ALTERNATIVE PORTMANAGEMENT STRUCTURES AND OWNERSHIP MODELS

M O D U L E 3

WORLD BANKPORT REFORMTOOL KIT

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

The Public-Private Infrastructure Advisory Facility (PPIAF) PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of theirinfrastructure through private sector involvement.For more information on the facility see the web site:www.ppiaf.org.

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

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

International Maritime Associates (USA)

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

(The Netherlands)

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

AXELCIUM – Ingenierie et Regulation Financiere (France)

Nathan Associates (USA)

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

PA Consulting (USA)

Comments are welcome. Please send them to the World Bank Transport Help Desk. Fax:1 202 522 32 23.Internet:Transport@worldbank.org

OBJECTIVES AND OVERVIEW

This Module, the third of seven compris-ing the World Bank’s Port Reform Toolkit,lays out an array of alternative port man-agement and control structures, andexplains for each structure the respectiveroles most likely to be filled by the publicand private sectors. It provides a frame-work for all of the Modules by definingthe characteristics of specific managementstructures and the tasks and responsibili-ties to be performed by private and publicsector entities. In particular, it identifiesthe problems facing port managers whenadapting their organizations to the chal-lenges of today’s global market place.The solutions and "tools" suggested inthis Module are adapted as much as pos-sible to the port manager’s specific situa-

tions. Examples have been included illus-trating approaches that have been suc-cessful as well as those that have beenless than fully successful. This Modulealso notes how ports have adjusted organizational and administrativearrangements as a result of the strategicshifts and competitive pressures affectingthe maritime sector. These developmentsare described in Module 2 in detail.

Module 3 is organized into seven sec-tions, including this overview.

The section titled “Evolution of PortInstitutional Frameworks” provides basicterms of reference and a conceptualframework for defining the respectiveroles of the public and private sectors inport management. The section alsodescribes a number of public interest

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STRUCTURES &OWNERSHIP MODELS

M O D U L E 3

issues affecting port planning, port oper-ations and infrastructure development.

The section titled “Port Functions,Services and Adurinis-fration Models”defines a number of typical manage-ment structures that ports use aroundthe globe. This section spells out thekinds of tasks that public ports under-take and defines for each of the alterna-tive management structures ways inwhich discrete elements of these tasksare assigned to various parties.

The next section focuses on the impor-tant subject of port finance, a topic thatis dealt with at greater length in Module5. Here, the private sector plays anincreasingly important role in providingfunds for infrastructure development, inaddition to paying for superstructure,equipment and systems. This has notonly a profound impact on managementstructures, but also on long-term publicparticipation in port development. Theanalysis assesses various aspects of pub-lic versus private investments in infra-structure including: which componentsof infrastructure are paid for by theGovernment or by the Port Authority;which investments should be made bythe terminal operator; and howGovernments with limited funds canharness private funding for port-relatedinvestments. This section also analyzesthe role global terminal operators -- bothshipping lines and stevedoring compa-nies -- play in today’s maritime sectorand assesses their impact on port man-agement and finance.

The section titled “Port ReformModalities” presents an overview ofvarious port reform options and

describes the strengths and weaknessesof each. There are many ways to changethe institutional structure of a port.Traditional methods of operating andmanagement structures have been aban-doned, with ports increasingly operatingas commercial entities in the global mar-ket place. The process of structuralchange can be a painful one, with thepotential for costly mistakes to be made.However, increasingly the internationalport community agrees on the structuralrole and function of port authorities.The global market has had a unifyinginfluence on emerging institutionalstructures. The increasing influence ofInternational Finance Institutions onport development also facilitates theintroduction of efficient models andstructures all over the world. Althoughthere still is a large diversity of portmanagement and organizational struc-tures, the trend towards several success-ful port management models is strong.

The next section analyses the reformtools that port managers can use. Therole of governments in financing portdevelopment is eroding and the privatesector has assumed more responsibilitynot only in port finance but also in portoperations. This causes a gradual shift inthe balance of power between govern-ments and the private sector. It is notclear how far this shift will go, but it isevident that the balance is likely to bedifferent from port to port and fromcountry to country.

The final section analyzes traditionalmarine services in the context of portreform. Such services include activitiesthat are carried out by both the publicand private sector. Marine services

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ensure the safe and expeditious flow ofvessel traffic in port approaches andharbors and a safe stay at berth or atanchor. In every port the Harbormaster(or Port Captain) is responsible for nau-tical safety and often also for the protec-tion of the environment. Other servicessuch as vessel traffic management,pilotage, and dangerous goods controlare described as well. Finally, the sec-tion describes several possible reformapproaches that can be applied tomarine services.

Upon completing this Module, the read-er should have attained a better under-standing of the various types of portmanagement and ownership alterna-tives, their respective strengths andweaknesses, and which alternativesmight best fit a port’s particular circum-stances.

EVOLUTION OF PORT INSTITUTIONALFRAMEWORKS

Private sector investment and involve-ment in ports emerged as a significantissue in the 1980s. By this time, manyports had become bottlenecks to efficientdistribution chains of which they are anessential component. Three main prob-lems contributed to the gradual deterio-ration of service quality (illustrated byport congestion and consequent chronicservice failures) during this period.

The first was restrictive labor practices.Increasingly after World War II, anti-quated work practices and methods formatching available labor with occasionalwork -- practices that developed duringa previous era characterized by break-bulk cargo handling -- needed to be

transformed and renegotiated to adjustto modern bulk handling methods, unit-ized handling and containerization. Allof these developments resulted in arapid modernization of port handlingequipment. At the start of this process,labor unions often refused to acceptreductions in the labor force, andignored the need to upgrade skills.Later, however, unions realized that portreform was a necessity. Enlightenedlabor leaders accepted moderatereforms. As Module 7 describes ingreater detail, it is no longer realistic fordockworkers and their trade unions tooppose institutional reform and thetechnological advances that frequentlyprecede and accompany it.

The second reason why many portsfailed to respond adequately to theincreased demands imposed on themwas centralized government control inthe port sector. Particularly between1960 and 1980, central planning (in theport sector as well as in other sectors)prevailed not only as a norm in socialisteconomies, but also as in many westernand developing countries where nation-al port authorities were often promotedby international development banks.Slow paced and rigidly hierarchicalplanning, control and command struc-tures often accompanied central plan-ning. Only in the 1980s did the disman-tling of communist systems and theincreasing introduction of market-ori-ented policies on a worldwide basisopen the way for decentralized portmanagement and for reduced govern-ment intervention in port affairs.

The third main reason for a lack of portservice quality was the inability or

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unwillingness of many governments toinvest in expensive port infrastructureor the "mis-investment" in infrastructure(i.e., to provide facilities that were badlymatched with the needs of foreign tradeand shipping). During this period anumber of beautifully constructed portcomplexes became "white elephants"when expected demand failed to materi-alize. See Box 1. As a result of systemicfailures in managing port development,governments have learned to relyincreasingly on private investors toreduce ports’ reliance on state budgetsand to spread investment risks throughjoint undertakings.

During this period, fundamental ques-tions arose about the appropriate divi-sion of responsibilities between the pub-lic and private sectors. So-called"boundary line" issues came into sharpfocus during the 1980s. Policy makersbecame increasingly aware of the needfor co-ordination among various branch-es of government and for consultationwith diverse port interests. They real-ized clearly that port development hadcollateral consequences and effects onpublic interests in land use, environ-mental impact, job creation and econom-ic stimulation for economically blightedareas. Moreover, among some leaders,first in the United Kingdom and thengradually in other parts of the world, itbecame increasingly clear that large-scale government involvement in portoperations was self-defeating anddestructive of private initiative. Theycame to realize that the role of govern-ment in a market economy should focuson the provision of "public goods" (i.e.,goods and services that the private sec-

tor has no adequate incentive to provideand, consequently, are under-suppliedwithout some form of government inter-vention).

In many countries today, still anothertrend has emerged: the private provisionof public services. Increasingly, govern-ments have transferred public tasks to

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"White Elephants" in PortDevelopment

During its early years, the container terminal of thePort of Damietta in the Arab Republic of Egypt wasoften cited as a "white elephant" in port develop-ment. The terminal was constructed and fullyequipped in the 1970s to handle anticipated con-tainer transshipment requirements in the EasternMediterranean. Yet, for various reasons, the terminalwas without any business for years. Only when theshipping company Scan-Dutch decided to change itsEastern Mediterranean port of call from Cyprus toDamietta did throughput start to increase sharply.Today, more than twenty years later, Damietta is oneof the leading container ports in the region compet-ing with terminals in Italy, and on Malta and Cyprus.During the 1960s, major West-European ports suchas Rotterdam, Antwerp and Marseilles developedlarge industrial sites near their port facilities. Thesesites became centers for refineries and petro-chemi-cal industries. In view of the apparent success ofports becoming industrial centers, the DutchGovernment created three regional ports to supportthe ailing economies of their respective regions. Twoof these ports – Flushing and Terneuzen – developedfairly well. They are located along the River Scheldtin the vicinity of their large neighbors: Antwerp andRotterdam. The third port was built along the RiverEems near Germany in the Northern Province ofGroningen. Despite modern port facilities and largegovernment subsidies, the Port of Eemshaven neverbecame a success. It was too isolated and lacked anindustrial hinterland. It struggled on for years togradually develop a few niche markets. The case ofEemshaven shows that the creation of a new port, assuch, does not guarantee success when there is nonatural hinterland generating significant cargo flowsand when the port does not attract large-scale hubtraffic.

Box 1

private contractors. "Outsourcing" ofkey functions and roles has had a majorimpact on redrawing traditional bound-ary lines in the port sector. Hence, inmany ports today, the public sectormainly acts as planner, facilitator andregulator, whereas the private sector actsas service provider, operator and devel-oper.

Experimentation in shifting the bound-ary line that divides the public and pri-vate sectors has resulted in a healthypragmatism. Today, best practice ismore concerned with results than withideology, and is intended to result in:

• Increased service levels for infra-structure users;

• Increased efficiency in operations;and

• Improved allocation of limited publicfunds.

At the same time, various types of portterminals have become highly special-ized in the cargo handling services theyprovide and manifest fewer of the char-acteristics of a public good. New "greenfield" container terminals have beenbuilt with private capital and other con-tainer terminals have been re-developedand re-capitalized through some form ofprivatization. Box 2 presents two of theinstitutional formats used in recentyears to develop "green field" terminals.

Increasingly, ports are being integratedinto global logistics chains, and the pub-lic benefits they provide are taking onregional and global attributes. At thedawn of the 21st century the value ofservices provided by regional ports

increasingly transcends the interests oflocal users, and benefits businesses andcommunities located beyond regionaland national borders. This global diffu-sion of benefits poses some interestingchallenges with respect to the need forlarge-scale investments in the sector. At

5

Institutional Formats of "Green Field" Ports

Salalah, Oman

In 1997 Salalah Port Services (SPS) was awarded a30-year concession to equip and operate the Port ofSalalah in Oman. SPS is a joint venture with 30% for-eign investment and 70% Omani Government andpublic/private investment. The concession contractcovers the container terminal, the conventional port,and the Free Trade Zone.

Investment in the port comprised the following pro-portions:• Omani Government: 20%• Government pension funds: 11%• Sea-Land Services: 15%• Omani private investors: 19%• Public offering: 20%• Maersk / A.P. Moller: 15%.

The initial capitalization was US $260 million. TheGovernment built the infrastructure.Container Terminal at Vadhavan, India

Vadhavan, India

In February 1997 P&O Ports Ltd. was selected by theGovernment of the State of Maharashtra to head aconsortium to develop a US$ 950 million "greenfield" deep water oil and container port at Vadhavan(North of Mumbai). The participants were:• Maharashtra Government: 11%• ICICI: 11%• Jakari Terminals: 4%• Meherji Cassinath: 2%• P&O Ports and other private investors: 72%.

The future of this project is uncertain, however, sincethe Environmental Protection Authority ruled thatthe project was illegal.

Box 2

the same time, as discussed in Module 2,private port service providers them-selves have become increasingly globalin scope and scale. Even more recently,a number of strategic alliances haveformed both within the global shippingindustry and the port services industry.These alliances have profound implica-tions for the ways ports are financed,regulated and operated. Confrontedwith these global shipping and portservice powers, port authorities willhave challenges in defending "public"and local interests. The full implicationsof these developments on port manage-ment and structure are not yet clear andwill emerge only with time.

PORT FUNCTIONS, SERVICES ANDADMINISTRATION MODELS

Overview

Ports produce a combination of publicand private goods. Public goodsinclude those that are inherently non-divisible and non-consumable, such ascoastal protection works necessary tocreate port basins. Private goods areboth consumable and divisible and theiruse entails a minimum of economicexternalities.

Most of the value of private goods canbe captured in market transactionsbetween private parties. A substantialportion of the value of public goods, onthe other hand, cannot be captured inarms length transactions. Consequently,private firms have little incentive to pro-duce them. Public goods create positiveexternalities when they are used; thesocial benefits they generate are greaterthan the price that private parties can

charge for them. Thus, some form ofpublic intervention is appropriate intheir production to make certain that anadequate level of public goods is pro-duced.

Ports represent a mix of public and pri-vate goods. They generate direct eco-nomic benefits (private goods) throughtheir operations as well as additionalindirect benefits (public goods) in theform of trade enhancement, secondorder increases in production volumesand collateral increases in trade-relatedservices. These "economic multipliereffects" have been used by many portsto justify direct public sector investment.It is in this dual production of both pub-lic and private goods that complexitiesarise, which makes defining roles forand boundaries between the public andprivate sectors challenging in the portsindustry. Box 3 lists a number of areaswhere ports generate economic multipli-er effects.

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Examples of Port EconomicMultiplier Effects

• Petro-chemical industry

• Value Added Services

• Repair and maintenance

• Packing and repacking

• Labeling

• Testing

• Telecommunications

• Banking

• Customs

• Inland transport

Box 3

Both through targeted developmentpolicies and the unplanned growth ofinterrelated industries, many ports havebecome the location for industrial clus-ters. Industrial clusters are geographicconcentrations of private companies thatmay compete with one another or com-plement each other as customers andsuppliers in specialized areas of produc-tion and distribution. Industrial clustersrepresent a kind of value chain, a web ofinterrelated activities that are mutuallysupportive and continuously growing.Clustering of related activities improvesthe competitive advantage of clusterparticipants by increasing their produc-tivity, by reducing transaction costsamong them, by driving technologicalinnovation, and by stimulating the for-mation of new business spin-offs.

Large ports offer particularly attractivelocations for "seed" industries and distri-bution-intensive enterprises. Severalnotable port-centered industrial clustershave developed over the last 50 yearsincluding those in Rotterdam,Yokohama, Antwerp, Hamburg,Marseilles and Houston, to name but afew. In the 1970s, the larger Europeanports targeted refineries and chemicalindustries for co-location and co-devel-opment, with considerable success.Thus, for example, a large cluster of fiverefineries and many chemical-processingcompanies located in the Port ofRotterdam as a direct result of publicpolicies developed in 1950s. A cluster ofworld class, specialized marine serviceslikewise established themselves in thePort of Rotterdam as a result of the goodhinterland connections and the gas andoil finds in the North Sea. A second

example of cluster development is thePort of Colombo. A fashion goods andapparel industry cluster has developedaround Colombo, which focuses on reli-able, short transit container services tocomplete just-in-time (JIT) purchaseorders. This development was business-driven and not the direct result ofexplicit public policy. The lessondemonstrated in Colombo is that quasi-public goods in the form of efficientindustrial networks can be created anddeveloped through private initiatives.

As a matter of strategic developmentpolicy, many ports encourage the co-development of various value addedservices through franchising, licensing,and incentive leasing. Today, ports aimat attracting enterprises that extend theirlogistics chains or provide them withspecialized capabilities to add value tocargos that are stored and handled inthe port. General services that manyports attempt to develop include chand-lering, ship repair, container mainte-nance, marine appraisals, insuranceclaims inspections and banking. Box 4describes the efforts of one port toexpand and develop its ensemble ofvalue added services.

Many governments are directly or indi-rectly involved in port development.They often use a "Growth Pole" argu-ment to justify the direct financing ofbasic port infrastructure. This "GrowthPole" rationale derives from the beliefthat investments in port assets havestrong direct and indirect multipliereffects on the entire national economyand, further, that the commitment ofpublic resources is necessary to encour-age co-investment by the commercial

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and industrial sectors. These sectors arethus stimulated to make investmentsthat they would not make in the absenceof public "seed investment" in port infra-structure. However, determining causallinks between public investment andspecific commercial activities and invest-ments is difficult and at times specula-tive. Still, it is important that govern-ments envision and articulate futuredevelopment scenarios, maintain fre-quent consultation with the private sec-tor, and implement public policies thatare applied consistently and that enablethe private sector to invest with confi-dence in projects that support the statedpublic policy objectives.

On the other hand, port operations arebusinesses in their own right and shouldbe managed to achieve optimal utiliza-tion of capital. Investments in portassets are affected by risk, by competi-tion for land, for capital or other factorsin the competitive business environ-ment. Subsidies and government-pro-vided incentives distort the allocation ofresources for port development and mayresult in over or under investment.

It is the delicate alignment of public andprivate interests that determines thestructure of port management and portdevelopment policy. A full spectrum ofinstitutional frameworks is available,

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Value Added Development Efforts in the Port of Rotterdam

Distriparks

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

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

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

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

Trade, Distribution and Marketing Centers (TDMCs)

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

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

Box 4

differing primarily in where the bound-ary line is drawn between the publicand private sectors. At one end of thisspectrum, full public control over plan-ning, regulation and operations resultsin what this report will refer to as aService Port. At the other end, thealmost total absence of public owner-ship, control or regulatory oversightresults in a Fully Privatized Port.

The alignment of public and privateinterests in recent years has resulted in adiminishing role for governments in theport industry. This trend is clear. Thetotal absence of public involvement inthe port sector, however, still remains anexception, limited primarily to situationsin which surplus port capacity may existin a national market and where competi-tion for port services is already intense.

When governments undertake toincrease national economic welfarethrough port development, they maychoose to apply one of two distinct nor-mative frameworks: the market surro-gate framework or the public interestframework. In seeking to increase eco-nomic welfare, governments mayattempt to remedy market imperfectionsand capture non-market externalitieswithin appropriately engineered andcontested transactions. Alternatively,they may pursue explicit goals devel-oped through public consultativeprocesses designed to determinedemand for public goods.

With respect to the market surrogateframework, the primary task of govern-ment is to identify and eliminate marketimperfections and anti-competitivebehavior or to regulate its undesired

effects. For example, competition "forthe market" can replace competition "inthe market," and competition "for themarket" can be engineered into con-testable offers of rights in ways thatassure pro-competitive outcomes.

It follows that one of the objectives ofpublic policy should be to create con-testable market structures for port serv-ices and to manage competitive behav-ior. This might be done through licens-ing, leasing, concessioning, and othermethods designed to bring about an effi-cient allocation of resources. This mar-ket surrogate view of the role for gov-ernment in the port sector is followed inmost countries with market orientedeconomic policies.

The need for some form of governmentintervention in markets for port servicesis related to the unique economic char-acteristics of seaports, some of whichtend to make them natural monopolies:

• The provision of port services entailslarge fixed costs and low marginalcosts. The marginal benefits associ-ated with using port services exceedthe marginal costs of providing theseservices.

• A relatively large minimum initialcapacity of basic infrastructure isrequired for technical reasons.

• The infrastructure is frequently indi-visible and, as a result, increases ininfrastructure capacity can only berealized in "quantum chunks."

• Both initial construction and portexpansion require large amounts ofcapital. As a result, the need to

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develop basic port infrastructure(e.g., sea locks, breakwaters, quaywalls, and main roads) all at onetime creates large capital operatinglosses and foregone investmentopportunities as a result of underuti-lized capacity during the earlierphases of a project’s lifecycle.

• The life span of port infrastructureprojects often exceeds the time hori-zon acceptable for private investorsand commercial banks.

• Basic port infrastructure is immobileand has few alternative uses.

This set of characteristics is the mainreason for financial involvement of gov-ernments in port construction andexpansion projects.

Interaction with Port Cities

Ports and the cities of which they are apart interact across many dimensions:economic, social, environmental and cul-tural. Any port reform process shouldtake into account the linkages betweenport city objectives and port objectives.Transport integration – the smoothtransfer of cargo and equipment fromland to water-borne systems – is anessential port function; but it doesn’ttake place in isolation. A seaport nodewithin a multi-modal transport systemis frequently associated with the devel-opment of an urban center and gener-ates substantial employment, industrialactivity and national and regional devel-opment.

Many big cities trace their roots to theestablishment of a port. This does not

mean, however, that the port will beextended at the place where it was origi-nally founded. Antwerp and Rotterdamare examples of ports that developedrelatively close to the cities’ centralcores. Over time, however, they shiftedoperations away from city centers. Theunderlying reason was the increase inship sizes (requiring deeper drafts andlonger berths). Another reason con-tributing to the weakening of linksbetween port and city centers is therapid mechanization and specializationof port work and the accompanyingincrease the operational scale and scope.This leads to increased storage spacerequirements and makes ports veryspace-intensive.

Another factor is the rapid industrializa-tion of most developed country cities.The new industries emerging afterWorld War II required large tracts ofland, preferably close to deep water,which often could not be found withinthe original port borders. Therefore,Maritime Industrial Development Areas(MIDAs) were located at some distancefrom old city centers.

Technological changes and consequen-tial port re-location have left substantialareas available for redevelopment forother purposes. Such areas are oftenlocated near city centers, since that iswhere the port (and city) began.Therefore, land values are potentiallyhigh, although probably depressed priorto redevelopment because of the pres-ence of decaying port facilities.

Three approaches commonly have beenused for the development of surplusport land:

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• Retaining it within the PortAuthority for redevelopment as inthe case of the Port of Barcelona.This implies a widening of the port’sfunction from that of a port into aproperty developer. Such changemay require modifications to thestatutes of the public port authority,or of the trust port. The experienceof Associated British Ports (ABP)shows that, when the port is in pri-vate hands, it is capable of effectivedevelopment of surplus lands. ThePort Authority of New York andNew Jersey is an example of a publicport authority with wide redevelop-ment powers.

• Transferring it to the local authori-ty/municipality for redevelopment.In practice this is not always effec-tive, as the municipality might lackthe resources to realize the full valueof the land in question. On the otherhand, there are examples (e.g.,Baltimore and Rotterdam) of the suc-cessful regeneration by the munici-pality of port lands near the city cen-ter.

• Creating a special development cor-poration for the specific purpose ofredeveloping an old dock area. Thisis most appropriate when the area isvery extensive, involves variousmunicipalities and involves highredevelopment costs. An example ofa separate corporation establishedfor this purpose is the PuertoMadera Corporation in Argentina,which is a joint venture by the Cityof Buenos Aires and the nationalgovernment for the redevelopment

of old city docks for mixed commer-cial, residential and recreational use.Probably the biggest and best-knownspecial purpose corporation is theLondon Docklands DevelopmentCorporation (LDDC) created to rede-velop the old docks of the port ofLondon. The LDDC was created bythe government and endowed withextensive planning powers as aresult of the inability of six riparianmunicipalities to agree on a coherentand feasible plan for the dock’s rede-velopment.

Finally, the interests of ports extendbeyond local traffic and transport.Hinterland connections, nationally andinternationally, rely on road, rail andwaterway links. Both the Port Authorityand the port city should use their influ-ence to establish needed intermodalinfrastructure and agreements. In addi-tion, the Port Authority and the port cityshould collaborate to efficiently accom-modate traffic flows and limit transportcosts (including external costs).

Role of a Port Authority

Ports usually have a governing bodyreferred to as the Port Authority, PortManagement or Port Administration."Port Authority" is used widely to indi-cate any of these three terms.

The term "Port Authority" has beendefined in various ways. In 1977 aCommission of the European Uniondefined a Port Authority as a "State,Municipal, public or private body,which is largely responsible for the tasksof construction, administration andsometimes the operation of port facili-

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ties and, in certain circumstances, forsecurity." This definition is sufficientlybroad to accommodate the various portmanagement models existing within theEuropean Union and elsewhere.

The UNCTAD Handbook for PortPlanners in Developing Countries liststhe statutory powers of a National PortAuthority as follows (on the assumptionthat operational decisions will be takenlocally):

• Investment: Power to approve pro-posals for port investments inamounts above a certain figure. Thecriterion for approval would be thatthe proposal was broadly in accor-dance with a national plan, whichthe authority would maintain;

• Financial policy: Power to set com-mon financial objectives for ports(for example, required return oninvestment defined on a commonbasis), with a common policy onwhat infrastructure will be fundedcentrally versus locally; advising theGovernment on loan applications;

• Tariff policy: Power to regulate ratesand charges as required to protectthe public interest;

• Labor policy: Power to set commonrecruitment standards, a commonwage structure and common qualifi-cation for promotion; power toapprove common labor union proce-dures;

• Licensing: When appropriate, powerto establish principles for licensing ofport employees, agents, etc.;

• Information and research: Power tocollect, collate, analyze and dissemi-nate statistical information on portactivity for general use, and to spon-sor research into port matters asrequired; and

• Legal: Power to act as legal advisorto local port authorities.

Increasingly, central governments imple-ment seaport policies through the alloca-tion of resources rather than through theexercise of wide-ranging regulatorypowers.

While central governments should pur-sue macro-economic objectives throughan active seaport policy, Port Authorityobjectives should be more narrowlyfocused on port finances and operations.

It is a widely accepted opinion amongport specialists that a Port Authorityshould have as a principal objective thefull recovery of all port-related costsincluding capital costs plus an adequatereturn on capital. The full recovery ofcosts will help a Port Authority to:

• Maintain internal cost discipline;

• Attract outside investment andestablish secure long-term cashflows;

• Stimulate innovation in the variousfunctional areas to guarantee a long-term balance between costs and rev-enues, especially when faced withinnovations by terminal operators,port users, rival ports and hinterlandoperators;

• Generate internal cash flows needed

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to replace and expand port infra-structure and superstructure;

• Compete according to the rules ofthe market system, without excessivedistortions of competition;

• Put limits on cross-subsidization,which may be rational from a mar-keting point of view (market pene-tration, traffic attraction) but whichcan undermine financial perform-ance; and

• Avoid dissipation of the PortAuthority's asset base to satisfyobjectives of third parties (e.g., portusers demanding the use of land inthe port area without regard to theland’s most economic use; port andcity administrations using PortAuthority assets to pursue generalcity goals).

Full cost recovery should be viewed as aminimum Port Authority objective; oncethis objective has been achieved, howev-er, the Port Authority would be betterable to pursue other-than-financialobjectives considered desirable by thegovernment or by itself.

Role of Port Operators

Just as central governments and PortAuthorities play key roles in the portcommunities, so too do private portoperators (such as stevedoring firms,cargo-handling companies, and terminaloperators). Port operators typically pur-sue conventional micro-economic objec-tives, such as profit maximization,growth, and additional market share.Only if port operators are free to pursue

such objectives can the benefits of amarket-oriented system be achieved.

Roles of a Transport Ministry

In a market-oriented economic systemthe Ministry of Transport typically per-forms a variety of functions at a nationallevel. With respect to coastline and portissues, the main tasks and responsibili-ties of the Ministry can be summarizedas follows:

Policy making. The Ministry developstransport and port policies related to:

• Planning and development of a basicmaritime infrastructure includingcoastline defenses (shore protection),port entrances, lighthouses and aidsto navigation, navigable sea routesand canals;

• Planning and development of ports(location, function, type of manage-ment).

• Planning and development of porthinterland connections (roads, rail-ways, waterways, pipelines).

Legislation. The Ministry drafts andimplements transport and port laws,national regulations and decrees. It isresponsible for incorporating relevantelements of International Conventions(e.g., SOLAS, Law of the Sea, MARPOL)into national legislation.

International Relations. Specializeddepartments of the Ministry representthe country in bilateral and multilateralport and shipping forums. The Ministrymay also negotiate agreements withneighboring countries relating to water-

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borne or intermodal transit privileges.

Financial and Economic Affairs. AMinisterial department is usuallyresponsible for planning and financingnational projects. It should be able tocarry out financial and economic analy-ses and assess the socio-economic andfinancial feasibility of projects in thecontext of national policies and priori-ties.

Auditing. Auditing functions should beperformed independently from theaffected line organization and are usual-ly included in a staff office. The audi-tors should report directly to theMinister.

In many countries TransportDirectorates are established as inde-pendent bodies within a Ministry andperform an executive function. They areusually responsible for one of the modesof transport; e.g., the Maritime and PortsDirectorate (Maritime Administration).

The principal elements of a typicalMaritime and Ports Directorate are:

• Ship Inspections and Register ofShipping (oversight of ship safetyand manning conditions);

• Traffic Safety and Environment (safemovement of shipping and protec-tion of the marine environment);

• Maritime Education and Training(maritime academies, merchant offi-cers exams, licensing of seafarers);

• Ports (execution of national portspolicy);

• Hydro-technical construction (con-struction of protective works, sea-locks, port entrances, etc.);

• Vessel Traffic Systems and Aids toNavigation (construction and main-tenance); and

• Search and Rescue.

Port Functions

Within the port system, one or moreorganizations fill the following roles:

• Landlord for private entities offeringa variety of services;

• Regulator of economic activity andoperations;

• Planning for future operations andcapital investments;

• Operator of nautical services andfacilities;

• Marketer and promoter of port serv-ices and economic development;

• Cargo-handler and storer; and

• Provider of ancillary activities.

In view of the strategic significance ofport land, port land is rarely sold out-right to private parties because of itsintrinsic value and scarcity. Therefore, akey role for many Port Authorities, isthat of landlord with the responsibilityto manage the real estate within the portarea. This management includes theeconomic exploitation, the long-termdevelopment of the land and the upkeepof basic port infrastructure such as fair-ways, berths, access roads and tunnels.

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Port Authorities often have broad regu-latory powers relating to both shippingand port operations. It is responsible forapplying conventions, laws, rules andregulations. Generally, as a public organit is responsible for observance of con-ventions and laws regarding public safe-ty and security, environment, navigationand health care. Port Authorities alsoissue port by-laws, comprising a multi-tude of rules and regulations withrespect to the behavior of vessels inport, use of port areas, etc. Often, exten-sive police powers are also part of PortAuthorities’ powers.

The planning function of the PortAuthority in co-ordination with theMunicipality is a complicated affair,especially for large ports located withinor near a city. The port planner has toconsider:

• The consistency of his/her planswith the general terms of land usethat have been set by the competentauthority;

• The impact of port development pro-posals on the immediate surround-ings (environment, traffic, facilities,roads, etc.);

• The appropriateness of port develop-ment proposals in the context ofinternational, national and regionalport competition.

Actual port services and balancing ofsupply and demand occur at the levelsof the Port Authority and individualport firms. Hence, the development ofrealistic investment projects for infra-structure and superstructure should be

initiated at these levels. Investmentplans of industrial and commercial portoperators or projects for specific cargohandling, storage and distributionshould be integrated at the level of thePort Authority to arrive at a strategicmaster plan for the port. The individualmaster plans may then be integratedinto a national seaport policy, takinginto account macro-economic considera-tions. Integration of individual masterplans may call for changes in someports’ plans to:

• Avoid duplication of expensive, tech-nologically advanced facilities whendifferent ports in a national systemstrive to attract the same customers;and

• Select the appropriate location forspecific seaport facilities that willinterconnect maritime and landtransport systems.

To conclude, central governmentsshould establish a national port policythat supports national economic objec-tives and creates a reasonable frame-work for port development. The devel-opment of plans for specific port proj-ects, however, should remain in thehands of port operators.

Oversight of nautical operations shouldbe within a Port Authority’s mandateand is often referred to as theHarbormaster’s function. It generallycomprises all legal and operational tasksrelated to the safety and efficiency ofvessel management within the bound-aries of the port area. TheHarbormaster’s office allocates berthsand co-ordinates all services necessary

15

to berth and un-berth a vessel. Theseservices include pilotage, towage, moor-ing and un-mooring, and vessel trafficservices (VTS). In view of its generalsafety aspects, the Harbormaster’s func-tion has a public character. Often, theHarbormaster is also charged with aleading role in management of shippingand port-related crises (e.g., collisions,explosions, natural disasters, dischargeof pollutants).

The cargo-handling and storage functioncomprises all activities related to load-ing and discharging seagoing andinland vessels, including warehousingand intra-port transport. A distinctiontypically is made between cargo-han-dling on board of the vessel (stevedor-ing) and cargo-handling on shore (land-side or quay handling). Terminal opera-tors can fulfill both roles.

There are two types of cargo handlingand terminal operating firms:

• Firms that own and maintain allsuperstructures at a terminal (e.g.,offices, sheds warehouses, cranes,forklifts, conveyor belts); and

• Firms that use superstructure androlling stock owned by the PortAuthority; such firms only employstevedores and have virtually nophysical assets.

The port marketing and promotion func-tion is a logical extension of the portplanning function. Port marketing isaimed at promoting the advantages ofthe entire port complex both for the PortAuthority to attract new clients and forthe ports industry to generally promote

its business. This type of broad portmarketing is distinct from customer-ori-ented marketing that is aimed at attract-ing specific clients and cargos for specif-ic terminals or services.

A variety of ancillary functions such astowage and ship-chandlering, fire pro-tection services, linesmen services, portinformation services, and liner and ship-ping agencies exist within the port com-munity. Large Port Authorities usuallydo not provide these services, with theexception of towage. In a number ofsmaller ports, however, these are part ofthe Port Authority operations because ofthe limited traffic base.

Port Administration Models

A number of factors influence the wayports are organized, structured, andmanaged including:

• The socio-economic structure of acountry (e.g., market economy, openborders);

• Historical developments (e.g., formercolonial structure);

• Location of the port (e.g., within anurban area, in isolated regions); and

• Types of cargos handled (e.g., liquidand dry bulk, containers).

Four man categories of ports haveemerged over time. They can be classi-fied into four main models:

• Service Port;

• Tool Port;

• Landlord Port; and

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• Fully Privatized Port or PrivateService Port.

These models are distinguished by howthey differ with respect for such charac-teristics as:

• Public, private or mixed provision ofservice;

• Local, regional or global orientation;

• Ownership of infrastructure (includ-ing port land);

• Ownership of superstructure andequipment (in particular ship-to-shore handling equipment and ware-houses); and

• Status of dock labor and manage-ment.

Service and tool ports mainly focus onthe realization of public interests.Landlord ports have a mixed characterand aim to strike a balance betweenpublic (Port Authority) and private (portindustry) interests. Fully privatizedports focus on private (shareholder)interests.

Service ports have a predominantlypublic character. Many ports in devel-oping countries are still managedaccording to this model (e.g., India, SriLanka). Under it, the Port Authorityoffers the complete range of servicesrequired for the functioning of the sea-port system. The port owns, maintainsand operates every available asset (fixedand mobile) and cargo-handling activi-ties are executed by labor employeddirectly by the Port Authority. Serviceports are usually controlled by (or even

part of) the Ministry of Transport(and/or Communications) and theChairman (or Director General) is a civilservant appointed by, and/or directlyreporting to, the Minister concerned.

Among the main functions of a serviceport are cargo-handling activities. Insome developing country ports thecargo-handling activities are executedby a separate public entity, oftenreferred to as the "Cargo HandlingCompany." Such public companies usu-ally report to the same Ministry as thePort Authority. To have public entitieswith different and sometimes conflictinginterests reporting to the same Ministry,and forced to co-operate in the sameoperational environment, constitutes aserious management challenge. For thisreason the Port Authorities and CargoHandling Companies of Mombassa,Kenya, and Tema, and Takoradi, Ghana,were merged into one single entity.

In the tool port model, the PortAuthority owns, develops and main-tains the port infrastructure as well asthe superstructure, including cargo-han-dling equipment such as quay cranes,forklift trucks, etc. Port Authority staffusually operates all Port Authority-owned equipment. Other cargo-han-dling on board vessels as well as on theapron and on the quay is usually carriedout by private cargo-handling firms con-tracted by the shipping agents or otherprincipals licensed by the PortAuthority. "Ports Autonomes" in Franceis an example of a container terminalmanaged and operated as a tool port,although for more recent terminals theprivate terminal operator has made theinvestment in gantry cranes. This

17

arrangement has generated conflictsbetween Port Authority staff and termi-nal operators, which has impeded oper-ational efficiency.

The above-mentioned division of taskswithin the tool port system clearly iden-tifies the essential problem with thistype of port management model: splitoperational responsibilities. Whereasthe Port Authority owns and operatesthe cargo handling equipment, the pri-vate cargo-handling firm usually signsthe cargo-handling contract with theship owner or cargo owner. The cargo-handling firm however, is not able tofully control the cargo handling opera-tions itself. To prevent conflicts betweencargo-handling firms, some PortAuthorities allow operators to use theirown equipment (at which point it is nolonger a true tool port). The tool porthas a number of similarities to the serv-ice port, both in terms of its public ori-entation and the way the port isfinanced.

Under a tool port model, the PortAuthority makes land and superstruc-tures available to cargo-handling com-panies. In the past, these companiestended to be small, with few capitalassets. Their costs were almost entirelyvariable. The cost of under-utilizationof port facilities was usually absorbedby the Port Authority, which minimizedrisk for the cargo-handling companies.Often, the provision of cargo-handlingservices was atomized: cargo-handlingcompanies were small with activity frag-mented over many participants. Thelack of capitalization of the cargo-han-dling companies constituted a signifi-cant obstacle to the development of

strong companies that could functionefficiently in the port and be able tocompete internationally.

As noted, the landlord port is character-ized by its mixed public-private orienta-tion. Under this model the PortAuthority acts as regulatory body andas landlord, while port operations (espe-cially cargo-handling) are carried out byprivate companies. Examples of land-lord ports are Rotterdam, Antwerp, NewYork and, since 1997, Singapore. Todaythe landlord port is the dominant portmodel in larger and medium sizedports.

In the landlord port model, infrastruc-ture is leased to private operating com-panies and/or to industries such asrefineries, tank terminals and chemicalplants. The lease to be paid to the PortAuthority is usually a fixed sum persquare meter per year, typically indexedto some measure of inflation. The levelof the lease amount is related to the ini-tial preparation and construction costs(e.g., land reclamation and quay wallconstruction). The private port opera-tors provide and maintain their ownsuperstructure including buildings (e.g.,offices, sheds, warehouses, ContainerFreight Stations, workshops). They alsopurchase and install their own equip-ment on the terminal grounds (e.g.,quay cranes, transtainers, conveyorbelts) as required by their business. Inlandlord ports dock labor is employedby private terminal operators, althoughin some ports part of the labor may beprovided through a port-wide laborpool system.

Fully privatized ports (which often take

18

the form of a private service port) arefew in number, and can be found mainlyin the United Kingdom and NewZealand. Full privatization is consid-ered by many as an extreme form ofport reform. It suggests that the Stateno longer has any meaningful involve-ment or public policy interest in the portsector. In fully privatized ports, portland is privately owned, contrary to thesituation in other port managementmodels. This requires the transfer ofownership of such land from the publicto the private sector. Additionally, alongwith the sale of port land to privateinterests, some governments may simul-taneously transfer the regulatory func-tions to private successor companies. Inthe absence of a port regulator in theUK, for example, privatized ports areessentially self-regulating. The risk inthis type of arrangement is that portland can be sold or re-sold for non-portactivities, thereby making it impossibleto reclaim for its original maritime use.

The decision to move to full privatiza-tion in the UK was made for three mainreasons:

• To modernize institutions and instal-lations, both of which often datedback to the early years of the indus-trial revolution, making them moreresponsive to the needs and wishesof the users;

• To achieve financial stability andfinancial targets, with an increasingproportion of the financing comingfrom private sources; and

• To achieve labor stability and adegree of rationalization, followed

by a greater degree of labor partici-pation in the new port enterprises.

Box 5 summarizes the strong and weakpoints of the principal port managementmodels.

Box 6 summarizes the sectors (public orprivate) with which various responsibili-ties typically lie under the four basicport management models.

Globalization of Terminal Operations

Port Authorities are increasingly con-fronted with the globalization of termi-nal operations. During the 1990s, anumber of terminal operators and majorshipping lines emerged to invest in andtake control of a large number of termi-nals all over the world. This trend hasfar reaching consequences for the strate-gic position of port management vis- à-vis some of their major clients.

This trend toward globalization hasaffected mainly containerized opera-tions. Today, a handful of major carrieralliances and independent terminaloperators increasingly dominate themajor global container trades. The glob-al carriers have sought to secure theircompetitive positions by concludinglong-term contracts for dedicated con-tainer terminals in major, strategicallylocated ports. Their reasoning is thatthey believe they need to control allstages of the transport chain to remaincompetitive. These efforts to establishintegrated transport chains pose a chal-lenge for port authorities in their rela-tions with the largest carriers. Forexample, how should a port respond if alarge container operator demands to

19

20

Strong and Weak Points of Port Management Models

Public Service port:

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

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

Tool Port:Strength: Investments in port infrastructure and equipment (in particular ship/shore equipment) are

decided and provided by the public sector, thus avoiding duplication of facilities.

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

Landlord Port:Strength: A single entity (the private sector) executes cargo-handling operations and owns and operates

cargo-handling equipment. The terminal operators are more loyal to the port and more likely to make needed investments as a consequence of their long-term contracts.Private terminal handling companies generally are better able to cope with market requirements.

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

Fully Privatized Port:

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

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

Box 5

operate a dedicated terminal and threat-ens to leave the port when it does notget its way?

It should be emphasized that full con-trol of the transport/logistics chain byone consortium (a global monopolist) isnot a desirable development. Because ofregulatory measures by the UnitedStates and the European Union, thecomplexity of the transport/logisticschain and the number of players, a carri-er’s ability to control of the full chainseems an illusion. However, somealliances may attain a significant degreeof market dominance. Box 7 lists thefleets of the major container carriers,showing the number of vessels operat-ed, the number of TEUs this represents,and the number of TEUs under con-struction.

Competition between major alliances isintense. The scale of investment in anew generation of container vessels rep-resents a massive commitment. To fillthese vessels the alliances try to securelocal control and co-ordination overinland cargo haulage and feeder opera-tions. In this way they try to securetheir market share and meet perceivedservice needs. Port handling charges are

considered as being of secondary impor-tance in achieving these goals.

Relationships between ports and carriersfall into four broad categories:

First are ports that face strong inter-portcompetition in the container handlingsector. Container lines may easily shiftoperations to other ports if their finan-cial and operational demands are notmet. To attract major container lines, thePort Authority may offer them dedicat-

21

Basic Port Management Models

Type Infrastructure Superstructure Port Labor Other Functions

Public Service Port Public Public Public Majority PublicTool Port Public Public Private Public/PrivateLandlord Port Public Private Private Public/PrivatePrivate Service Port Private Private Private Majority Private

Box 6

Major Container Carriers as ofSeptember 2000

1. Maersk/Sealand: operating 298 vessels (682,000 TEUs),139,000 TEUs under construction.

2. Evergreen Group: operating 134 vessels (318,000 TEUs),91,000 TEUs under construction.

3. P&O Nedlloyd: operating 124 vessels (302,000 TEUs),112,000 TEUs under construction.

4. Hanjin/DSR Senator Line: operating 80 vessels (246,000TEUs), 39,000 TEUs under construction.

5. Mediterranean Shipping Co: operating 130 vessels(229,000 TEUs), 76,000 TEUs under construction.

Source: Mainport News Rotterdam (October 2000) / BarryRogliano Salles-Alphaliner.

Box 7

ed facilities while other, smaller lines areaccommodated at common user termi-nals. Without such dedicated facilities,major lines would move to other com-peting ports. Examples of this categoryof ports are Yokohama and Long Beach.

Second are ports that derive the bulk oftheir business from a major containerline, and therefore, are dominated bythis client. If the dominant line were toabandon the port, 80-90% of the trafficcould be lost. Examples of such portsare Algeciras and Salalah.

Third are ports where, although no sin-gle shipping line may dominate theport’s traffic volume, there is a possibil-ity for that line to pressure the PortAuthority into accepting a dedicated ter-minal because of competition for transittraffic in the larger region. An exampleof this type of port is Miami, whichserves the Caribbean, Central and SouthAmerica as a hub. Competitors areKingston and Freeport (Bahamas). Asthe competitive positions of these portsimprove, carriers may increase pressureon Miami to grant dedicated terminals.

Fourth are major world ports such asRotterdam, Antwerp and Singapore.Such ports have a very well developedcontainer sector with operators (PSA inSingapore, HN and NN in Antwerp andECT in Rotterdam) that heavily investedin modern equipment and automation.They usually operate common userfacilities and occupy a stronger marketposition than their immediate competi-tors for the very largest container ves-sels. Container terminal operators insuch ports resist moves to develop dedi-cated carrier terminals that would upset

the present system and undermine theprofitability of the existing common userterminals. Pressures at the major portsto accept dedicated terminals areintense. How long even major ports canresist such pressures depends not onlyon their competitive position but also onthe operational and financial strength ofthe local terminal operators. A hybridarrangement has surfaced in recentyears, namely a dedicated terminaloperated as a joint venture (e.g., ECT(with Maersk, Sealand and P&ONedlloyd in Rotterdam) and Hessenatie(with MSC/CP in Antwerp)). When con-fronted with the serious possibility ofloosing a substantial quantity of theirthroughput, Port Authorities may becompelled to yield to the demands ofthe major container line alliances. Thiswas recently the case in Rotterdam,where the Port Authority allowedMaersk Sealand and P&O Nedlloyd torun their own dedicated terminals.

Apart from major container lines, a lim-ited number of global stevedore compa-nies have emerged during the 1990s.The largest of these are:

• Hutchison Port Holdings (HongKong)

• P&O Ports (Australia)

• International Container TerminalServices (Philippines)

• Stevedoring Services of America(United States)

• PSA Corporation Ltd. (Singapore).

• Eurogate (Germany).

22

These companies operate a large num-ber of terminals all over the world.Their main objective is not to control thetransport chain, but to make a profit byoffering terminal services. However,when too many terminals within aregion are controlled by one operator,the competent authority or governmentagency may decide that special regulato-ry measures are needed to protectagainst the danger of a monopoly. Thiswas the case in Rotterdam whenHutchinson International bought 49% ofthe shares of ECT. The EuropeanCommission decided to refuse permis-sion for this transaction on the groundsthat this would have allowedHutchinson to establish a dominantmarket-position in Northwest Europesince Hutchinson already ownedFelixstowe, Thamesport and Harwich.

Box 8 lists some of the principal globalport operators and the container termi-nals they operated or participated in atthe beginning of the Year 2000.

Port Management and Port Competition

Competition within and between portshas a bearing on the management struc-ture of the port and the relationsbetween the Port Authority and the ter-minal operators/cargo-handling compa-nies. These changing relations are oftencited as an important reason for chang-ing the port management structure.Many Port Authorities consider the cre-ation of competitive conditions amongport operators the cornerstone of theirport policy.

One can distinguish between inter-portcompetition (competition between dif-

ferent ports) and intra-port competition(competition between different enter-prises within one port complex). Toreduce the risk of monopolies, PortAuthorities usually stimulate intra-portcompetition. However, medium sizedand smaller ports, because of their limit-ed traffic, often accommodate only oneport terminal operator. In such cases,Port Authorities often use their quasi-governmental powers to regulate portcharges and tariffs.

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Principal Global Container Terminal Operators

Hutchinson International Terminals (HIT)Balbao and Cristobal (Panama), Freeport (Bahamas),Thamesport, Felixstowe and Harwich (UK), Rotterdam(The Netherlands), Hongkong, Yantian and Shanghai(China), Rangoon (Myanmar), Tanjung Priok (Indonesia)

International Container Terminals Systems Inc. (ICTSI)Veracruz, Ensenada and Manzanillo (Mexico), Buenos Aires(Argentina), Damman (Saudi Arabia), Karachi (Pakistan),Laem Chabang (Thailand), Manila (Philippines) and Dar-es-Salaam (Tanzania)

Maersk/Sea-LandTacoma, Oakland, Long Beach, New Jersey, Norfolk,Charleston and Jacksonville (USA), Algeciras (Spain),Gioao Tauro (Italy), Rotterdam (The Netherlands),Kaohshiung (Taiwan), Yokohama and Kobe (Japan)

P&O PortsVarious terminals in China (including Qingdao), variousterminals in Australia, Southampton and Tilbury (UK),Cagliari (Italy), Derince (Turkey), Buenos Aires (Argentina),Qasim (Pakistan), Nhava Sheva, Cochin, Chennai andKandla (India), Colombo (Sri Lanka), Manila (Philippines),Surabaya (Indonesia) as well as Gulf Services (USA) andSouth Asia Ports (Malaysia)

PSA CorporationDalian, Fuzhou, Nantong (China), Aden (Yemen), Pipapavand Tuticorin (India), SinesPortugal), and Genova (Italy)

Source: Journal of Commerce/Atas (Trainmar) News number 02/00 –Edition 78

Box 8

Key factors affecting inter-port competi-tion include:

• Geographic Location. A port that isstrategically located close to well-established transport routes has com-petitive advantages. A strategic loca-tion typically possesses at least thefollowing characteristics:

• Proximity to one or more majormaritime routes;

• Natural deep water, good protec-tion against waves and currents,large waterfront and land-sideexpansion possibilities;

• Proximity to majorproduction/consumption areas;

• Good hinterland connections(road, rail, pipeline and water-way) with high frequency serviceoffering good connectivity.

• Financial Resources. A port with suf-ficient financial means of its ownand/or the capacity to raise thefunds required to develop andimprove the port has a competitiveadvantage over ports with limitedresources or no financial autonomy.

• Institutional Structure and Socio-eco-nomic Climate. The managementstructure of the port must be con-ducive to private sector investment.Related to this is the socio-economicclimate in the port. Private investorsprefer ports with a sufficient andwell-trained labor force and withgood relations between employeesand employers.

• Efficiency and Price. Various investi-gations indicate that port costs are animportant, although not decisive,factor in making choices, especiallyfor cargo owners or their representa-tives. In a world where manufactur-ers seek to trim costs and improvecustomer service through the adop-tion of sophisticated logisticsprocesses, efficiency and the price-performance ratio are increasinglyimportant.

• Image of the Port. The image theport projects is another factor in itscompetitiveness. The preferredimage is an optimum mix of theabove mentioned components.

Box 9 summarizes the key elementsinfluencing port competition.

Port Sector Regulator

When inter-port competition is muted orabsent, Port Authorities and/or publicor private terminal owners are apt touse their monopoly market positions toraise tariffs (in particular for captive car-gos), which may justify regulation. Theneed for such regulation may lead to thecreation of an independent Port SectorRegulator.

The objectives of the Port SectorRegulator are to ensure fair competitionamong competing operators in the port;to control monopolies (including publicones) and mergers; and to prevent anti-competitive practices.

A Port Sector Regulator typically haslegal powers to counter anti-competitivepractices, such as:

24

• Use of a dominant position to pre-vent or lessen competition;

• Cross subsidization by monopolyservices of contestable services,thereby threatening fair competition;

• Price fixing among competitors;

• Use of other practices that areintended to restrict, distort or pre-vent competition.

Smaller ports are more vulnerable toanti-competitive abuses since their traf-

fic volumes limit the number of contain-er, bulk or oil terminals. Generally,when a monopoly or merger situationdoes not operate against the publicinterest, it may be permitted provided itis properly regulated.

The establishment of a Port SectorRegulator should only be effected in theevent of serious threats to free competi-tion within the port. It should prefer-ably have the character of an arbitratorinstead of a court of law and be accept-ed by the port community as being inde-pendent. For a more detailed discussion

25

Elements Influencing Inter-port Competition

Inland Transport System

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

Transshipment (sea-sea transfer of cargo)

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

Freight Forwarders and Multimodal Transport Operators (MTOs)

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

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

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

Box 9

of the economic regulation of ports seeModule 6.

Value Added Services

Generally, the function of a port as anode in the transport chain depends onits location and on the economic andtechnical developments that exist in itshinterland. Modern production tech-niques and consumption patternsincrease the use of transportation sys-tems beyond levels suggested purely bythe growth in trade and commerce. As aresult, more specialized handling, stor-age and other logistics facilities areneeded. More and more, ports arebecoming part of so-called integratedlogistics chains. This process of special-ization and changing demands, whichhas taken place over the last twodecades in most Western countries, isnow taking place with even greaterspeed in new market economies.

From the port’s point of view, creatingnew services boosts the port’s economicperformance as well as its attractivenessto existing and potential clients. This, inturn, can help maintain and improve aport’s competitive position. Whenassessing the wisdom of developingnew services, it is important to payattention to the value adding potentialof the services. This potential can varyproduct by product and activity byactivity.

Numerous activities can be classified as"Value Added Services." Box 10 identi-fies a number of them.

Value Added Services can be dividedinto Value Added Logistics (VAL) and

Value Added Facilities (VAF). ValueAdded Logistics has two major compo-nents: General Logistics Services (GLS)and Logistics Chain Integration Services(LCIS).

General Logistics Services are, amongother activities, loading/unloading,stuffing and stripping, storage, ware-housing and distribution. These are themore traditional logistics activities, anddo not directly affect the nature of theproduct as it moves through the port.

Beyond these traditional activities, morecomplex Logistics Chain IntegrationServices are being developed. To carryout activities that manufacturers do notconsider part of their core business,logistics service providers may take overparts of the production chain (e.g.,assembly, quality control, customizingand packing) and after sales services(e.g., repair and re-use). However, LCISare only appropriate for certain types ofgoods. The products that have the high-est potential to benefit from such servic-es include: consumer electronics, phar-maceutics, chemical products (except forthose carried in bulk), clothing, cosmet-ics and personal care products, food,machinery and control engineeringproducts.

The second group of Value AddedServices -- Value Added Facilities (VAF)-- is very diverse. These types of activi-ties cannot generally be assigned to aparticular type of product or freightflow. It is possible, however, to imputea certain "VAF-potential" by analyzingfreight flows such as dry and liquidbulk, general cargo, containerized cargoand roll-on/roll-off. A large container

26

throughput might create the economicbasis for establishing container repairfacilities; handling vast quantities ofchemicals requires port reception facili-ties; substantial roll-on/roll-off trafficmight justify truck maintenance andrepair shops.

Box 11 broadly depicts the potential forboth VAL and VAF activities for differ-ent types of cargos.

Containerized and general cargos typi-cally have the highest VAL-potential.General Logistics Services and the

Logistics Chain Integration Serviceshave the best opportunity to serve thesecargos. The VAL-potential for roll-on/roll-off is very limited. Trucks withdrivers are too expensive to be delayedwhile the cargo is modified; additional-ly, these loads are usually customer-tai-lored. Value Added Facilities, such astanking, cleaning, repair, parking, secu-rity, renting and leasing facilities have abetter potential to serve the roll-on/roll-off market. Dry and liquid bulk flowshave the lowest potential for both VALand VAF.

27

VALUE ADDED SERVICES

Value AddedFacilities

General LogisticsServices

Logistics ChainIntegration Services

Value AddedLogistics

loading/unloadingstripping/stuffingbulk storageTank storagegeneral warehousingconditioned warehousingdistribution centres

parking facilitiesweighbridgescustoms facilitiestruck maintenance and repair facilitiescontainer repair and maintenancecleaning facilitiestanking facilitiestrailer renting and leasinginformation and communicationsafety and security servicesoffices/WTChotels, restaurants shops

quality controlrepackingcustomizingassemblytestingrepairre-use

Overview of Value Added Services in Ports

Box 10

To provide a favorable environment forVAL and VAF, many ports are develop-ing so-called Distriparks. A Distriparkis an area where companies are estab-lished to perform trade and transport-related value added services. There isno standard development plan for aDistripark. As can be seen from the var-ious developments in the Netherlands,France, Germany and the UnitedKingdom, there is a large variety inDistriparks. For example, in Rotterdam,there are three Distriparks. The oldestone (Eemhaven) is devoted to containercargo distribution; the second one(Botlek) is devoted mainly to chemicals;and the third and most recent one is alsodedicated to containerized cargos, and

includes large warehouses containinggoods for Europe-wide distribution(e.g., Reebok).

PORT FINANCE OVERVIEW

Before 1980, service ports and tool portswere mainly financed by theGovernment. The general infrastructureof landlord ports typically was financedjointly by the Government and the PortAuthority, and the terminal superstruc-ture and equipment by private opera-tors. Fully privatized ports were theexception. In the event a Governmenthad no funds for expensive port infra-structure, either port development washalted or money was acquired at prefer-ential rates from an International

28

VAF POTENTIAL

CONTAINERS

GENERAL CARGO

ROROLIQUID BUILT

DRY BULK

VA

F P

OTE

NTI

AL

HIGH

HIGHLOW

Potential for VAL and VAF

Box 11

Financial Institution such as the WorldBank.

Ports require expensive infrastructure tobe able to compete successfully. Untilrecently, Port Authorities mainly reliedon contributions and subsidies fromnational Governments for building orimproving basic port infrastructure.Such contributions usually were exclud-ed from port financial accounts andtherefore helped ports to exhibit positivefinancial positions.

Whether national Governments financebasic maritime and port infrastructuredepends the Government’s political andeconomic policies. For example, if portsare considered part of the general trans-port infrastructure of the country, theninvestments in them may be consideredto promote the national interest. If portsare assumed to be independent econom-ic entities, however, they have to fullybear their own costs without directGovernment support.

In some countries, financing basic mar-itime infrastructure is considered a pub-lic task (e.g., in France and Croatia)because this part of infrastructurebelongs to the so-called "public domain,"which is protected by law. To carry outconstruction activities and/or port oper-ations in this domain, a public license isrequired. This requirement couldreduce intra-port competition if thelicenses are granted only on a limitedand discriminatory basis.

An often-occurring problem with public(thus political) investment decisions isthat the decision to invest does not nec-essarily originate at the same level of

government as that of the financingsources and responsibilities. Because ofthis disconnect, the interest of publicofficials to increase efficiency and prof-itability of port assets is usually limitedbecause they are not held accountablefor the success or failure of their invest-ment decisions.

As mentioned earlier, the increasing roleof private enterprise in the port sectorexerts a direct influence both on portmanagement and operations, as well ason the way capital projects are financed.The private sector has become interestedin financing the construction of entireterminals including quay walls, landreclamation, dredging, superstructureand equipment. This has given rise to alarge variety of financing and manage-ment schemes such as BOT (Build,Operate, Transfer), BOOT (Build, Own,Operate, Transfer) and BOO (Built,Own, Operate). Each is designed tomobilize private capital while balancingpublic and private interests.

Government’s views about ports areevolving. Increasingly, ports are consid-ered separate economic entities,although still subject to national regionaland local planning goals. As such, theyshould operate on a commercial basis.By the same token, subsidies for portinfrastructure construction, especiallyfor port land, quay walls, common areasand inner channels, should be avoided.

Box 12 summarizes the EuropeanUnion’s views and this latter point.

There still is, however, a category of portinfrastructure for which it will be hardto find private investors—investments

29

for expensive and long-lived infrastruc-ture (e.g., breakwaters and locks,entrance channels and fairways, andland reclamation). The main stumblingblock for private financing of such proj-ects is their life span, which oftenexceeds 100 years, and the "sunk invest-

ment" aspect of these projects. Costrecovery of such works often cannot beeffectuated in 20 years, which is a nor-mal repayment period for long-termloans for infrastructure works byInternational Finance Institutions.Nevertheless, the second and third-

order benefits from such infrastructureinvestments for national and regionaleconomies may be substantial. Hence,many Governments are still willing tofinance part or all of long-term portinvestments as these contribute to theachievement of public policy objectives.

Caution is warranted, however, whenev-er Governments contemplate underwrit-ing such investments.

Financing Port Projects

To further clarify financing approachesit is important to distinguish among

30

European Rules on Port Subsidies

Beginning in the 1960s heated discussions took place in Europe on the issue of port subsidization. Especially theUK accused Continental European countries of secretly subsidizing their ports to improve their competitive posi-tion. Indeed, most European governments subsidized directly or indirectly the development of their ports. NoEuropean rules or regulations were in place because the port sector was not included in the Treaty of Rome.However, rules were laid down within the framework of regulating subsidization of infrastructure. Art. 93 para. 3regulates the admissibility of State subsidies in port infrastructure as follows:

• Subsidies should be necessary for the project in question to be realized.

• The period of subsidization should be limited.

• Subsidies must be in the interest of the European Union.

• Subsidies must be compatible with the objectives of the common transport policy.

• Subsidies should not disrupt competition.

• The investment must be profitable from the financial and socio-economic points of view.

• More than one party should benefit from the subsidy.

• Subsidy of mobile assets is not permitted.

• Subsidies to cover operational costs are not permitted.

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

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

and are not allowed.

Box 12

investments in "basic port infrastruc-ture," "operational port infrastructure,""port superstructure" and "port equip-ment." Understanding these distinc-tions will help us decide which invest-ments should be paid for by the port,which should be paid for by the localor regional community, the centralgovernment and private investors.Box 13 lists various types of port assetsunder these four categories.

In addition to financing the construc-tion, rehabilitation, acquisition andmaintenance of physical assets, portsmay also need to finance organization-al restructuring and associated laborcompensation as well as working capi-tal to support operations.

Each of these categories and theirpotential sources of financing is dis-cussed below.

In many countries, the Government isresponsible for financing basic infra-structure, either directly or through acontribution to offset its cost whenundertaken, for example, by aHighway Authority or a PortAuthority. For example, in theNetherlands, construction of maritimeaccess and protection works used to becarried out by and for the account ofthe Government with the port authori-ties obliged to pay one-third of the rel-evant costs.

For the Government there are two keyissues associated with making largedirect investments in port facilities:

• How to find the necessary funds;

• How to recover the investment.

31

Categories of Port AssetsBasic Port Infrastructure:

• maritime access channels

• port entrance

• protective works including breakwaters, shore protection

• sea locks

• access to the port for inland transport (roads, tunnels, etc.)

• rail connection between the hinterland and the port

• inland waterways within the port area.

Operational Port Infrastructure:

• inner port channels, turning and port basins

• revetments and slopes

• roads, tunnels, bridges, locks in the port area

• quaywalls, jetties and finger piers

• aids to navigation, buoys and beacons

• hydro/meteorological systems

• specific mooring buoys

• Vessel Traffic Management System (VTMS)

• patrol/fire fighting vessels

• docks

• port land (excluding superstructure and paving)

• access roads to general road infrastructure

• rail connection to general rail infrastructure, marshalling yards

• dry-docks for ship repair.

Port superstructure:

• paving, surfacing

• terminal lighting

• parking areas

• sheds, warehouses and stacking areas

• tank farms and silos

• offices

• repair shops

• other buildings required for terminal operations.

The following items are part of Port equipment:

• tugs

• line handling vessels

• dredging equipment

• ship/shore handling equipment

• cargo handling equipment (apron and terminal).

Box 13

The way the Government (or any otherpublic body) funds investments isdiverse:

• Direct investments coming from theGovernment investment budget;

• Direct investments coming from aspecial (port) fund;

• Loans from International FinanceInstitutions.

Direct investments, paid for by theinvestment budget or a special fund, arebased on the assumption that they willhave a substantial positive effect on theeconomy, as shown by the positiveresults of a cost-benefit analysis (alwaysheavily dependent on traffic forecasts).For investments broadly benefiting theentire nation, it is not unusual that aGovernment would not seek directfinancial repayment.

However, there are also situations wherethe Government may receive directreimbursement for the funds it investedvia a variety of rates and chargesassessed against the beneficiaries of theinvestments. These may take the formof:

• Compensation paid by the PortAuthority in proportion to the vol-ume of goods transported through anewly dredged channel, etc. (per tonor per TEU);

• A fixed amount per year paid by thePort Authority to the Government; or

• A percentage of the annual port duespaid by the Port Authority to the

Government.

Often, basic infrastructure elements arefinanced by an International FinanceInstitution under a government guaran-tee. However, even when InternationalFinance Institution financing is madeavailable, ports and/or Governmentsmust still face the challenge of providingmatching shares for a period of some 30to 50 years and making interest pay-ments over a period of 20 years.

When considering financing of opera-tional infrastructure Port Authoritieshave a number of options from which tochoose. For Service Ports or Tool Ports,governments will usually finance theoperational infrastructure, with or with-out the assistance of an InternationalFinance Institution. For Landlord Portsmade up of self-contained terminals,investment in the terminal should befinanced by the terminal concessionaireor the lessee, while the port provides theland (often in a condition ready for con-struction). The port may also providethe quay wall with the land, but,increasingly, private concessionaireshave been willing to invest in this infra-structure.

Other financial arrangements are com-mon. For example, in U.S. public ports,the Port Authority may have access to"cheaper" money than a private sectoroperator. In this case, the Authority hasthe option to issue tax-free port revenueand general obligation bonds. Both giveports access to capital markets; the for-mer relies on the revenues generated byoperation of the new facility to repaydebt; the latter assures purchasers of thedebt that the Government will make

32

good on any repayments should rev-enues from operation of the new facilityprove inadequate.

The most attractive situation, both fromthe point of view of the Landlord PortAuthority as well as of the operator, isthe conclusion of a long-term lease con-tract with the operator (running for aperiod of 20 to 30 years) for the use ofpart of the port area. This type of long-term lease has the legal character of aproperty right and has four advantages:

• At the end of the contract, possessionof the land reverts to theGovernment or Port Authority;

• The contract represents a propertyright that under certain conditionscan be transferred to a third party.There usually is a clause in such con-tracts stating that such transfer ofproperty rights requires prior per-mission from the Port Authority;

• All superstructures (buildings andequipment) may be financed andowned by the operator;

• It can be used as security for a bankloan.

For the financing of common areas (allareas within the port area not being partof a terminal or other port enterprise),the Port Authority may make use ofretained earnings, issue its own bonds(where permitted to do so by its statutesand legal system) or make use ofEurobonds, or simply take a bank loan.Except in the first case, the associatedrisk is with the borrower. The problemconfronting public ports is what to useas collateral or guarantees for the lender,

particularly since there may be restric-tions with respect to the use of the port’sassets.

In the event of a major reorganizationprogram for the Port Authority, substan-tial amounts of money may be requiredfor compensation payments to person-nel. (See Module 7 for a detailed discus-sion of labor issues affecting portreform.) Such payments often have ashort payback period. Nevertheless, tra-ditional sources of finance may beunwilling to lend money specifically forthis purpose. There is, however, a possi-bility for "triangular" financing, i.e.,lending the money for some other trans-action on condition that the funds thusliberated are used to compensate dis-placed workers. Moreover, a nationalGovernment might be willing to providefunds for labor redundancy schemeswith or without the involvement of anInternational Finance Institution.

Port operators and providers of serviceswho take over existing installations andequipment from a Port Authority mayhave a greater need for working capitalthan investment capital, especially intheir start-up periods. With respect todebt financing, operators face the prob-lem of providing security, since installa-tions and equipment often are leasedunder conditions that prevent theirbeing mortgaged. Since port operatorsare essentially private companies, anattractive alternative to debt financing isthrough the flotation of equity shares,the success of which will depend largelyon the degree of confidence prospectiveshareholders have in the newly foundedcompany and in its management.

33

Supplier credit, provided that it includesthe financing of necessary spare partsover a period of at least three years,offers another potential source of fund-ing for the procurement of equipment,with the usual limitations of this type offinancing.

Finally, a joint venture between the PortAuthority and the operator offers whatmay be an attractive source of financefor the operator. For a specialized termi-nal, where the likelihood of a competingterminal being constructed is remote, ajoint venture may be reasonable. Inmost circumstances, however, the likelyeffect of a joint venture between a PortAuthority and an operator is to obscurethe transparency of the relationshipbetween the different port functionsand, more pragmatically, to discouragethe entry of new operators to the port.Box 14 describes the challenges mount-ed by such relationships in the case ofone port authority.

Financing Ports:From a Lender’s Point of View

Port Authorities or port operators seek-ing to finance new facilities or equip-ment typically have to offer some sort ofsecurity to a prospective lender.Generally they have assets and othersupport from political and business cir-cles for the project they want to under-take. In many ports, however, land isGovernment-owned and cannot be usedto secure financing. And, when a portneeds money to dredge a channelentrance to remain attractive and com-petitive, the channel itself does not con-stitute credible security for the lender.There are however, various options for

ports to provide lenders "comfort."

Prospective lenders will examine closelythe position of the borrower, whichmight be a Port Authority or a portenterprise. In the vast majority of casesthe latter are structured as limited liabil-ity companies. In the case of loans to apublic Port Authority, the State orMunicipality usually provides a guaran-tee. A Port Authority might also be cor-poratized with the State and/or PortCity as main shareholders. In both casesthe lender will assess the financialstrength of the Port Authority and thepublic bodies owning it. This is oftensufficient to ensure financing of the ven-ture without too much regard to theassets comprising it. In Anglo-Saxon

34

Multiple Terminal Ownership in Sri Lanka

The Sri Lanka Port Authority (SLPA) faces a number ofchallenges.

In 1999 the Government of Sri Lanka entered into a 30-year concession for the Queen Elizabeth Terminal (QEQ).QEQ will be operated under a BOT scheme by P&O ports,with other partners including Evergreen MarineCorporation and John Keels (Sri Lanka). SLPA will retain arole in the terminal as well. The Port of Colombo is cur-rently a Service Port, and its lead container terminal, JayaContainer Terminal (JCT), is and will continue to competeactively with QEQ.

Given SLPA’s stake in both JCT and QEQ, as well as inmany services in the port area including inter-terminaltransfers, SLPA’s position as a neutral landlord is compro-mised. Looking into the future, a major expansion, theso-called South Port, will require that the role of SLPAbecome one of a non-discriminatory landlord without adirect hand in operations. This should improve efficiencyand minimize the conflicts of interest. Moreover, a portsector regulator is to be established on or before 2003 asagreed in the QEQ concession agreement.

Box 14

jurisdictions, a borrower may create a"floating charge" (similar to a mortgage)over all assets. This avoids the need toconsider specific elements of the portassets as collateral.

A port’s most valuable asset is its land;however, land’s value as security under-pinning financing varies significantly.Generally the land is owned by a publicbody or by the Port Authority itself. Inlandlord ports the land is concessionedor leased to private operators, with theexception of common areas, which usu-ally have a low commercial value. Inmany cases the concession or the leasecan be mortgaged to a lender who canuse it or sell it to a third party in case ofdefault. Using the land itself as collater-al, however, is more complicated. Theland must have inherent worth and auser should be able to exploit it. If aright to use the port area concerneddoes not accompany the mortgage onport land, its value is considerablydiminished. Another problem might bethat the national legislation grants onlylimited rights to a mortgage. Lastly, inthe event of a public Port Authority, thelender might be confronted with politi-cal processes complicating his ability toexercise his rights under a mortgage.This makes the security less valuable toa lender.

In most ports the concession or lease toprivate operators is the principal securi-ty for lenders, provided that the condi-tions of the concession or lease allowtransfer of the contractual rights toanother party. In the case of a full-fledged concession (including a BOTscheme), the financier often desires tohave the ability to arrange for the opera-

tion of the terminal itself if the operatordefaults. In the case of a land lease, aPort Authority is usually obliged to givepermission to transfer the lease to athird party, such as transfer anotherport-related firm, when certain condi-tions are met. This might be a cargo-handling firm or terminal operatingcompany, or a port-based industry suchas a refinery or a chemical plant.Conditions attaching to the transfer typ-ically require the new firm to use thefacilities in accordance with their initialassignment and to generate sufficientsea-going traffic.

A port complex comprises a large vari-ety of other assets that might be mort-gaged or used as collateral. Theyinclude warehouses, quay cranes, officesand other buildings, tugs, dredged chan-nels, etc. Some of these assets mightprovide security to a lender, especiallywhen the assets can be used in otherports (e.g., cranes and tugs). Others,because they are immobile or have fewalternative uses, constitute little or nosecurity (e.g., dredged channels). Animportant aspect of securing financing isthe legal right of a port operator to ownbuildings on land leased from the PortAuthority. Lenders are usually preparedto finance buildings and certain types ofequipment in view of their intrinsicvalue.

Port firms, and sometimes privatized orcorporatized Port Authorities, typicallytake the legal structure of a joint stock orlimited liability company. The equity ofsuch enterprises does not constitutesecurity in itself but may help to attractinvestment funds. Rights of equityholders to repayment usually rank

35

immediately behind the rights of alender. When a "balance sheet" financ-ing is undertaken, a high level of equity(in relation to debt) means that morefunds are available to absorb lossesbefore lenders come under threat.

One of the most important elements offinancial security is the cash flow gener-ated by the port or terminal. A lenderalmost always wants the earnings of theproject to provide security for his/herloan. Estimation of such earnings ishighly complex since it involves assess-ing elements such as future traffic levels,port revenues and expenses, the expect-ed general economic development of thecountry, potential exchange rate risks,the future political climate, etc. Themore accurate and reliable the trafficand financial forecasts are perceived tobe by prospective investors, the higherthe probability that a Port Authority orport operator will be able to attract riskcapital and/or obtain loans.

Governments may also guarantee com-mercial loans against political risk andpossibly use the guarantee programsoffered by the International FinanceInstitutions. In the port sector, lendersoften take security via assignment ofport charges. However, much willdepend on the terms of the concessionor lease agreement, terms of earlierfinancing and the rights of third parties.

Finally, financing can be affected by theprovision of additional Governmentsupport. A Government may investequity in a firm it deems essential forthe general development of the port. Itmay also provide subordinated loans.Direct financial involvement of

Governments and public PortAuthorities is increasingly common,despite potential conflicts of interest.Sometimes, a Government may assigncertain rights or grant concessions suchas a duty-free status (e.g., as was thecase at Jebel Ali) to enhance the successof the venture. Properly focusedGovernment support can be very impor-tant to provide additional comfort tolenders.

Public-Private Partnerships

As private sector involvement in financ-ing port and other infrastructure workshas increased, the tools for financingthese facilities have become increasinglysophisticated and the legal conditions tobe satisfied by the project more strict.The private sector will evaluate its par-ticipation in port infrastructure/super-structure projects based on the followingelements:

• Expected yield;

• Adequate debt/equity financingstructure (e.g., 65/35, 70/30, 75/25);

• Strong sponsorship;

• Solid legal contracts;

• Transparent legal framework;

• Fair and open bidding procedures;and

• Credible feasibility analyses (techni-cal, institutional, financial, economicand environmental).

Funding large infrastructure invest-ments in green field port projects is

36

more risky because of certain complicat-ing factors including:

• The large proportion of necessaryequity contributions (e.g., a mini-mum proportion of 60%) due to thehigh risk associated with long con-struction and payback periods;

• The difficulty of projecting futuretraffic volumes;

• The capital intensive nature of theinvestments; and

• The continuing risks associated withoperations, such as a refusal ofrequests for tariff adjustments,changes in tax policy or introductionof new handling techniques thatmake existing facilities obsolete.

PORT REFORM MODALITIES

Overview

Today, the term "port reform" connotesthe changing institutional structure ofthe port business and the much greaterinvolvement of the private sector in theexploitation and financing of port facili-ties, terminals and/or services. Portreform, therefore, results in changingrelationships between the public andprivate sectors.

The sharp increase in world trade overthe last 50 years focused the attention ofnational governments on the economicimportance of ports. This was especiallythe case in major ports developing largeindustrial sites within their domain. Inthe 1950s and 1960s, many nations intro-duced institutional changes with the aimof coordinating port development at

national and regional levels and pre-venting over-investment in expensiveport infrastructure. For example, theUnited Kingdom established itsNational Ports Council for this purpose.

In the former Soviet Union, EasternEurope and in many socialist-orienteddeveloping countries the situation wasentirely different. Ports were consideredpart of the national state structure (e.g.,as an element of the Ministry ofMerchant Marine/Ministry of Transport)and were often controlled by nationalshipping companies. Every matterinvolving maritime policy was decidedcentrally, with Port Authorities carryingout the various day-to-day nautical andoperating functions.

At the beginning of the 1980s the beliefin the management and operatingcapacities of national governmentsfaded in most market-economy coun-tries. Central structures came under fireand often lost part of their powers. Theprivatization wave launched in the late1970s and early 1980s by MargaretThatcher in the UK also affected the portsector and resulted in a re-assessment ofthe role of the government and privateenterprise.

The demise of the communist system inthe beginning of the 1990s resulted inthe virtual collapse of centrally con-trolled port systems in the former social-ist countries. They, too, embarked onport reform and adapted the institution-al and financial structure of their portsectors to market conditions.

Despite the social and economic reformsof the past thirty years, the public sector

37

has retained a strong role in port devel-opment. Generally, in a market-orientedeconomy a government continues to beresponsible for the development of"public goods," goods that have a socialutility, but that cannot be provided bythe private sector because of low prof-itability. Moreover, another reason forcontinuing government involvement inthe port sector is the strong ties to gov-ernment responsibilities in the areas ofland use planning, environmental pro-tection, job creation and the economicstimulation of underdeveloped areas.

Box 15 summarizes the most frequentlycited reasons for change in the manage-ment and/or ownership of ports, asthese have been compiled from a largenumber of documents and articles.

Definitions

Many port managers and governmentofficials believe that the only way toimprove the performance of public portorganizations is through the process ofprivatization. They hold this viewbecause they believe that certain charac-teristics of the private sector are indis-pensable to achieve commercial success.The term "privatization" has thereforebecome synonymous (and confusinglyso) with "port reform." Privatization,however, more accurately refers to oneaspect of port reform–the introductionof the private sector into areas previous-ly reserved to the public sector.

Governments and port managers canselect from among a variety of strategiesfor improving organizational and opera-tional performance including:

• Modernization of port administra-tion and management ;

• Liberalization or de-regulation portservices;

• Commercialization;

38

Reasons for Pursuing Port Reform

General Reasons:

• Improve port efficiency

• Decrease costs and prices

• Improve service quality

• Increase competitive power

• Change the attitude with respect to port clients(become more client friendly)

Administrative/Managerial Reasons:

• De-politize the public port administration

• Reduce bureaucracy

• Introduce performance–based management

• Avoid government monopolies

Financial reasons:

• Reduce public expenditure

• Attract foreign investment

• Reduce commercial risks (investments) for the publicsector

• Increase private sector participation in the regionalor national economy

Employment reasons for change:

• Reduce of the size of the public administrations

• Restructure and retrain the port labor force

• Eliminate restrictive labor practices

• Increase private sector employment.

Box 15

• Corporatization; and

• Privatization.

Each of these options may be equallyvalid and successful forms of portreform depending on the setting of theport in question. Each of these optionsis defined below.

Modernization of port administrationassumes that performance can beimproved by introducing more suitablesystems, working practices, equipmentand tools within the existing system ofbureaucratic constraints. The advantageof this strategy is that certain changes inthe organization can be made withoutthe requirement to change laws ornational policy.

Liberalization/de-regulation means thereform or partial elimination of govern-mental rules and regulations to enableprivate companies to operate in an areawhere previously only the public sectorwas allowed to operate.

In the case of commercialization,although the public port is not trans-formed into a private company, it isgiven more autonomy and madeaccountable for its decisions and overallperformance. It applies the same man-agement and accounting principles asprivate firms and can adopt private sec-tor characteristics and practices tobecome more customer-oriented as wellas more efficient and profitable.

In the case of corporatization, a publicport is given the legal status of a privatecompany, although the public sector orgovernment still retains ownership. Allassets are transferred to this private

company, including land lease rights.Land ownership usually remains withthe Port Authority.

The most complex form of reform is pri-vatization. One definition of this termcan be found in the UNCTAD publica-tion of 1998:

"Privatization is the transfer of owner-ship of assets from the public to the pri-vate sector or the application of privatecapital to fund investments in port facil-ities, equipment and systems."

More specifically related to the port sec-tor, the following variations of privatiza-tion can be defined.

Comprehensive privatization: a schemein which a successor company becomesthe owner of all land and water areas aswell as of all the assets within the port’sdomain (this is equivalent to the sale ofan entire port to a private company).

Partial privatization: a scheme wherebyonly part of the assets and activities of apublic port body are transferred to theprivate sector (such as the sale of exist-ing berths, the transfer of pilotage ortowage functions or a concession by apublic Port Authority to a private com-pany to build and operate a terminal ora specialized port facility).

Hence, privatization expands the role ofthe private sector in the ownershipand/or operations of existing port facili-ties and services, as well as in the devel-opment of new port facilities. In the fol-lowing sections the various port reformoptions are described in greater detail.

39

Modernization of Port Administration

The strategies of liberalization, commer-cialization, corporatization and privati-zation all aim at improving the efficien-cy of the port administration and theoperations through the introduction of abusiness-like environment.

Although these strategies can be effec-tive, some governments are reluctant toimplement them since they fear thatsuch institutional modifications maylead to a disruption of services or loss ofgovernment authority, prerogatives andpower. As a result, governments some-times prefer other less sweeping meth-ods to improve organizational perform-ance, such as the modernization of theport’s administration.

Such a strategy assumes that the per-formance can be improved even in theprevailing environment of bureaucraticconstraints. The advantage of this strat-egy is that certain changes in the organi-zation can be made without the necessi-ty to make legal or policy changes.

Examples of improvements that can beintroduced without legal or policychanges are:

• Adoption of corporate planningpractices;

• Application of human resourcesdevelopment (HRD) planning;

• Use of computer applications andmanagement information systems(MIS); and

• Development of electronic data inter-change (EDI) and information and

communication technology (ICT).

Many ports have refrained from intro-ducing corporate planning (strategicmanagement or strategic planning)because port managers fear that its posi-tive effects may be undermined bybureaucratic or cultural considerations.

Effective corporate planning is depend-ent on strategy formulation involvinggroup interaction. While group-basedstrategic decisions often can offer thebest available alternatives, a strict hier-archical organizational structure placesthe majority of important decisions inthe hands of a single executive. In suchcases, the success or failure of portdevelopment and port policy is depend-ent on one person only, which is a riskysituation. But this is precisely the mostfrequently observed form of manage-ment in traditional ports.

Career planning and managementdevelopment are important elements ina port modernization strategy. Manyports have failed to introduce careerplanning and career development in theorganization, or omitted to link the twoactivities. As a result, such organiza-tions are characterized by low employeemotivation levels, high absenteeism, andhigh turnover rates at management levelpositions.

Efforts to improve the administrativeenvironment and performance shouldinclude the rational use of computerapplications and the application of mod-ern communication technologies. Suchdevelopments are perhaps the most sig-nificant technological efforts undertakenby ports. Many have developed

40

advanced computerized managementinformation systems. Also electronicdata interchange (EDI) and informationand communication technology (ICT)are excellent tools to improve portadministration and communication.

In the final analysis, the Modernizationof Port Administration Option generallyhas not led to fundamental changes inthe port sector, which is what the reformprocess sets out to do. It should, there-fore, be considered as a stepping stonetowards a more comprehensive reformprogram.

Liberalization

Liberalization sets the stage for a privateorganization to carry out certain portactivities previously reserved exclusive-ly for the public sector (public monop-oly). With this reform the private sectoris authorized to provide selected portservices to users in a competitive envi-ronment with the intent of increasingefficiency and improving port-clientresponsiveness. The essential feature ofthe Liberalization Option is that itsimplementing legislation permits theprivate sector to provide facilities andservices and to compete with the exist-ing public port organization.

The most important advantage of thissystem compared to other port reformsystems is that the public port operator,even if inefficient, will continue to existas a form of insurance against disrup-tions in service, while unsuccessful pri-vate port operators can be replaced.

Since liberalization may temporarilyintroduce competition between public

and private port operators, the two mustbe able to compete effectively and fairly.This might require the introduction ofan independent port sector regulator.Actually, the logic of liberalizationshould lead the public Port Authority tofully withdraw from commercial activi-ties and concentrate on any necessaryregulatory functions.

Liberalization is often opposed becausethe existence of internal as well as exter-nal cross-subsidizies.

This, for instance, occurs when portswith a statutory monopoly cross-subsi-dize unprofitable services in competitivemarkets with profits earned in monop-oly markets. For example, in manyports the most profitable activity is thecontainer terminal operation, the rev-enues of which frequently support bulkor general cargo facilities and services.

Other forms of cross-subsidy occurwhen a public port organization realizessubstantial revenues from non-maritimerelated activities, such as real estatedevelopment, and uses these revenuesto underwrite port-related costs. Withthis type of support to draw on, thepublic organization has a competitiveadvantage over its private counterpart.

On the other hand, the price advantagethat the public port body may have haddiminishes as competition erodes itsmonopoly power and prices are set in amore competitive environment. Its pricelevels cannot match those of the privatesector if it has to rely on inflated pricesto subsidize other port services. Theformer monopoly may, as a conse-quence, be forced to scale back or cease

41

the unprofitable activities (which,although unprofitable, may be vital tothe nation) to compete effectively withthe private sector.

On many occasions, the public sectorcontinues to rely on public subsidies,thereby undermining fair competitionbetween the public and the private sec-tors. This strongly argues for the clearseparation of the regulatory and com-mercial roles in a port, with the PortAuthority taking on the former and theprivate operator the latter.

Another potential problem associatedwith the liberalization option is the pos-sibility that the public port organizationwill use other unfair practices to com-pete against private operators. The PortAuthority, for example, may take actionsthat are beneficial to the public termi-nals, but are disadvantageous to the pri-vate terminals. An example is that ofdredging certain Asian ports. Often,the government ministry or the publicPort Authority provides exclusivedredging services. This public entitycan refuse to offer this service to the pri-vate operators, thereby putting thoseoperators at a competitive disadvantage.Another possibility is that the servicewould be provided to the private sectorat a higher price than the one charged tothe public sector. To avoid such poten-tial conflicts of interest, the governmentmay also decide to liberalize or privatizethese essential complementary servicesto create a level playing field. As aresult, the logical conclusion of theLiberalization Option is for all commer-cial activities of the port ultimately to betransferred to the private sector.

Commercialization

Commercialization is the introduction ofcommercial principles and practices intothe management and operation of a PortAuthority or part thereof, requiring it tooperate under market disciplines. Theprocess can be achieved through negoti-ated performance contracts between thegovernment, acting as the owner of theport, and the port management. Theagreement specifies the port’s objectivesin terms of performance goals, servicequality, and social obligations.

Commercialization is characterized bythe following:

• Decentralization of the decision-mak-ing process;

• Relaxation of the hierarchy of theport organization, thereby allowingport management to exercise muchgreater control over:

• budgeting;

• procurement and purchasing;

• maintenance strategies and pro-gramming;

• salary scales and employmentconditions of labor and staff;

• hiring and firing ;

• setting objectives and perform-ance targets, and

• formulation of strategies.

Essentially, commercialization aims tocreate an environment in which the PortAuthority runs on a commercial basis.

42

This involves a variety of business-typedecisions. The Chief Executive typicallyhas a certain freedom of action andrefers only specific matters relating tooverall policy or strategy to the control-ling body (e.g., the relevant Ministry orCity Board). Commercialization isdesigned to allow port management toconduct, to a large extent, its own affairsand at the same time imposes on itresponsibility and accountability for itsdecisions and performance. In practice,however, a common problem has beenthat Governments continue to interferein port decisions, undermining theauthority of port management.

Commercialization aims to provide portmanagers with decision-making authori-ty and responsibility similar to thatexisting in private sector organizations.However, since the port enterprise maystill have substantial monopoly power,managers may not be confronted direct-ly with the hardships and necessary dis-cipline imposed by market competition.Therefore, a commercialized govern-ment organization often will not be asefficient as a comparable private firm,unless it is subject to competition.

Since the essence of commercialization isto require and empower port manage-ment to perform as well as the privatesector, changes in the institutional andlegal structures of the port organizationare required to remove bureaucraticobstructions.

A common first step in the process ofcommercialization and the eliminationof bureaucratic inefficiencies is to trans-form the port organization into a trulyautonomous Port Authority. Box 16

notes that the Government of Mexicofollowed this course.

Commercialization should result in thecreation of a Port Authority Board tooversee the organization’s activities,removing that responsibility from thecentral government ministry or city. Atthe same time, however, the governmentmay still need to exercise some form ofoversight to safeguard the public inter-est.

Commercialized Port Authoritiesshould:

• Be financially independent (i.e., owntheir assets, establish their ownbudgets and make their own invest-ment decisions);

• Have their own personnel schemesseparate and distinct from thenational civil service and patternedon the schemes of private companies;

• Have a management that is responsi-ble for and held accountable for theport’s performance by a Board.

43

Creation of Independent Port Authorities in Mexico

In 1993/1994, the management of the major ports inMexico was transformed into the AdministraciónPortuaria Integral (Integral Port Administrations). Thisdecentralized the port system, set up individual portadministrations co-ordinated by the CoordinaciónGeneral de Puertos, and opened the way to the privatiza-tion of operational activities in the ports such as cargo-handling, storage and towage. The Secretariat ofCommunication and Transportation retained economicand safety oversight of the decentralized port system.

Box 16

Board members can be appointed bythe national or local government,port users and representative labororganizations.

In many countries the process of com-mercialization is only partially imple-mented since procurement and contract-ing practices remain subject to nationalgovernment regulations.

A weakness of the commercializationprocess is that, during its introduction,the acting public sector managerbecomes the chief executive responsiblefor pushing through the changes in theorganization. His performance and hiscommitment to the commercialization ofthe Port Authority greatly influence hismanagement team and the shape andpace of reform. In other words, man-agers accustomed to civil service proce-dures and practices have to drasticallychange their management styles. Thishas proven to be a difficult transitionand is the reason why, in many suchprocesses, managers with private sectorexperience soon replace the former civilservice senior management. A wellthought-out training program may be aneffective tool to change attitudes andprepare management and staff for thedifferent style and culture commercial-ization brings.

Corporatization

The next gradation on the path to fullprivatization is corporatization. Oneport practitioner noted that:

"Corporatization goes further thancommercialization in that it involvesthe transformation of the public Port

Authority into a corporation. Thismeans that the Port Authority isconverted into a legally and finan-cially independent legal body withits own Board of Directors. The gov-ernment retains ownership of theport. By applying market principles,corporatization can lead to enhancedefficiency."

Corporatization, then, is the process inwhich a public sector undertaking, orpart thereof, is transformed into a com-pany under private corporate law. Thisis achieved by selling shares in a newcompany that conducts the port’s busi-ness and holds its assets, although theshares are issued and may be ownedentirely by the government (or PortAuthority). The main objective is todecrease direct government control overthe company and to make it moreresponsive to market forces. Similar toprivatization, corporatization caninclude financial restructuring and be acatalyst for the introduction of commer-cial principles. Corporatization is, ineffect, privatization without divestment.

For political or legal reasons (oftenboth), comprehensive or partial privati-zation may neither be appropriate norpossible. In such cases corporatizationmay offer an effective alternative forachieving more efficiency and greatermarket orientation.

Corporatization usually features most ofthe following characteristics:

• A complete separation of the publicmanagement and regulatory func-tions from the commercial activitiesthat are being corporatized;

44

• The Government sets clear and non-conflicting objectives for the newfirm;

• Management is given greater respon-sibilities and autonomy for decisionson operations, investments, revenuesand expenditures, and on commer-cial strategy;

• Where no market-based scrutiny ispossible, performance is measuredagainst a range of financial and non-financial criteria;

• Rewards and sanctions for managersare based on performance;

• The government makes certain thatthe corporatized firm does not haveany comparative advantages or dis-advantages relative to private portfirms operating under similar marketrisks and conditions (e.g., withrespect to tax and interest rates).

Corporatization can be implementedeither through incorporation under acommercial code as a limited liabilitycompany or as a statutory authorityunder its own articles of incorporation.The statutory option is the most com-mon approach for corporatizing PortAuthorities.

During the initial phase of the corporati-zation process the following principalactions are required:

• Preparation and enactment of anyneeded legislation; such legislationoften serves to eliminate the statemonopoly within the affected sector;

• Development of the company charter

(e.g., the memorandum and articlesof incorporation) of the corporatizedport enterprise, and its subsequentincorporation;

• Development of a corporate planincluding traffic forecasts, a businessdevelopment plan, and pro formaincome statement and balance sheet;

• Capitalization and vesting of part ofthe assets and liabilities of the formerpublic company in the new corpora-tion;

• Creation of a new labor statute, pro-vision of financial and social meas-ures to cope with excess personnel(such as pension fund guarantees,redundancy payments, retraining,etc.) and transfer of personnel fromthe former public entity, if required;

• Re-training of management and staffto increase commercial orientationand improve managerial procedures.

The key difference from the otheroptions discussed is that the aim of cor-poratization is to constitute the corpora-tized firm as a single, self-containedentity. The corporatized company’smanagement should be free from directgovernment interference or control(bureaucratic constraints) to allow themto operate the company on commercialterms. At the same time, managementshould also be held accountable for theiractions.

The new corporation can be organizedwith clearer lines of communication andresponsibility. Clearer targets can be setand adhered to. Stricter internal finan-cial controls can be introduced and,

45

where necessary, information andaccounting systems established. This allaims to make the business more awareof market and client requirements.

One of the corporatized port’s greateststrengths is its financial autonomy. Thismeans that tariffs should no longerrequire approval from the governmentor ministry (unless it is a monopolyenvironment and the government wish-es to exercise strict control) and that thecompany should be allowed to establishits own procurement, contracting andhiring and firing practices. In addition,such companies do not rely on govern-ment support for investments and havethe authority to negotiate loans directlywith commercial banks. The govern-ment, however, typically will continueto exert some measure of political con-trol. Usually this is effected through theappointment of Board members.

Among the reasons for pursuing corpo-ratization over other alternatives are:

• To allow time for the management tosettle into its new role before con-templating full privatization;

• To overcome the reluctance of pri-vate capital suppliers to invest in thecompany; and

• To protect the public interest.

Having completed the corporatization ofport operational activities, subsequentlyone can consider the corporatization ofthe Port Authority as a regulatory body(e.g., as in the case of the Port Enterpriseof Antwerp).

Negative aspects of corporatization

include:

• In a majority of cases, the new corpo-rate entity still has a monopoly;

• Unless competition is created, thecorporate company may not be asefficient as anticipated;

• Governments are still able to politi-cize the corporatized firm by retain-ing the right to appoint Board mem-bers and Executive Directors;

• There will often be a need to intro-duce a port sector regulator to createa level playing field among compet-ing service providers.

Box 17 describes the process of corpora-tization for the Jaya Container Terminalin Sri Lanka.

Privatization

Privatization can be either comprehen-sive or partial. The latter takes the formof a public-private partnership and isusually combined with the introductionof a Landlord Port Authority.Comprehensive privatization remains anexception and is not a preferred optionfor major ports.

Many reasons may prompt governmentsor a Port Authority to enter into the pri-vatization process.

Removal of Trade Barriers. Outdatedwork practices, obsolete facilities, inade-quate institutional structures and exces-sive charges in ports cause inefficienciesthat can create obstacles to foreign trade.Indirectly, the entire population of acountry pays for port inefficiencies,

46

which are reflected in the prices of bothimport and export commodities.

Harnessing the Efficiency and Know-how of the Private Sector. Increasingspecialization in the shipping and portindustry requires highly trained person-

47

Corporatization of the Jaya Container Terminal, Colombo

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

The new enterprise developed a business plan, containing the following main topics:

• JCT’s mission statement;

• Legal structure of the firm, Memorandum and Articles of Association;

• A Concession Agreement with SLPA;

• Definition of institutional, financial and operational relations with SLPA;

• Determination of leasehold area and asset base;

• Traffic forecasts and competitive position of JCT vis-a-vis local and international competition;

• Transfer of personnel and organization;

• Operations and automation including the creation of a new financial system;

• Profit and loss accounts and cash-flow projection situation.

JCT’s mission was:

To provide for professional container terminal management and operations, with respect to container handling, effi-cient and regular services for stevedoring, landing, transporting and warehousing as well as stuffing and stripping ofcontainerized dry and wet cargo, and wharfage, in such as way that:

• Internal cost discipline is maintained;

• All costs are recovered;

• An adequate return on capital is achieved;

• Customer needs are satisfied;

• Replacement and expansion investments are financed mainly by internal cash flows.

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

Box 17

nel, advanced systems and equipmentand capital intensive cargo-handlingtechniques to meet the fast changingdemands of port users worldwide.Government-owned firms, with theircumbersome administrative procedures,poor cash flow generation, inflexiblepayment schemes and lack of marketorientation, usually cannot cope withthese requirements.

Elimination of Political Interference.Although there are countries with well-balanced political systems and minimalpolitical interference in the functioningof the state or municipal-owned portenterprises, the appointment of politicalnominees with inadequate experience tohigh level positions in government-owned ports is a well-known phenome-non. In contrast, privatization of portoperations often results in the selectionof professional port managers with anundiluted focus on the market and itschanging needs.

Reduced Demand on the Public SectorBudget. Partial privatization does notnecessarily mean a total withdrawal ofthe government from port investments.However, a large (often major) part ofport investments can be undertaken bythe private sector without compromis-ing wider social and economic benefits.Development of a modern port stillrequires a balanced public-private finan-cial package with balanced risk-sharing.

Reduced Expenditure on Port Labor.Government-owned enterprises tradi-tionally have been a large source ofdirect employment; in the port sectorthe greatest employment is in cargo han-dling services. A privatization scheme

that maintains restrictive working prac-tices cannot be effective. In the longrun, creating an internationally competi-tive port system, with all its direct andindirect economic spin-off effects, ismore valuable than the short-term objec-tive of maximizing local dock labor.

Other Objectives. Governments some-times pursue privatization for other rea-sons such as raising revenues for theState Treasury, disposing of assets, andencouraging competition and broadercitizen participation in share ownership.

In its many variations, privatizationusually includes the following core fea-tures:

• Divestiture (selling off government-owned assets);

• Deregulation;

• Competitive tendering; and

• Private ownership of operationalassets with market-based contractualarrangements.

In theory, privatization provides thesame flexibility to the management ascommercialization. Unlike under com-mercialization (where in the worst casescenario the government is likely to sub-sidize the company if it fails to performadequately), a privatized terminal oper-ation can be permitted to fail, providedother facilities can handle its traffic. Or,existing facilities may be taken over by anew operator who continues the opera-tions. The management determines itsown fate, free from significant govern-ment influence, as long as it complieswith regulatory requirements.

48

REFORM TOOLS

Overview

Before deciding on a port reformprocess, governments should to articu-late clearly the ultimate goals of reform.Broadly, there are two alternatives:

• The public authority in charge of theport sector (either a Service Port or aTool Port) wants to restrict its publicrole by privatizing cargo handlingoperations and other non-landlordactivities. In this case, existing oper-ations have to be privatized or cor-poratized and Service or Tool Portsreconstituted as a Landlord Ports."Partial privatization" is the goal.

• The public entity having finalresponsibility for the port sector(most probably a national govern-ment) wants to privatize the entiresector, including responsibilities thatgenerally are considered belongingto the public domain. Ownership ofport land, planning, investment andmanagement are all transferred toprivate sector entities, which have noformal commitments to any publicinstitution. "Comprehensive privati-zation" is the goal (see Box 19 for anexample of this type of privatizationprocess).

This section focuses on the implementa-tion of "partial privatization," since thatapproach has been used successfully tobalance public and private interests andstill meet the objectives of port reform.Box 18 shows the spectrum of portreform tools that will be discussed in

greater detail in this section.

49

Public Management and Operations

Outsourcing

Management Contracts

Lease and Rent Contracts

Full Concession IncludingBOT/BOOT/etc.

Built, Own, Operate (BOO)

Divestiture by License

Divestiture by Sale

Private supply and Operations

Box 18

Spectrum of Port Reform Tools

CO

NC

ESSI

ON

S

Contracting Out and Use of ManagmentContracts

One tool available to governments toimprove port efficiency and perform-ance is contracting out to the privatesector of certain functions previouslyexecuted by the public port manage-ment. A public enterprise may decide tocontract out certain of its operationsthrough a tender-bid procedure insteadof undertaking them "in-house" whenthe following circumstances apply:

• The functions can be performed at aprice that is substantially lower thanthe cost of undertaking them in thepublic sector;

• There is ample scope for competitivebidding; and

• Government policy is to transfergradually certain non-core activitiesof the public sector to the privatesector.

Contracting out, however, should behandled with caution as it involves sev-eral risks:

• If the number of potential bidders islimited, a meaningful comparison ofthe bids may not possible;

• Potential bidders may form a cartelor otherwise collude when biddingfor a contract; and

• Contracting out may create a mono-poly for those activities, whichwould be contrary to the publicinterest unless there is a proper regu-latory oversight framework.

Also within the framework of commer-cialization, a separate contract for themanagement of the public PortAuthority or public terminal operatormay be awarded. Use of such a toolmay be appropriate in cases where:

• A Port Authority has experiencedpoor management for an extendedperiod of time;

• The financial condition of the PortAuthority needs to be substantiallyimproved with a view to its corpora-tization/privatization at a later stage,on terms favorable to the Ministry ofFinance of the country concerned; or

• The Port Authority generally wouldbenefit from the introduction of pri-vate management.

The usual practice is for the governmentto agree on a management contract witha private sector operator. The operatoragrees to employ the existing port staffand to provide adequate and efficientservice to all customers. This formerrequirement (retention of existing staff),however, often emerges as the main rea-son for the failure of management con-tracts (e.g., the Port of Mombasa). Themanagement company may be saddledwith excess labor and labor costs thatcannot be sustained in a competitivemarket.

A management contract is usuallyentered into for a specified period, gen-erally between three and five years.Upon expiration of the contract period,it may either be renewed or awarded toanother party. A management contractmay also be used as a stepping stone

50

towards the granting of a more exten-sive concession. It is important whenentering into a management contractthat the government or ministry has theright to impose financial penaltiesand/or terminate the contract in casethe private operator does not meet spec-ified minimum levels of efficiency,financial performance or throughput.

Concession Arrangements

Governments are still widely involved

in port management, mainly serving aslandlord. At the same time, the role ofprivate enterprise in the sector will con-tinue to grow. Service and Tool Portswill gradually disappear and be trans-formed into Landlord Ports; in somecases, fully privatized ports will emerge.For Landlord Ports public bodies willretain the ultimate ownership of assets(especially land), but will transfer amajor part of the financial and opera-tional risks to the private sector.

51

The Experience of the Hanseatic Landlord Ports

On the north-west European continent five universal ports – Antwerp, Rotterdam, Bremen/Bremerhaven andHamburg–compete intensely for business generated in overlapping hinterland areas. Surprisingly, the basic organizationalstructure of all these ports is quite similar. They are operated in a public-private partnership, where the public entity takesresponsibility only for:

• setting the legal framework and the guidelines for port development

• providing the port infrastructure

• administering and renting out the publicly owned land

• regulating and supervising ship movements.

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

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

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

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

BOX 19

Governments will act mainly as regula-tors and land developers, while privatefirms will assume the responsibility forport operations. The main legal instru-ment used to achieve this realignment ofpublic and private sector roles andresponsibilities is a "concession."

Concessions are widely used in the portsector today. A port concession is acontract in which a government trans-fers operating rights to private enter-prise, which then engages in an activitycontingent on government approval andsubject to the terms of the contract. Thecontract may include the rehabilitationor construction of infrastructure by theconcessionaire. These characteristicsdistinguish concessions from manage-ment contracts on one end of the reformspectrum and comprehensive port pri-vatization on the other. Concessions, bypermitting governments to retain ulti-mate ownership of the port land andresponsibility for licensing port opera-tions and construction activities, furtherpermit governments to safeguard publicinterests. At the same time, they relievegovernments of substantial operationalrisks and financial burdens.

There are two main forms of concessionused in ports today:

• Lease contracts, where an operatorenters into a long-term lease on theport land and usually is responsiblefor superstructure and equipment;

• Concession contracts, where theoperator covers investment costs andassumes all commercial risks. Suchcontracts are often combined withspecific financing schemes such as

Build, Operate and Transfer (BOT).

Lease contracts and concession contractsshare the same principal characteristics:

• The Government or public PortAuthority conveys specific rights to aprivate company;

• They have a defined term (10-50years);

• They are geographically delimited;and

• They directly or implicitly allocatefinancial and operational risks.

Leasehold Agreements. Landlord portsderive a substantial part of their incomefrom leases. Typically, only land orwarehouse facilities are leased. Berthsmay be included or excluded from thelease rent. If excluded, the PortAuthority collects and keeps all revenuederived from berthing fees, berth occu-pancy fees, dockage, etc.

There are three basic forms of lease inuse today: flat rate, "mini-max," andshared revenue leases.

Flat rate leases give the lessee the rightto use a fixed asset for a specific periodof time in exchange for periodic pay-ments of a fixed amount. In the case ofa land lease, this can be a fixed paymentper year per square meter. Lease ratesmay vary depending on the degree ofport site development (e.g., unpaved vs.paved land or land with or withoutstructures). The main advantage of thisform of lease is that the lease rent isknown to both parties in advance. Theflat rate lease also provides to the lessee

52

the greatest incentive to fully use theavailable capacity of the terminal.

The main characteristics of the flat ratelease are:

• A specific sum of money is paid persquare meter of port area for a spe-cific period of time;

• In principle, the lease represents a"fair return" to the Port Authority onthe value of the property; and

• Lease payments may be adjusted forinflation over the life of the lease.

To set lease payments at the properlevel, the Port Authority must be able toforecast accurately the level of business(and, hence, the wear and tear on portinfrastructure and the traffic from whichthe lessee will benefit). It should alsotry to assess the true value of the land(e.g., in its best alternative use) and aimto recover this value through the antici-pated level of business transacted by thelessee. Because the lessee must makethe same lease payment regardless ofthe revenue his business generates, hehas a strong incentive to make full useof the leased land and structures.

A flat rate lease is often the preferredform of lease for a port whose primaryobjective is to maximize throughput andbenefits to the local economy.

Under a mini-maxi lease the lessor givesto the lessee the right to use a fixed assetfor a specific period of time in exchangefor a variable lease payment. There is aminimum and a maximum paymentdepending on the level of activityrecorded.

The characteristics of the mini-max leaseare:

• The lessee’s payments to the lessor(Port Authority) for the use of struc-tures, equipment and land are estab-lished on a scale, which is defined byminimum and maximum through-puts;

• The rent varies with the actual vol-ume of activity recorded;

• The minimum rate is applicableregardless of the volume of activity,but is based on reasonable assump-tions about the expected minimumthroughput;

• From this minimum, a sliding pay-ment scale is applied until a pre-determined maximum throughput isreached;

• The minimum rate may not fullycover the interest and amortizationof the lessor;

• When the specified maximumthroughput level is reached, the les-see pays no further rent.

With this form of lease, then, there arepre-established floor and ceiling rents tobe paid; between the floor and ceilingrents, the lessee will pay more or lessdepending on the tonnage or number ofTEUs handled. In this fashion the PortAuthority and the private lessor sharethe risks and rewards of port invest-ments and operations. The lessor has astrong incentive to operate efficientlyand to generate traffic beyond the levelat which the maximum rent is paid,since he receives the full benefit of any

53

revenues generated beyond that point.

In a shared revenue lease, the lessor alsogives to the lessee the right to use afixed asset for a fixed period inexchange for a variable amount ofmoney. As distinguished from a mini-max lease, with a shared revenue leasethere is a minimum payment regardlessof the level of activity, but no maximumpayment.

The main characteristics of the sharedrevenue lease are:

• There is a minimum level of compen-sation;

• There is no established maximumlevel;

• The only limit on the maximum com-pensation is the facility’s/ terminal’scapacity;

• Minimum compensation may notfully cover the interest and amortiza-tion of the lessor (Port Authority) forthe lease area.

Both mini-max and shared revenue leas-es represent true partnerships betweenthe Port Authority and the lessees.Under both arrangements, the port mustcarefully determine the minimum leasepayment taking into consideration itsfinancial obligations, its own forecasts oftraffic volumes, and its statutory andbusiness tolerances for risk. Once mini-mum throughput levels are attained, thelessee and the port share the benefitsderiving from any additional activity.The shared revenue lease is the onlyapproach in which the Port Authoritycan maximize revenues, employment

levels and throughput. Along with thispotential for added rewards, however,come added risks.

Box 20 shows how the three differentforms of lease would work for a notion-al terminal.

All three types of leases can be used forso-called multi-user as well as for single-user (dedicated) terminals or berths.

Potential lease partners for a PortAuthority are:

• Terminal operators;

• Cargo-handling companies;

• Shipping lines;

• Forwarding agents; and/or

• Inland transport operators.

Today it is common for shipping lines tobe major lessors from ports. For these

54

LEA

SE P

AY

MEN

T

TRAFFIC VOLUME

FLAT RATE LEASE

SHARED VALUE LEASE

MINI-MAX LEASE

Box 20

Comparison of Lease Systems

leases to succeed for all parties, howev-er, two key conditions should exist:

• The shipping line lessor should gen-erate a large volume of cargo at theport (i.e., it should be a major cus-tomer); and

• The port should possess additionalfacilities of the same type leased tothe shipping line to prevent creatinga monopoly (i.e., a public accessfacility should be available).

If the port does not have other similarfacilities (and other customers), the cre-ation of a monopoly will conflict withthe interests of both the port and thenational economy. In this respect, thefollowing points should be kept inmind:

• Shipping lines may, at any point,decrease, re-route or altogether halttheir services as a result of changesin financial conditions or shifts inpatterns of trade. A well-knownexample of this is the cancellation ofround-the-world service of UnitedStates Lines in the 1980s;

• Shipping lines constantly merge orconclude cooperation agreements(alliances) with other shipping lines.Such practices may result in chang-ing sailing schedules or the establish-ment of special ties with other ports;and/or

• Shipping lines may re-organize theirsailing schedules for reasons of inter-nal policy.

Signing a lease contract with an operat-ing company may be less risky than

with a shipping line, since:

• The operating company usually doesnot rely on a contract with one singleuser, but will spread the risk andsafeguard its business interests byconcluding contracts with severalclients; and

• In the case of a contract with a local-ly incorporated port operator, shoulda legal (contract) issue arise, it is gen-erally easier to enforce liens andother measures needed to compelcompliance with the lease than in thecase of a company whose home basein another country.

Which form of lease is to be preferred?In general, one may conclude that:

• If the port’s principal objectives areto maximize throughput and providemaximum benefits to the local econo-my through increased employment, aflat rate lease may be preferable.This is often the case when a port isnewly established and wants todevelop its business.

• If the port's principal objectives areto maximize throughput andemployment, with an initial need tosubsidize the terminal lessee, themini-max lease may be preferable; or

• If the port's principal objective is tomaximize revenues, with an initialneed to subsidize the terminal lessee,the shared revenue lease may bepreferable.

Concession Agreements

A landlord port for the most part does

55

not involve itself directly in port opera-tions. Instead, private port operatorsand service providers conduct theirbusiness independently and compete inthe market. The Port Authority acts as aneutral landlord promoting the port as awhole. Together, they represent theinterests of the entire port, with the PortAuthority in the lead.

Relations between the Port Authorityand the private sector are twofold:

• Commercial relations based mainlyon lease agreements;

• Relations based on public oversightfunctions of the Port Authority, suchas enforcement of port by-laws, dan-gerous goods regulations, vesselmanagement, etc.

During the last decade, relationsbetween landlord Port Authorities andprivate port operators have becomeincreasingly complex, and the alignmentof responsibilities have further shifted.One of the valued features of a LandlordPort is its clear division of responsibili-ties. Each party knows exactly its rights,liabilities and financial responsibilities.Moreover, many governments today areseeking to diminish their financialinvolvement in ports and to use privatesources to finance new port develop-ment including construction of basicinfrastructure such as quay walls. Thisimplies not only an increased role forthe private sector in port development,but also increased financial exposure. Insuch situations, a simple and straightfor-ward lease contract often is not suffi-cient to cover all responsibilities and lia-bilities. As a result, a more complex

contractual relationship -- a concessionagreement -- has been developed.

The primary objective of concessionagreements is to transfer investmentcosts from the government to the privatesector. Concessionaires are obliged toconstruct and rehabilitate infrastructureand operate a facility or service for afixed number of years. Concessions maybe "positive," when a concessionairepays the government for concessionrights; or "negative," when the govern-ment pays a concessionaire for the serv-ices it provides under the agreement.

The benefits of concessions in the portsector include:

• Better and more efficient port man-agement (especially port operations)performed by private operators;

• Avoidance of the drawbacks associat-ed with monopolies through theinclusion of detailed concession con-ditions;

• The application of private capital tosocially and economically desirableprojects, freeing up governmentfunds for other priority projects;

• Under certain circumstances, the cre-ation of new revenue streams forgovernments;

• The transfer of risks for construction,finance and operation of the facilityto the private sector;

• The attraction and use of foreigninvestment and technology.

Disadvantages associated with conces-

56

sion contracts include:

• The need for continuing close gov-ernment regulation and oversight;

• The system can work properly onlywhen the legal framework permitstransfer of land rights to a privateparty;

• Winning bids are sometimes basedon unrealistic financial projections,placing the sustainability of the con-cession agreement in jeopardy;

• The danger that a concessionaire willnot properly maintain the facilitiesunder concession, returning them tothe government in bad condition; orthe danger that the concessionaireand the Port Authority disagree onthe operational need for and finan-cial feasibility of critical investments.

Concession agreements are often devel-oped as a part of a BOT scheme and rep-resent specific agreements between agovernment/Port Authority and theSpecial Purpose Company (SPC) estab-lished by the concessionaire to carry outconstruction and operation of a portdevelopment project. Under conces-sions, the ultimate ownership of theaffected assets is retained by the nation-al or local government, or by the PortAuthority. At the same time, part of thecommercial risks of providing and/oroperating the assets is transferred to aprivate concessionaire.

In agreements involving a SpecialPurpose Company, a Port Authorityshould ensure that:

• The SPC provides adequate service

throughout the term of the conces-sion;

• The SPC observes relevant safety andenvironmental protection standards;

• The charges levied on port users arereasonable and do not endanger thecompetitive position of the port; and

• The SPC performs proper mainte-nance and repair of all assets toensure that, on their return at theend of the concession, the PortAuthority receives an operationalproject and facilities in good workingorder.

The Port Authority may (depending onlegal strictures) hold a financial interestin the SPC created by the concessionaire,or it may not. If the Port Authoritychooses not to participate financially inthe SPC responsible for developing theport assets under a concession contract,then its role as an independent andimpartial public entity does not signifi-cantly change. The only real change isin the shift in responsibility for invest-ments from the Port authority to theconcessionaire.

If a Port Authority not only concludes aconcession agreement with the SPC, butalso participates in the company as ashareholder, then the Port Authority’srole changes more dramatically. Byinvesting risk capital the Port Authoritybecomes more directly involved in portoperations. Sometimes this situation isprohibited by law (Poland). If the ven-ture has a monopoly in the port (i.e., hasthe only container terminal), the situa-tion might be acceptable, although a

57

conflict of interest may arise betweenthe roles of Port Authority as an investorand as the regulator of the monopoly. Ifthe venture competes with other termi-nals in the port, however, participationof the Port Authority in the SPC willgive rise to a serious conflicts of interestand will undermine its independent,neutral position.

Depending on the specific situation, aconcession agreement may consist of acombination of contracts including:

• A leasehold agreement on non-devel-oped land, the formal documentunder which the Port Authoritygrants the SPC possession of the con-cession area;

• A Terminal Access Agreement, whichregulates the SPC’s access to the con-cession area, and also the access bythe Port Authority to the area;

• A Port Services Agreement, whichregulates the provision by the PortAuthority to the SPC of various portservices such as pilotage, towage,and dredging;

• A Sponsor’s Direct Agreement,which is an agreement between theGovernment/Port Authority and theSPC dealing with the issue of compe-tition;

• A Design Contract between the SPCand a technical consultant for thedesign of new facilities (the PortAuthority usually has no direct con-trol over who does the design workor the terms of appointment, butoften retains the right to review anydesign);

• A Building Contract between theSPC and a construction company forconstruction/development work(with the Port Authority typicallyexercising some form of quality con-trol);

• Financing Documents drawn upbetween the SPC and its lenders toprovide finance for port develop-ment; a Port Authority may providepartial financing;

• A Management Contract between theSPC and its chosen manager (operat-ing company) for provision of man-agement services in operating theport.

Generally, a typical concession agree-ment will clearly set out the terms relat-ing to:

• The land, facilities, and equipment(e.g., container cranes, transtainers,and rail-mounted port cranes)included in the concession;

• The functional requirements of theport and/or terminal, the proposeddesign solution for any construction,the construction program and timeschedule, including milestones;

• Rights and responsibilities of theconcessionaire and Port Authority(concession sponsor) with respect tothe completion of the constructionprogram;

• Human resources development andthe employment of former PortAuthority employees, if applicable;

• Activities permitted to be carried out

58

in the concession area;

• Equal access to common areas in theport;

• Payment of fees, royalties, revenuesand canon (lease rental) to the PortAuthority;

• Termination of the concession;

• Return of land, facilities and equip-ment after the concession period hasexpired;

• Other issues as may be required.

It is common practice that, during con-struction, the concessionaire and thePort Authority use an independent TestCertifier to certify that all work has beencarried out in conformity with therequirements of the concession agree-ment. Upon the return of facilities, theSPC should be required to carry out anywork needed to bring them up to anagreed standard. Accordingly, provi-sions must be included to inspect facili-ties and identify any deficiencies.

A concession agreement for a "greenfieldproject" is less complicated than thetake-over of an existing terminal or port.In such a case, no personnel or existingfacilities are acquired by the SPC.However, a terminal access agreementstill must be drawn up between the gov-ernment/Port Authority and the SPC tocover such things as the building ofaccess road and rail, the provision ofwater and electricity and other facilities.

Finally, in some instances, port reform isimplemented through a master conces-sion contract, enabling a private opera-

tor to carry out many of the port func-tions. This type of contract has not beenused extensively, but is an option in theevent that a public Port Authority is notable to exercise its core functions prop-erly. A master concession is a sort of"wrap-around" agreement that includesthe same basic ingredients as a normalconcession agreement, and more. Themain difference between a routine con-cession agreement and a master conces-sion is the latter’s provision for a con-cessionaire to conclude wide rangingsub-agreements with other operators.This form of concession approachescomprehensive privatization. Variousinterests can be represented (such as ter-minal operators, dredging companies,construction firms, banks and the gov-ernment, itself) in the consortium orSPC concluding a master concession. Akey concern with master concessions ishow to avoid potential conflicts of inter-est between the public service functionof the master concessionaire and itscommercial activities. This comprehen-sive approach may be most suitable forsmall-sized ports.

BOT Arrangements

A landlord Port Authority is typicallyresponsible for constructing fairways,quay walls and terminal areas. Suchconstruction is usually based on a portmaster plan and carried out in close con-sultation with the future operator.Sometimes construction of such facilitieshas already started before agreementshave been concluded with the prospec-tive operators. This may be the casewhen the market demand is strong and

59

the Port Authority is confident of find-ing clients, and is prepared to take therisk that port capacity will go unused.As a rule, Port Authorities should per-mit private operators to finance most ofthe additional capacity (including thequay wall). The Port Authority can thenconcentrate on access infrastructure andprotective works relating to port exten-sion, and on renovation projects. PortAuthorities may sometimes have diffi-culties amassing from taxes the invest-ment funds necessary to finance suchcommon access facilities and protectiveworks. In such cases, they have soughtto acquire funds either from anInternational Finance Institution (suchas The World Bank) or from privatelending institutions. For specific portfacilities, such as container or bulk ter-minals, private funding can be arrangedthrough a concession agreement asdescribed above. BOT schemes are aspecialized form of concession designedto increase private financial participa-tion in the creation of port infrastruc-ture/superstructure without changingthe landlord structure of the concernedport.

The core of a BOT arrangement is a con-cession for a specified period of timeinvolving the transfer or re-transfer ofall or some of the project assets. Anillustrative definition of a BOT arrange-ment is:

"A project based on the granting of aconcession by a principal, usually agovernment, to a promoter, some-times known as the concessionaire,who is responsible for the construc-tion, financing, operation and main-tenance of a facility over the term of

the concession, before finally trans-ferring to the principal, at no cost orat a pre-determined price to theprincipal, a fully operational facility.During the concession period, thepromoter owns and operates thefacility and collects revenues inorder to repay the financing andinvestment costs, maintains andoperates the facility and makes amargin of profit."

Denton Hall Projects Group; AGuide to Project Finance; 1998Edition, p.47

BOT is a frequently used form of conces-sion model that in many respects has thecharacter of a temporary privatization.BOT schemes have some features of acontract (e.g., clauses that cannot bechanged such as duration and pay-ments) as well as those of a license (e.g.,permitting changes in activities or per-formance by the concessionaire withinthe broad framework of the licenseagreement).

Under the BOT approach, the govern-ment grants an exclusive concession tothe private sector to build and operate aport project. In return, the private sector(sometimes a consortium of banks, con-tractors and operators, sometimes aglobal operator) undertakes the risk ofcompleting the project and operating itprofitably. The concession runs for anumber of years, after which the projectassets are transferred back to the gov-ernment. After termination, the govern-ment/Port Authority can lease out thefacilities, or grant another concession,enter into management contract, whichmay or may not have a new construc-

60

tion component.

Exceptionally, the scheme may bearranged in such a way that the privatecompany collects all port dues, includ-ing wharfage and berth dues. The PortAuthority is then paid a base fixed feeplus a variable fee based on either rev-enue or cargo (tons or units) handled.In this way the Port Authority shares inthe increased value of the facility due toimproved productivity and efficiency.

The BOT scheme ends with the return ofthe project/terminal to the relevantauthority, usually the Port Authority, ata specified date. The value of suchtransfer to the Port Authority depends

on whether the transfer occurs beforethe facility becomes economically ortechnically obsolete.

When designing BOT schemes, it isimportant to consider carefully whichparts of the port can be concessionedand which parts should remain with thePort Authority. Generally, BOT schemescan be applied to all assets that can beexploited as a separate business. Keyamong these are:

• Fairways/Channels: This part of theport infrastructure can be conces-sioned under a BOT scheme torequire the concessionaire to dredgeand maintain the fairway (and,

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BOT Schemes and Port Development

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

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

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

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

BOX 21

optionally, to operate aids to naviga-tion) for a specified period duringwhich he derives an income fromvessels using the fairways under anagreed fare system (e.g., San Martin-Rosario Fairway, Argentina,described in Box 22);

• Terminals: BOT schemes are usuallyapplied to specific terminals, mainlyin developing countries. There aremany examples of such terminalssuch as JNPT-Nhava Sheva, India;Queen Elizabeth Terminal, Colombo,Sri Lanka; Port of Buenos Aires,Argentina; and many others;

• Entire Port Complexes: A BOT struc-tured as a master concession contractcould cover an entire port complexcomprising a variety of terminals.Here, the SPC (or port operator)assumes defacto the role of a land-lord Port Authority for the assets ithas agreed to construct. The masterconcessionaire then offers sub-leasesof various terminals to third parties.Such a scheme can approach compre-hensive privatization. The only realdistinctions are that under a BOTand master concession, the transferof assets is temporary and the con-cessionaire has no regulatory respon-sibility for marine safety, environ-ment, and Vessel TrafficManagement. There are no examplesof effective implementation of thistype of BOT master concessionscheme; but new legislation inMadagascar provides for "une con-cession globale" that is equivalent toa master concession for small portsof local interest.

Other port assets cannot be easily con-cessioned as individual items. The mostimportant of these are items such asbreakwaters, piers, connecting channels,intra-port roads, and other commonareas. These assets, however, can bepart of a master concession agreementor a comprehensive privatizationscheme.

A carefully crafted concession is centralto the implementation of a BOT scheme.The concession contract gives the con-cessionaire the right to run the facility(with limited and clearly defined gov-ernment oversight) and earn a commer-cial return on his investment. The con-cession/BOT agreement, together withthe required business plan, will set outestimates of the likely revenues, costs,debt repayment, and profit for the SPC.This information is necessary to assessthe project’s financial viability and itsdebt repayment capacity. Many plannedBOT projects fail because their terms arenegotiated without taking into accountwhether or not the project is "bankable."Governments often try to negotiate aBOT arrangement at an early stage inthe project preparation cycle, before thefull scope of the project is known andbefore a regulatory oversight regime hasbeen decided. While this might gener-ate significant revenues for the govern-ment in the short run, it may saddle theconcessionaire with an impossible-to-complete project.

There are many variants of BOT-likeschemes including:

• Build–Own-Operate (BOO): meaningfull privatization of the terminal,since the port land and the facilities

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built on it are not returned to thegovernment/Port Authority;

• Equip-Operate-Transfer (EOT):where port infrastructure alreadyexists, but superstructure is suppliedby the SPC;

• Build-Transfer-Operate (BTO): wherethe new port facilities are directlytransferred to the competent authori-ty (government or Port Authority)immediately after construction.Under BTO schemes, the ownershipof the assets being financed has beenan issue for lenders who requireasset-based collateral to secure bankloans. With BTO schemes, the onlycollateral is the concession contractitself, which may be insufficient.

BTO schemes are necessary in coun-tries where legal strictures do notpermit private ownership of mainport infrastructure (e.g., Costa Rica,South Korea);

• Build-Own-Operate-Transfer(BOOT): where ownership of landand facilities conveys to the conces-sionaire, but is transferred back at anagreed price at the end of the conces-sion period;

A special case is the Wraparound BOT(WBOT). This scheme is used in thecase of expansion of a government-owned port facility by the private sector,which would hold title to the expansiononly. Under such a scheme, the SPCwould:

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San Martin - Rosario Waterway Concession

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

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

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

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

BOX 22

• Operate the entire port facility undera Project Development Agreement(PDA);

• Manage the government-owned sec-tion under a management contract;and

• Expand the facility under a BOT con-tract.

In many cases, the government effective-ly becomes a partner in a BOT arrange-ment by investing in certain portions ofthe infrastructure. Private partiesappear to be reluctant to invest in basicport infrastructure, not only because itmakes it more difficult to price use ofinfrastructure in a manner that permitsthe concessionaire to realize a reason-able return on the investment, but alsobecause these assets are largely immo-bile and have no comparable alternativeuse. Political instability, change of con-trol, anti-privatization backlashes(nationalization), unexpected new taxregulations, and other governmentalactions could make comprehensive BOTschemes much less attractive.

Comprehensive Privatization

Comprehensive port privatization has,until now, been developed only in theUK and in New Zealand. Outright saleof port land combined with a transfer oftraditional public port tasks such assafety and environmental oversight(e.g., harbormaster’s tasks) remains anexception. Other countries have intro-duced significant privatization schemes,but mostly with respect to port and ter-minal operations.

Comprehensive port privatization oftenrequires the enactment of new laws,both to regulate the transfer of owner-ship and functions from the public tothe private sector and to define the bor-derline between re-drawn public andprivate responsibilities and tasks. Suchlegislation should establish:

• Authority for the Port Authority toestablish a new "successor" companyor companies to take over all or partof the Authority’s business;

• The right of the "successor" companyto issue shares, either to theAuthority or to a third party;

• The time and manner for selling orotherwise distributing the shares tothird parties as well as for a paymentto the successor company from theproceeds of the sale;

• The basic authority and mechanismsneeded for the government to shapeand direct the privatization;

• A levy on the proceeds of the dispos-al of shares of the successor company(in the UK this levy was set at 50% ofthe net proceeds of the sale);

• A levy on profits accruing to the suc-cessor company as a result of the dis-posal of port land transferred underthe privatization scheme (in the UKthis levy was set at 25% of the profitduring the first five years, 20% dur-ing the next two years and 10% dur-ing the last three years of the levyperiod);

• Provisions for the transfer of PortAuthority personnel to the successor

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company (e.g., the number and cate-gories of personnel, salaries, benefits,pension rights) and/or their dis-missal (e.g., separation package, re-training allowance, re-hiring prefer-ences);

• Terms for the transfer of "publictasks," to the successor company orother entity such as aids to naviga-tion, pilotage, handling of dangerousgoods, and protection of the environ-ment;

• The tax regime applicable to the suc-cessor companies; and

• Authority for the government to dis-solve the Port Authority once it issatisfied that the objectives of theenabling legislation have been metand to transfer all remaining proper-ty, rights and liabilities to the succes-sor company.

Privatization legislation may includeadditional elements, depending on thelocal situation, the structure of the for-mer Port Authority and the specificlegal, institutional and socio-economicsituation in the country concerned.

In the UK, the benefits of comprehensiveport privatization most often cited are:

• The generation of revenue for theTreasury;

• The ability of privatized companiesto diversify their businesses;

• Greater access to capital markets;

• The removal of restrictions on invest-ment and borrowing;

• The introduction of new industrialrelations practices;

• A more commercial and entrepre-neurial approach to management ofthe business; and

• Greater competition.

These features, it was argued, wouldresult in improvements to the port sys-tem’s financial and operational perform-ance.

Note, however, that not all of the above-mentioned benefits are due exclusivelyto comprehensive privatization; otherport reforms may generate similar bene-fits.

A vast majority of maritime nations con-siders comprehensive privatization to beincompatible with national and regionalinterests. Specific reasons why govern-ments and Port Authorities haverefrained from pursuing full privatiza-tion are diverse, but often include one ormore of the following:

• A public monopoly can easilybecome a permanent private mono-poly;

• The macro-economic benefits of largeport complexes to the regional andnational economy are perceived to bethreatened by comprehensive priva-tization;

• The danger of discriminatory treat-ment of customers;

• The risk that, in practice, privatiza-tion may undermine competition;

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• Fear of over-investment in andduplication of dedicated terminalsfor major clients, which could unbal-ance demand for additional publictransport infrastructure;

• Neglect by the private owners of theport’s public service function;

• Reluctance of labor unions to aban-don government protection and theirfear of losing jobs;

• Reluctance of public authorities tolose political control, includingpatronage; and

• Reluctance of public authorities tolose income generated by the portbusiness.

Background on the UK’s port privatiza-tion is provided in Box 23. After tenyears of experience in the UK with com-prehensive privatization, some conclu-sions can be drawn. Generally, the UKmodel of port privatization is highlydetermined by local factors and ideolog-ical considerations that are unique to theBritish experience. However, it appearsthat:

• The valuation of port assets sold toprivate parties was judgmental sincethere was no established market dur-ing the time of privatization.Subsequent trading of port sharessuggests that the original prices wereonly 25% of their true market value.

• Ports were sold at significantly dis-counted prices. Discounted sales (inaddition to the ruling that 50% of thesale proceeds from disposal of TrustPorts should be returned to the

buyer) significantly reduced the orig-inal debt of the new port company.Certain privatized Trust Ports, there-fore, realized very high profits (ashigh as 20-30% of turnover) at theexpense of port users and taxpayers.Although difficult to prove, privati-zation via a concession, rather thanout-right sale, would probably haveraised considerably larger revenuesfor the public Treasury.

• Transfer of port regulatory functionsto the private sector has raised seri-ous issues. The new privatized portsare essentially self-regulating andhave little incentive to safeguard andenhance inter-port competition. Thedriving force behind the new portowners is corporate interest ratherthan public interest. The question,then, is who protects the public inter-est?

• In terms of investments and profits,privatized UK ports have done betterthan the still-existing public ports.Privatization led to an injection ofcash, but only for purchasing exist-ing assets. Former Trust Portsclaimed that investments were ham-pered by financial institutions look-ing only for short-term returns.

• The abolition of the National DockLabor Scheme had a more profoundeffect on labor stability than the sell-ing of port land.

• Where terminals were already pri-vately operated (i.e., in LandlordPorts), selling the underlying portland made little difference. Forexample, port land at Dover (a for-

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67

Impetus Behind Full Privatization in the UK

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

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

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

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

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

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

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

One of the main structural problems of the port system in the UK – especially among Trust Ports – was the composition of theirBoards, which were defined in statutes. These Boards tended to be strongly representative of port users, who were by naturereluctant to authorize tariff increases sufficient to generate the revenues needed to allow for depreciation and subsequent re-investment in port facilities. Those tariff increases that were authorized tended to be offset by increasing labor costs, whichincreased steadily as a result of pressure from organized labor, supported by the National Dock Labour Scheme. The ports, there-fore, operated with inadequate surpluses and with depreciation allowances based on historical costs. Without substantial sur-pluses, the ports had to raise the money they needed for their modernization from fixed interest loans and bonds. The net resultof these factors was that the port operated with net deficits, leading to de-capitalization over the post war period, up to around1970.

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

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

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

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

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

BOX 23

mer Trust Port) or Portsmouth (amunicipal port) did not affect portoutput, since port operations in bothports were already in private hands.

• Some nationalized and Trust Portswere sold under a M(E)BO scheme toformer public officials. These man-agers reaped windfall profits by sell-ing their shares at a later date.

• There are limited possibilities forport cities to re-develop obsolete portland. On the other hand, land spec-ulation by privatized ports hasbecome a reality, since older portfacilities often are situated near thevaluable real estate of city centers.

The UK experience, therefore, has yield-ed very mixed results and provides fewarguments supporting comprehensiveprivatization (i.e., the sale of port landand transfer of all public functions tothe private sector) when other, less radi-cal reforms can achieve the same objec-tives.

Port as Transport Chain Facilitators

Increasingly, major terminal operatorsare trying to secure their strategic posi-tion by offering complementary terminalfacilities located either in the foreland orhinterland. This practice is most appar-ent in connection with containerizedcargos. In the event that an operatorengages in operating other facilities suchas inland terminals, rail facilities or evenentire port complexes abroad, its objec-tives and motivations are broader thanthose of a localized operator.

The phenomenon of supply chain man-

agement can be observed in the port ofRotterdam, where Very Large CrudeCarriers (VLCCs) discharge crude oilfrom various oil-producing countries.Rotterdam has a virtual monopoly inthis traffic in Northwest Europe as aresult of its very deep access channel tothe North Sea (78 feet). Pipeline systemshave been constructed to connect theport with various refineries in the hin-terland, for example in Belgium andGermany. Thus, the inland transportchain is effectively controlled by oneport, creating a stable environment forthe transport of crude oil as well as anattractive location for balancing refiner-ies. The Rotterdam Municipal PortManagement was instrumental in devel-oping the pipeline systems, but did notinvest in them. A separate private com-pany was established to invest in thenecessary infrastructure and carry outthe oil transport function.

Some Port Authorities also seek toattract customers to their port facilitiesby facilitating and/or co-financing ter-minal facilities outside their port area.This more expansive view of a PortAuthority’s role has the potential toinfluence "traditional" port managementstructures, in particular in ports struc-tured on the landlord model.

A Port Authority’s involvement in ter-minal operations beyond its homeportmay not be focussed solely on improv-ing logistics chains. The main objectivemight be to maximize the PortAuthority’s revenue by making morewidespread use of its operationalexpertise and management, especially inthe case where the Port Authority acts asterminal operator as well.

68

Port Authorities seeking to becometransport chain facilitators should beaware of possible conflicts of interestand the potential loss of their neutralposition. Managing a port area includ-ing attendant public functions is differ-ent from optimizing a logistics chain,which can be considered a supportingfunction for the ports industry, and forthat reason essential from a point ofview of competition.

The PSA Corporation is a prime exam-ple of globalization of terminal opera-tions. Since its establishment, it hasbecome a leading player in the globalterminal operating business and todayowns, manages and operates a chain ofcontainer terminals and logistics hubsthroughout the world. Before taking onthis expanded role, PSA had to changethoroughly its legal structure. Box 24describes what this entailed.

MARINE SERVICES AND PORT REFORM

Overview

This section discusses a variety ofmarine services and how they are affect-ed by port reform. Special emphasis isplaced on how these services might beoutsourced, concessioned or privatized.

Marine services are port-related activi-ties undertaken to ensure the safe andexpeditious flow of vessel traffic in portapproaches and harbors and the safestay at berth when moored or at anchor."Safe" means that port conditions ensurethat vessels using the port, the portenvironment and the marine environ-

69

Singapore Creates PSA Corporation

The Port of Singapore is a very successful container portand, since 1986, the busiest port in the world in terms ofshipping tonnage, most of it containerized transshipmentcargo. Singapore was a service port, combining land owner-ship, statutory functions and cargo operations within oneorganization, and one of the few successful public serviceports in the world. In 1996, however, the Government ofSingapore decided to fundamentally change the manage-ment structure of the port.

The Government changed the port’s structure by creating acorporatized entity (PSA Corporation) whose structurewould be sufficiently flexible to permit it to operate andinvest in the region, especially in container terminals locat-ed on major shipping lanes. Corporatization of part of thePort Authority’s business meant increased financial autono-my and generated greater cash flows. It also enhancedSingapore’s position as a hub port and was expected tocontribute to the economic development of Singapore andthe surrounding region. The PSA Corporation will be listedon the Stock Exchange of Singapore.

Since the PSA Corporation has a monopoly position inSingapore, it is regulated. The Maritime and Port Authorityof Singapore was established by an Act of Parliament (TheMaritime and Port Authority of Singapore Act 1996) to pro-vide that oversight. The main tasks of the new Authority(MPA) are to promote the use, improvement and develop-ment of the port, to control vessel movements and ensurenavigational safety, to license and regulate marine servicesand facilities including conventional cargo terminals, and toregulate the port industry’s economic behavior. The Actstates that no person shall provide marine or port facilitieswithout a public license or exemption from MPA. TheAuthority may control and fix the tariffs charged bylicensees for handling and storage of origin-destinationcargo (i.e., non-transshipment cargo). Transshipment cargois not regulated because the transshipment business is aninternational and highly competitive one. The original serv-ice port structure has thus been changed into one of a land-lord port

The newly formed PSA Corporation acts as a regulated ter-minal operator under Corporate Law. It is free to operate asa global terminal operator. The question remains whetherMPA will allow other private operators to carry out containeroperations in the Port of Singapore. The legal possibilityexists, but the introduction of intra-port competition hasnot yet materialized.

Box 24

ment are protected from danger."Expeditious" means that vessels are notunduly delayed and that the vessels’port transit times, as a part of the totalturn-around time in the port, are kept toa minimum.

Although ports may define marine serv-ices differently, and may have differentresponsibilities for providing them, inthis section we will use the term to referbroadly to services having a nauticalbearing, be it maritime safety, vesseltraffic efficiency or marine environmentprotection.

Other services (e.g., fire fighting, immi-gration and customs services and portstate control) may also affect port effi-ciency and safety. While important tothe overall operation of a port, theseother services are not dealt with in thissection.

The specific marine services rendered bya Port Authority depend largely on thescope of the port’s marine responsibili-ties and jurisdiction. The scope of theports’ marine jurisdictions do not followa general rule, and there exists no inter-national legislation or standard practicethat defines the responsibilities of PortAuthorities. Usually, marine servicesrendered by a Port Authority are geo-graphically delimited by the area direct-ly under control of the Authority, whichmay encompass only the waterfront ofriparian berths (i.e., the ports’ domain).However, there are countries where thePort Authority is also responsible formanaging lighthouse services outside itsimmediate area of control. This extend-ed area may cover harbor waters andapproaches as far as the open sea.

Harbormaster’s Function

Generally, the Harbormaster (or PortCaptain) manages port activities relatingto maritime safety and the protection ofthe marine environment. The legal basisof the Harbormaster’s function is usual-ly embedded in a port by-law or, in thecase of a State-owned port, in a specificlaw or ministerial decree. TheHarbormaster often has specific legalpowers to act in emergency situations.Typically, he is part of the PortAuthority organization and heads theMarine Department. In some countries,he may work for an independent publicentity such as the Coast Guard.

The Harbormaster is responsible forensuring the efficient flow of trafficthrough port and coastal waters (includ-ing allocation of vessels to public berths)and – on behalf of the Government orPort Authority – for coordinating allmarine services. The Harbormasteroperates out of a port coordination cen-ter (or Captain’s Room), which is oftenpart of an elaborate vessel traffic man-agement system.

Frequently, Harbormasters have policepowers and act as head of the portpolice. The main functions of suchpolice are enforcement of the port by-laws, especially with respect to trafficregulations, protection of the environ-ment and accident prevention.

When part of a Port Authority, theHarbormaster also usually serves ashead of the Pilotage Service. In theevent that the Pilotage Service is notpart of the Port Authority, he is respon-sible for coordination between this serv-

70

ice and port users. Finally, theHarbormaster is sometimes responsiblefor regulatory oversight of the carriageand storage of dangerous goods in theport area as well as for ensuring theproper use of port reception facilities.

In view of the public character of theHarbormaster’s responsibilities, thisfunction is rarely privatized. To do sowould raise a conflict of interestbetween the public interest (safety, envi-ronment, equal treatment under the law)and private interests from the portindustry. For example, since port timeof ships is an important cost and opera-tional factor, the Harbormaster willalways be under pressure to grant pref-erential treatment to shipping lines.Impartial and consistent application ofoperational safety measures for shipscarrying dangerous or environmentallysensitive goods such as gas carriers,chemical parcel tankers, and VLCCs, isessential to the safe functioning of anyport. The Harbormaster, therefore,should not function within a purelycommercial environment, but must havefreedom of action to carry out his publictasks in an unimpeded and unbiasedmanner.

Although the Harbormaster might bepart of a Port Authority’s managementteam, he should be free to exercise hisjurisdiction as independently as possiblefrom the commercial management of theport. In carrying out emergency meas-ures in the event of accidents and indus-trial disasters, he should have full free-dom of action and possess the ultimateauthority and responsibility for direct-ing all necessary activities.

In a fully privatized port, theHarbormaster should not be part of theport management, but should beemployed by a national or regional mar-itime administration.

Pilotage

In a port reform process, pilots often arethe first ones to demand privatization.Pilots usually constitute a closed groupof professionals (often Master Mariners),who are keenly aware of their uniqueposition in the port environment.Successful vessel management reliesheavily on the efficient functioning ofthe pilot organization, a fact that pilotsmay use to maximum advantage whenport reform is being undertaken.

In many countries, pilots (or pilot organ-izations) have been more or less success-fully privatized. This type of privatiza-tion, however, carries the risk of creatinga private sector monopoly in pilotageservices, especially when pilots are pri-vatized on a national or regional scale.Pilotage is an essential part of trafficmanagement, and safe passage of ves-sels through a port area requires expertteamwork of a vessel traffic manage-ment organization (Captain’s Room),tugs, mooring gangs and pilots. A pri-vate sector pilot monopoly that has theability to bring port operations to a com-plete and rapid stop represents a signifi-cant risk for ports, carriers, and shippersalike. As a consequence, retaining pilotsas part of a Port Authority’s marinedepartment may be desirable even whenother aspects of port management andoperations are privatized.

There are two ways of privatizing of the

71

pilotage function. Pilots can beself-employed and work under theoversight of a Maritime Authoritythat serves as the regulator andlicensor of the individual pilots, orpilots can organize themselves intoa private company.

The pilotage company should haveits own infrastructure and facilitiessuch as pilot boats, communicationequipment, pilot stations, etc.Sometimes a pilot organization(especially in smaller ports) mightalso operate a vessel traffic man-agement system (radar). The PortAuthority or MaritimeAdministration should regulate theprivatized pilot organization withrespect to the following points:

• Training requirement and pilotqualifications;

• Standards for obtaining a cer-tificate or license, and its revo-cation;

• Roles and responsibilities of theorganization for operation of avessel traffic management sys-tem;

• Communication equipment andchannels;

• Investigation of incidents andfollow-up actions;

• Pilotage tariffs and financialrecord keeping;

• Medical fitness and continuedproficiency; and

72

The Creation of a National Pilotage Monopolyin the Netherland

In 1988, The Netherlands Pilotage Service became an independentorganization, the pilots acting as private entrepreneurs. The objec-tives of the government in the privatization of the pilot services wereto reduce the governing executive burden and to improve efficiencyand adequacy of the pilot services.

A public entity, the Nederlandse Loodsen Corporatie (The NetherlandsPilot Corporation, NLC) was created to manage the register oflicensed pilots and be responsible for education and training oflicensed pilots. All licensed pilots constitute the NLC.

In every region, the licensed pilots have set up a legal entity, theRegionale Loodsencorporatie (Regional Pilot Corporation, RLC). Thelicensed pilots are all shareholders of the Loodswezen Nederland BV(Pilotage Service of the Netherlands Ltd.) which is responsible for theexploitation of the independent private enterprise. All supportingstaff is employed by this company. The company collects the pilotagefees and makes payments to the pilots in accordance with the finan-cial statute.

The ownership of the capital goods used by the pilots is incorporatedin the Loodswezen Materieel BV (Pilotage Services Matériel Ltd.).Individual pilots, united in regional partnerships, the so-called "PilotAssociations," render the pilotage services. Supporting services areprovided by the Loodswezen Nederland BV. Five Foundations areresponsible for education, social allowances, management of pensionfunds and allowances for special situations.

Privatisation in The Netherlands did not bring an end to the debateabout pilot services. The Government Audit Office directed harsh crit-icism at the privatisation process and asserted that the efficiencyimprovements did not benefit the shipping lines or the government,but solely the pilots. Notwithstanding the counter arguments theGovernment Audit Office’s criticism, The Netherlands’ privatization ofpilots is not considered a successful one.

To a certain extent, the government’s objectives have been attained.The increase in the amount of pilot activity and the reduced numberof licensed pilots have led to higher efficiency. However, pilotagebecame a virtual monopoly and the efficiency improvements have ledprimarily to a very substantial rise of the pilots’ incomes.

The cost structure of the Pilotage Organisation is not transparent. Thefees are non-negotiable, contrary to the fees for other marine servicesand pilot fees in other ports. The magnitude and rigidity of pilot feescreate strong pressures to reduce other cost elements in the highlycompetitive maritime transport sector.

Overall, the present situation has proven unsatisfactory to port users.

Box 25

• Reporting requirements to the rele-vant Port Authority.

Tugboat Operations

Tugboat operations are typically carriedout by private firms. If the volume ofvessel traffic is not sufficient to supporta tugboat service on a commercial basis,a Port Authority may be obliged to pro-vide such service itself. Sometimesneighboring ports can share tugboatservices to reach volumes sufficient tosustain a commercial operator.

In many instances traffic density allowsonly for one private tugboat company tooperate in the port area. In such cases,the Port Authority should regulate theservice with respect to the followingitems:

• Minimum crew size;

• Minimum bollard pull;

• Communication equipment andchannels;

• Roles and responsibilities relating tothe vessel traffic management sys-tem; and

• Tariffs.

The optimum situation is where a num-ber of tugboat firms compete vigorouslyin the port. In that event, the PortAuthority should not have to regulatetariffs. Regulation of other aspects oftug operations such as manning can beat the discretion of the Port Authorityand will depend on the local situation.

Mooring Services

Mooring services in smaller ports can beprovided by the local stevedore. In larg-er ports, a mooring service is usuallyperformed by a specialized private firm.Especially in a complicated nautical situ-ation (e.g., single point mooring buoys,specialized piers for chemicals or gasses,ports with large tidal differences), moor-ing activities require expert skills andequipment. A Port Authority maychoose to regulate this activity whenonly one specialized firm exists.Aspects to be regulated include:

• Minimum manning requirements;

• Communication equipment andchannels;

• Number of mooring boats and theircharacteristics; and

• Tariffs.

Vessel Traffic Services and Aids to Navigation

Vessel traffic services (VTS) usually arepart of a Port or a Maritime Authority.Such services are provided in port areasand in densely used maritime straits(such as the Dover Channel) or along anational coastline (e.g., the coast of TheNetherlands). In principle, it is possibleto privatize VTS services under aConcession Agreement. Aspects of theseservices that should be regulated by thecompetent authority include:

• System functions such as vessel man-agement and control, emergencyfunctions, information and commu-nication functions;

73

• Types and specifications of radarsand tracking software;

• Manning levels and qualifications;

• Reporting duties; and

• Tariffs.

Responsibility for aids to navigationusually rests with a national MaritimeAuthority in port approaches and incoastal areas, and with a Port Authorityin port areas. Often, provision andmaintenance of buoys and beacons iscontracted out. Since Aids toNavigation are generally part of an inte-grated maritime infrastructure, the costsof providing these services are includedin the general port dues. It is, therefore,difficult to privatize them.

Other Marine Services

The control of dangerous goods for mar-itime cargoes is usually performed by aspecialized branch of the Port Authority.The same goes for the handling of dan-gerous goods in port terminals.Oversight and regulation of land trans-port of dangerous goods is normally aresponsibility of the central government.The highly sensitive and technicalnature of this work makes it inadvisableto privatize it.

Waste management services in portsoften are privatized under strict controlof a Port Authority or another compe-tent body. Privatization carries risks,however, especially with respect to thedisposal of dangerous chemicals.Proper waste management can beexpensive for shipping lines. With highcosts, ship captains might be tempted to

dump waste into the sea or into portwaters. Control of such dumping prac-tices is extremely difficult, especially forchemical cargos. To spread waste man-agement costs, ports can include all orpart of the waste management costs inthe general port dues. Transport ofwaste from the ship to a reception facili-ty also poses a challenge, especially inlarger port areas. Port Authoritiesshould directly provide or organize theprovision of transport barges or trucksfor this purpose.

The entire waste management system,including personnel and facilities,should be closely controlled by the com-petent Authority. When private firmsare engaged in waste handling, theAuthority should employ experts fromits organization to ensure compliancewith all relevant laws, rules and regula-tions.

Larger ports use patrol vessels and vehi-cles for a variety of public control func-tions. In some ports, such patrol vesselsalso have fire-fighting equipment onboard. Port patrol services are part ofthe Harbormaster’s resources and, there-fore, should not be privatized.

Generally, emergency response servicesare carried out by a variety of publicorganizations such as the Port Authority(Harbormaster), fire brigade, healthservices and police. Some ports havesophisticated tools available to aid incrisis management, such as predictionmodels for gas clouds. Such tools areoften integrated in a traffic center of thelocal VTMS. Private firms (e.g., tugboatcompanies) may play a subsidiary rolein crisis management in the event that

74

they are equipped with fire-fightingequipment. When a port does not havepatrol vessels available, a contract witha tugboat company should be entered toguarantee availability of floating fire-fighting capability.

Control of dredging operations by a PortAuthority is of utmost importance.Often, Port Authorities or the competentMaritime Administration does not haveenough expertise to exercise sufficientcontrol over both maintenance and capi-tal dredging. Port Authorities withlarge water areas under their controlshould employ sufficient competent per-sonnel to prepare dredging contractsand oversee dredging operations.Sounding is an activity that shouldpreferably be carried out (or contractedout) by the Port Authority itself.Dredging is usually carried out by pri-vate firms. It might be cost effective forsome ports to use their own dredges,especially when continuous and impor-tant maintenance dredging is required.

Box 26 summarizes the prevailingapproaches for handling the mostimportant port functions.

75

Model

Public Service Port

Pu

Pu

Pu

Pu

Pu

Pu

Pu

Pu

Pu

Pu

Pu

Pu

Pu

Pu Pu

Pu Pu Pu Pu Pu

Pr Pr Pr

Pr Pr

Pr Pr

Pr

Pr Pr

Pr Pr Pr

Pr Pr Pr

Pr Pr Pr

Pu Pu Pu Pu Pu

Pu Pu Pu Pu Pu

Pu Pu Pu

Pu

Pr Pu Pr Pr Pr Pr

Pr Pr

Pr

Pr

PrPu

PrivateSectorPort

Tool Port

LandlordPort

PortAdministration

NauticalManagement

NauticalInfrastructure

PortInfrastructure

Superstructure(Equipment)

Superstructure(Buildings)

CargoHandling Activities

Pilotage Towage MooringServices

Dredging OtherFunctions

Diagnosis

Box 26

Prevailing Service ProvidersUnder Different Port Management Models

FOOTNOTES

1) Dr. Klaus Harald Holocher, PortManagement Textbook, Volume 1, Breman 1990.

2) The World Bank, Port DevelopmentStrategies for Asia, Phase 1; National Ports andWaterways Institute, Louisiana State University,July 1992

3) Stephen McDonagh, Port DevelopmentInternational, March 1999.

4) Alfred J. Baird; Port privatisation: objec-tives, extent, process, and UK experience; 4thAnnual World Port Privatisation Conference, 22-24 September 1999, London.

5) TWU Papers, The World Bank;Concessions in Transport; Shaw, William andThompson; Discussion Paper, November 1996.

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

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

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