Trade & Competitiveness Public Disclosure Authorized IN PRacTICE OCTOBER 2017 NO. 2 Achieving Full and Effective Corporatizationof Port Authorities Reform Models from Global Experience Most countries are reluctant to entirely privatize their port authorities, making port corporatization the model of choice. Today, the most commonly Public Disclosure Authorized pursued route for port governance reform embraces the concept of an Periklis Saragiotis autonomous, government-owned port authority with terminal operations Peter de Langen under private companies. Many countries fall short of fully effective Periklis Saragiotis (psaragiotis corporatization of their port authorities, however, because they retain some @worldbank.org) is a Private Sector Specialist working for administrative and decision-making mechanisms under government control. the Trade & Competitiveness This note outlines the challenges countries face when seeking to corporatize Global Practice of the World Bank Group. He is the technical their ports, summarizes the benefits of such reforms, and suggests key steps lead of port efficiency and of logistics lending and advisory in establishing an effectively corporatized port authority. projects, and he contributes to global research and analysis in Corporatization of port authorities is a critical around the world operate as autonomous these areas. reform step for improving port governance corporate entities. Many, such as those in and efficiency. Transition of port authorities the Netherlands and Singapore, are state- Dr. Peter de Langen (peter@ Public Disclosure Authorized from public sector entities to state-owned owned enterprises, while airport companies pl-advisory.com) is the owner port enterprises has proven to reduce risks of in a substantial number of countries, and principal consultant of politically motivated investments, promote including Australia, Germany, Spain, and the Ports and Logistics Advisory maximum utilization of existing port assets United Kingdom have been fully or partially and codirector of the knowl- (both land and basins), and facilitate the privatized. This “enterprise model,” whether edge dissemination platform www.porteconomics.eu. He is development of new port infrastructure government or privately owned, has been currently a visiting professor at (berths, quays, and landside access) based proven to enhance airport efficiency (Liebert Copenhagen Business School on commercially sound criteria. This note and Niemeier 2013). This note argues that and has worked at the Port of builds in two ways on the concept of port the ports industry will likely achieve the Rotterdam Authority. corporatization as described in the World same benefits if corporatization is done Bank Port Reform Toolkit (World Bank 2017): effectively. The authors gratefully acknowl- first, by addressing the need for a “shareholder edge insights and comments from Jose Guilherme Reis, policy” to provide direction to the corporatized Key Features of Corporatized William John Gain, Charles port authority, and second, by offering Port Authorities Kunaka, Ninan Oommen Biju, detailed recommendations on the governance and Wolfgang Fengler. structure of the corporatized entity. The corporatization of port authorities is less Public Disclosure Authorized advanced than that of the broadly similar The airport industry, in many ways airport industry. The majority of countries comparable to the port industry, has worldwide still manage their port authorities already undertaken similar reforms. under public administration. Managerial and The large majority of airport companies investment development decisions are thus TRADE & COMPETITIVENESS IN PRACTICE | 1 less likely to be aligned with market needs. Corporatized ports sign leases and Under the best-practice corporatized model, concession contracts with operating port authorities remain government owned companies that may include clauses but operate under commercial terms and for minimum performance levels. The aim at value creation for port customers port authority treats concessionaire(s) and stakeholders. Successfully corporatized as customer(s), since they often share a port authorities share the following strong interest in attracting more cargoes characteristics: to the port. • Self-sustained financially. Effectively Under the corporatized model, port authorities corporatized port authorities derive maintain a clear, strong commercial revenues from charges to ship operators focus, while at the same time, the national (port dues) and concessions or land lease governments, which remain the ports’ owners, agreements and have commercial freedom act to secure the public interest through a in setting prices, though potentially subject combination of regulatory measures and to competition regulation. The corporatized shareholder policies. model also allows access to capital markets, as in the case of the port of Ports can attain varying degrees of market Singapore, de facto reducing dependence power based on differences in maritime on state funding for investments. access, hinterland connections, transport Corporatization does not imply a focus on infrastructure, and the structure of the labor profit maximization (see Van der Lugt, De market. Governments recognize the imperfect Langen, and Hagdorn 2015). nature of inter-port competition and thus aim Box 1: Provision of to secure fair and transparent competition among ports as a central regulatory objective. Terminal Services • Committed to port development based on business needs. Corporatized port Ideally, a corporatized port authority is subject Under the Singaporean authorities have mandates to invest in port to competition laws similar to those applicable Corporatized Model infrastructure (berths, quays, terminals, to airport companies. This can become the Corporatization leads to a com- value-added services, and so on) based on responsibility either of a cross-industry mercial choice regarding the commercial logic. This does not preclude competition authority, as in the Netherlands business model to employ. Most these companies from seeking funding and the United Kingdom, or of a specific ports corporatized (or fully private) for such infrastructure from the national regulator, as in Greece and South Africa. port companies provide some government or from international financial activities in-house and some organizations (such as the European Bank through third parties (using the Corporatization Benefits landlord model). for Reconstruction and Development or the International Finance Corporation). Core benefits of the corporatized port, as compared to ports run by public authorities, The two corporatized port In Belgium and Germany, for instance, companies in Singapore are port infrastructure investment is partially derive from its stronger market orientation. interesting in this respect. funded by government. These benefits, highlighted in Figure 1, include: PSA Singapore has gradually shifted from in-house provision • Operated broadly under the landlord • Demand-driven infrastructure of terminal services toward model. The core role of the landlord port investments. Corporatized ports operate partnerships with shipping lines, is to develop a cluster of interlinked as effective and viable businesses. As such as its joint venture with companies in the port area. Corporatized such, they can efficiently assess and CMA-CGM. port authorities generally acknowledge implement sustainable infrastructure upgrades and expansion projects. In The other port company, JTC or that they cannot effectively provide Jurong Port, is a subsidiary of all required port services in-house and addition, the corporation’s improved levels an industrial estate developer therefore choose to operate under the of financial credibility increase the port’s with a landlord business model, landlord model (Box 1). These authorities attractiveness to private investors. but JTC provides most terminal make the commercial decision to outsource Demand-driven investment used in services in-house. It also oper- (some) port operations to private sector ates in joint ventures, however, corporatized ports contrasts with the companies and to focus their own efforts such as that with Oiltanking frequently supply-driven impetus behind on port development investments that Singapore. government-funded port expansion projects, strengthen the entire port complex and which consequently can remain underutilized Source: PSA 2016 and JTC 2016. thus increase its land value. for long periods. This is borne out by a • Empowered to negotiate and sign long- recent European Court of Auditors report term leases or concession contracts. on the impact of European Union–funded 2 | TRADE & COMPETITIVENESS IN PRACTICE port expansion projects (European Court of the same risks experienced by all state-owned Auditors 2016). enterprises. The most important of these is FIGURE 1: CORE continued political control, which often results BENEFITS OF THE • Revenue maximization from available in calls for favors for politically connected CORPORATIZED PORT assets. Given adequate skills, a interest groups and a soft budget constraint. MODEL corporatized port authority can effectively and innovatively exploit the port’s land An appropriate mitigation mechanism should and maritime assets to create value for its therefore be developed to alleviate the impact Dmnd-Drivn clients and for port users while capturing of potential political influence. First and Infrstructur that value through efficient pricing. Ports foremost,