Alternative Port Management Structures and Ownership Models

PORT REFORM TOOLKIT SECOND EDITION

MODULE 3 ALTERNATIVE PORT MANAGEMENT STRUCTURES AND OWNERSHIP MODELS

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

MODULE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Box 6: Basic Port Management Models

Type Infrastructure Superstructure Port labor Other functions MODULE 3 Public service port Public Public Public Majority public Tool port Public Public Private Public/private Landlord port Public Private Private Public/private Private service port Private Private Private Majority public Source: Author.

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

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Box 7: Top 10 Carriers as of June 2006

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

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

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

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

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

Box 8: Global Terminal Operators 2005 Throughput League Table

Ranking Operator Million TEU % Share

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

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

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

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

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

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

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

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Box 11: Overview of Value-Added Services in Ports

value-added services MODULE 3

value-added value-added logistics facilities

parking facilities weighbridges general logistics logistics chain customs facilities services integration services truck maintenance and repair facilities loading/unloading quality control container repair and stripping/stuffing repacking maintenance bulk storage customizing cleaning facilities tank storage assembly tanking facilities general warehousing testing trailer renting and leasing conditioned warehousing repair information and distribution centers re-use communication safety and security services offices/wtc hotels, restaurants, shops

Source: Author.

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

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Box 12: Potential for VAL and VAF

high

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

110 Alternative Port Management Structures and Ownership Models

Box 20: Spectrum of Port Reform Tools

Public management and operations MODULE 3

Outsourcing

Management contracts

Lease and rent contracts

Full concession including Concessions BOT, BOOT, etc.

Build-own-operate (BOO)

Divestiture by license

Divestiture by sale

Private supply and operations

Source: Author.

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

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

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

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

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

Box 21: Comparison of Lease Systems

Shared value lease

Flat rate lease Lease payment Lease payment

Traffic volume

Source: Author.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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