BOT) weight or measurement tons. Weight tons can A form of concession wherein a private party or be expressed in terms of short tons of 2000 consortium agrees to finance, construct, operate, pounds, long tons of 2240 pounds, or metric tons and maintain a facility for a specified period and of 1000 kilograms (2204.62 pounds). then transfer the facility to a government or Measurement tons are usually expresses as cargo other public authority. The concessionaire bears measurement of 40 cubic feet (1.12 cubic meters) the commercial risk of operating the facility. or cubic meters (35.3 cubic feet).

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Carrier Concession

Any person or entity who, in a contract of car- An arrangement whereby a private party (con- riage, undertakes to perform or to procure the cessionaire) leases assets from a public authority performance of carriage by sea, inland water- for an extended period and has responsibility for way, rail, road, air, or by a combination of such financing specified new fixed investments dur- modes. ing the period and for providing specified services associated with the assets; in return, the con- Cartage cessionaire receives specified revenues from the operation of the assets; the assets revert to the Intra-port or local hauling of cargo by drays or public sector at expiration of the contract. trucks; also referred to as drayage. Conservancy Chassis In some countries, this fee is levied to retain A frame with wheels and container locking upkeep of the approaches to waterways and devises to secure the container for movement. canals.

Classification yard Consolidation

A railroad yard with many tracks used for Cargo containing shipments of two or more assembling freight trains. shoppers of suppliers. Containerload shipments may be consolidated for one or more consignees. Cleaning in transit Container The stopping of articles (such as farm products) for cleaning at a point between the point of ori- Atruck trailer body that can be detached from gin and destination. the chassis for loading onto a vessel, a rail car, or stacked in a container depot. Containers may be Clearance ventilated, insulated, refrigerated, flat rack, vehi- The size beyond which vessels, cars, or loads cle rack, open top, bulk liquid, dry bulk, or other cannot pass through, under, or over bridges, special configurations. Typical containers may tunnels, highways, etc. be 20 feet, 40 feet, 45 feet, 48 feet, or 53 feet in length, 8 feet or 8.5 feet in width, and 8.5 feet or Cleat 9.5 feet in height.

A device secured on the floor of a container to Container freight station (CFS) provide additional support or strength to a Ashipping dock where cargo is loaded cargo-restraining device, or a device attached to ("stuffed") into or unloaded ("stripped") from a wharf to secure mooring lines. containers. Container reloading to/from sea Common carrier containers to rail and motor carrier equipment is an activity typically performed in a container A transportation company that provides service freight station. to the general public at published rates.

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Container pool Customhouse

An agreement between parties that allows the A government office where duties are paid, doc- efficient use and supply of containers; a com- uments filed, etc., on foreign shipments. mon supply of containers available to the shipper as required. Customs broker

Containership Aperson or firm, licensed by the customs authority of their country when required, Ship equipped with cells into which containers engaged in entering and clearing goods through can be stacked; containerships may be full or customs for a client (importer). partial, depending on whether all or only some of its compartments are fitted with container Cut-off time (Closing Time) cells. The latest time a container may be delivered to a Container terminal terminal for loading to a scheduled vessel, train, or truck. An area designated for the stowage of cargo in containers, usually accessible by truck, railroad, Daily running cost and marine transportation, where containers are picked up, dropped off, maintained, and Cost per day of operating a ship. housed. Deconsolidation point Container yard Place where loose or other non-containerized Amaterials handling/storage facility used for cargo is ungrouped for delivery. completely unitized loads in containers and/or Demurrage empty containers.

Contraband The delay of a vessel or detention of a shipment beyond the stipulated time allowed for loading Cargo that is prohibited. or unloading; the resulting payment to the owner for such delay or detention. Contract carrier Dock Any person not a common carrier who, under special and individual contracts or agreements, For ships, a cargo handling area parallel to the transports passengers or cargo for compensa- shoreline. tion. Draft Controlled atmosphere The depth of a loaded vessel in the water, taken Sophisticated, computer controlled systems that from the level of the waterline, to the lowest manage the mixture of gases within a container point of the hull of the vessel; depth of water, or throughout an intermodal journey, thereby distance between the bottom of the ship and the reducing decay. water line. Also referred to as draught.

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Dredging Force majeure

Removal of sediment to deepen access channels, The title of a common clause in contracts, provide turning basins for ships, and adequate exempting the parties for non-fulfillment of their water depth along waterside facilities. obligations as a result of conditions beyond their control, such as earthquakes, floods, or war. Dry Bulk Foreign trade zone Low density cargo, such as agri-food products, fertilizers and ores, that are transported in bulk Afree port in a country divorced from customs carriers. authority but under government control. Merchandise, except contraband, may be stored Dunnage in the zone without being subject to import duty regulations. Material used in stowing cargo either for separation or the prevention of damage Forty-foot equivalent units (FEUs)

Electronic data interchange (EDI) Unit of measurement equivalent to one forty- foot container. Two twenty-foot containers Transmission of transactional data between com- (TEUs) equal one FEU. Container vessel capaci- puter systems. ty and port throughput capacity are frequently EDIFACT referred to in FEUs or TEUs.

Electronic Data Interchange for Administration, Free trade zone Commerce and Trade. International data inter- A zone, often within a port (but not always so change standards sponsored by the United located), designated by the government of a Nations. country for duty-free entry of any non-prohibit- Eminent domain ed goods. Merchandise may be stored, displayed, used for manufacturing, etc., with the The sovereign power to take property for a nec- zone and re-exported without duties being essary public use, with reasonable compensa- applied. Also referred to as free port. tion. Freight, demurrage and defense Feeder service Class of insurance provided by a protection and Transport service whereby loaded or empty con- indemnity club that covers legal costs incurred tainers in a regional area are transferred to a by a ship owner in connection with claims aris- "mother ship" for a long-haul ocean voyage. ing from the operation of his ship.

Fixed costs Freight forwarder

Costs that do not vary with the level of activity. Person or company who arranges for the car- Some fixed costs continue even if no cargo is riage of goods and associated formalities on carried; for example, terminal leases, rent, and behalf of a shipper. The duties of a forwarder property taxes. include booking space on a ship, providing all

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the necessary documentation and arranging Heavy lift charge Customs clearance. A charge made for lifting articles too heavy to be Freight payable at destination lifted by a ship’s tackle.

Method of paying the freight often used for Hold shipment of bulk cargo whose weight is established on discharge from the ship. Aship’s interior storage compartment.

Gantry Crane In bond

A crane or hoisting machine moored on a frame Cargo moving under customs control where or structure spanning an intervening space, and duty has not yet been paid. designed to hoist containers into our out of a ship. Inducement

Gateway Placing a port on a vessel’s itinerary because the volume of cargo offered by that port justifies the A point at which freight moving from one terri- cost of routing the vessel. tory to another is interchanged between transportation lines. Inland carrier

Grounding A transportation company that hauls export or import traffic between ports and inland points. Deliberate contact by a ship with the bottom while the ship is moored or anchored as a result Intermodal of the water level dropping or when approaching the coast as a result of a navigational error. Movement of cargo containers interchangeably between transport modes where the equipment Groupage is compatible within the multiple systems. The grouping together of several compatible Jetty consignments into a full container load. Also referred to as consolidation. Structure projecting out to sea, designed to pro- Harbor dues tect a port from the force of the waves but also used to berth ships. Port charges to a vessel for each harbor entry, usually on a per gross registered ton basis for Jumboising commercial vessels. Conversion of a ship to increase cargo-carrying Harbor master capacity by dividing and adding a new section.

An officer who attends to berthing ships in a Keel harbor. A flat steel plate running along the center line of a vessel.

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Keelage Limited recourse financing

Dues paid by a ship making use of certain Project financing in which sponsors or govern- British ports. ments agree to provide contingent financial support to give lenders extra comfort; typically pro- Knot vided during the construction and start-up period of a project, which is generally the riskiest Measure of speed of a ship, equal to one nautical time in the life of an infrastructure project. mile (1,852 meters) per hour. Line haul LASH The movement of freight over the tracks of a Abbreviation for "Lighter Aboard Ship." A spe- transportation line from one city to another. cially constructed vessel equipped with an over- head crane for lifting specially designed barges Liner and stowing them into cellular slots on the vessel. Avessel sailing between specified ports on a regular basis. Laden draught Lloyds’ Registry Depth of water to which a ship is immersed when fully loaded. An organization maintained for the surveying and classing of ships so that insurance under- Landlord Port writers and others may know the quality and condition of the vessels involved. An institutional structure whereby the port authority or other relevant public agency retains Longshoreman ownership of the land, as well as responsibility for maintaining approach channels and naviga- Individual employed locally in a port to load tion aids; under this model, the port does not and unload ships. engage in any operational activities. Lo-Lo (Lift on/Lift off) Lease-develop-operate (LDO) A type of vessel that allows cargo to be loaded A form of concession wherein, under a long- or unloaded by either ship or shore cranes. term lease, a private company upgrades and expands an existing facility and manages its Malacca-max: Maximum size ships (contain- cash flows. The public authority holds title to erships and bulkers) which can cross the the facility throughout the concession period Malacca Straits. The Malacca-max reference is and receives lease payments on the assets. believed to be today the absolute maximum possible size for container vessels. Lighter Management contract An open or covered barge towed by a tugboat and used primarily to harbors and inland water- An arrangement whereby the operation and ways to carry cargo to/from alongside a vessel. management of a facility is contracted by the

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public authority to a specialized operator for a space from a carrier and re-sells it to smaller specified period and under specified conditions shippers. The NVOCC issues bills of lading, relating to performance criteria, economic incen- publishes tariffs, and otherwise conducts itself tives, maintenance and infrastructure commit- as an ocean common carrier, except that it does ments, etc. The public authority retains owner- not provide the actual ocean or intermodal serv- ship of the facility and the commercial risk asso- ice. ciated with its operation. On-carrier Mezzanine financing Person or company who contracts to transport A mix of financing instruments, including equi- cargo from the port or place of discharge of a ty, subordinated debt, completion guarantees, sea-going or ocean-going ship to another desti- and bridge financing, the balance of which nation by a different means of transport, such as changes as the risk profile of a project changes; truck, train or barge. i.e., as a project moves beyond construction into operation. Optional cargo Mixed cargo Cargo that is destined for one of the ship’s dis- Two or more products carried on board one charge ports, the exact one not being know ship. when the goods are loaded.

Mobile crane Overcarriage

General purpose crane capable of being moved The carriage of cargo beyond the port for which from one part of a port to another. it was intended.

Moor Pallet

To attach a ship to the shore by ropes. A flat tray, generally made of wood but occasionally steel or other materials, on which goods Neo-bulk cargo can be stacked. There are two principal sizes: the ISO pallet, which measures 1 x 1.2 meters Uniformly packaged goods, such as wood pulp and the europallet at 0.8 x 1.2 meters. bales, which store as solidly as bulk, but that are handled as general cargo. Panamax Non-recourse financing Maximum-size bulk carriers whose dimensions Project financing for which no loan guarantees enable the ship to transit the Panama Canal or financial support is provided by the sponsors when lock width is the limiting factor. or governments to lenders for the project. Permanent dunnage Non-vessel operating common carrier (NVOCC) Strips of timber fixed to the frames of a ship to keep cargo away from the sides of the ship in A cargo consolidator in ocean trades who buys order to avoid damage and condensation.

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Pier Pooling

The structure perpendicular to the shoreline to Sharing of cargo or the profit or loss from freight which a vessel is secured for the purpose of by member lines of a liner conference. loading and unloading cargo. Port dues Piggy packer Charges levied against a ship owner or ship A mobile container-handling crane used to operator by a port authority for the use of a port. load/unload containers to/from railcars. Port of refuge Pilferage Port, not on a ship’s itinerary, which she calls at Petty theft. due to some unforeseen hazard at sea and where she may undergo repairs, refuel or rescue cargo. Pilotage Port of registry The act of assisting the master of a ship in navigation when entering or leaving a port or in con- Place where a ship is registered with the authori- fined water. ties, thereby establishing its nationality.

Pilotage dues Portable unloader

Fee payable by the owner or operator of a ship Type of ship unloader that is wheeled and capa- for the services of a pilot; the fee is normally ble of being moved around a port wherever based on the ship’s registered tonnage. needed. It is typically used in ports where there is no dedicated terminal with its own fixed Platform flat equipment.

A shipping container without sides, ends or a Pre-entry roof. Normally 20 x 40 feet long, it is used for awkwardly shaped cargo that cannot fit on or in Presentation to the customs authorities of export or import declarations prior to the clearance of any other type of container. goods. Plimsoll mark/load lines Project financing A series of horizontal lines painted on the out- Financing wherein the lender looks to a project’s side of a ship marking the level that must cash flows to repay the principal and interest on remain above the surface of the water for the debt, and to a project’s assets for security; also vessel’s stability. known as "structured financing" because it Pontoon requires structuring the debt and equity such that a project’s cash flows are adequate to serv- Flat-bottomed vessel with a shallow draught. ice the debt.

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Reefer stacked two high on specially operated unit trains. Refrigerated container. Stevedore Relay Individual or firm that employs longshoremen To transfer containers from one ship to another. to load and unload vessels.

Ro/Ro Stevedoring charges A shortening of the term "Roll on/Roll off." A Fees for loading and stowing or unloading a method of ocean cargo service using a vessel ship. with ramps that allow wheeled vehicles to be loaded and discharged without cranes. Sto-ro

Ship chandler A vessel with capacity for break-bulk cargo as well as vehicles or trailer borne cargo. An individual or company selling equipment and supplies for ships. Stowage factor Ship’s tackle The average cubic space occupied by one tonne All rigging, etc., used on a ship to load or weight of cargo as stowed aboard a ship. unload cargo. Straddle carrier Side loader Mobile truck equipment with the capacity for A lift truck fitted with lifting attachments oper- lifting a container within its own framework. ating to one side for handling containers. Sturdons Spotting Port workers engaged in the stowage of cargo in Placing a container where required to be loaded the holds of a ship. or unloaded. Supply chain Spreader A logistics management system that integrates Apiece of equipment designed to lift containers the sequence of activities from delivery of raw by their corner castings. materials to the manufacturer through to delivery of the finished product to the customer into Stack car measurable components. An articulated multiple platform rail car that allows containers to be double stacked. Tare weight

Stacktrain The weight of wrapping or packing; added to the net weight of cargo to determine its gross A rail service whereby rail cars carry containers weight.

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Terminal Transshipment

An assigned area in which containers are pre- Adistribution method whereby containers are pared for loading into a vessel, train, truck, or moved between large mother ships and small airplane, or are stacked immediately after dis- feeder vessels, or between equally large ships charge from the vessel, train, truck, or airplane. plying north-south (Europe-Africa) and east- west (Asia-Europe) routes. Terminal charge Transshipment port A charge made for a service performed in a carrier’s terminal area. A port where cargo is transferred from one carrier to another or from one vessel of a carrier to Throughput charge another vessel of the same carrier without the The charge for moving a container through a cargo leaving the port. container yard off or onto a ship. Turnaround Top off The time it takes between the arrival of a vessel To fill a ship that is already partly loaded with and its departure from port; frequently used as a cargo. Typically occurs where there is a draught measure of port efficiency. restriction at the first load port – the ship loads a Twenty-foot equivalent units (TEUs) quantity of cargo corresponding to the permis- sive draught, then fills up at the second port Container size standard of twenty feet. Two where there is no restriction. twenty-foot containers (TEUs) equal one FEU. Top stow cargo Container vessel capacity and port throughput capacity are frequently referred to in FEUs or Goods that are stowed on top of all others in a TEUs. ship’s hold because of their relatively low density and the probability that they would be dam- Unitization aged if overstowed. The consolidation of a quantity of individual Toplift items into one large shipping unit for easier handling. Attachment to a fork-lift truck that is designed to lift a shipping container. Unloader

Towage Port apparatus employed to unload ships carrying dry bulk cargo. Charges for the services of tugs assisting a ship or other vessels in ports. Unmoor

Tramp line To remove the ropes that attach a ship to the shore. An ocean carrier company operating vessels on other than regular routes and schedules.

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Unstuff Sources:

To unload a shipping container. 1. Dictionary of Shipping Terms, Third Edition, Peter Brodie (1997) Variable cost 2. The Main Encyclopedic Dictionary, Fifth Costs that vary directly with the level of activity Edition, Eric Sullivan (1996) within a short time. Examples include costs of moving cargo inland on trains or trucks, stevedoring in some ports, and short-term equipment leases.

Vessel manifest

Declarations made by international ocean carriers relating to the ship’s crew and contents at both the port of departure and arrival. All Bills of Lading are registered on the manifest.

Warehouse

Aplace for the reception, delivery, consolidation, distribution, and storage of goods and cargo.

Waybill

Document, issued by a shipping line to a shipper, which serves as a receipt for the goods and evidence of the contract of carriage.

Wharf

Structure built alongside the water or perpendicular to the shore where ships berth for loading or discharging goods.

Wharfage

Charge assessed by a pier or dock owner against freight handled over the pier or dock or against a steamship company using the pier or dock.

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

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The Port Reform Toolkit publication was made possible through generous financial and in-kind contributions from the Netherlands Ministry of Transport, Public Works, and Water Management.

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

Library of Congress Cataloging-in-Publication Data

HE551.P757 2003 387.1'068—dc21

2003045093