Port Management Models Port Management Models and Port Reform Processesand Port Reform Processes

C. Bert KrukSenior Port SpecialistThe World Bank2006

Major port functionsMajor port functions

Landlord functionLandlord functionRegulatory function Regulatory function Planning functionPlanning functionNautical function Nautical function Port marketing and promotion functionPort marketing and promotion functionCargo handling functionCargo handling functionGeneral functions General functions

port functions

port managementmodel

best model?strong and weak points

changing boundaryconditions:- performance- finance- competition

wish to change - management and/or - ownership and/or - operational system

port reform modalities

service porttool portlandlord port

improvement of port administration

liberalisation or de-regulation

commercialisation

corporatisation

privatisation

port reform tools

- contracting out/management contract- concession- lease- bot schemes- full privatisation

Port management modelsPort management models

Basically four typesBasically four typesPublic Service portPublic Service portTool portTool portLandlord portLandlord portPrivate Service portPrivate Service port

Port management models (contPort management models (cont’’d)d)

Distinction between types principally inDistinction between types principally inOwnership of infrastructureOwnership of infrastructureOwnership of superstructure Ownership of superstructure (in particular ship(in particular ship--shore handling equipment)shore handling equipment)Employment of stevedoring labourEmployment of stevedoring labour

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Basic Infrastructure ComponentsBasic Infrastructure Components

Entrance channelEntrance channelBreakwatersBreakwatersQuaywallsQuaywallsPort landPort land(Terminal paving)(Terminal paving)(Buildings, sheds, warehouses)(Buildings, sheds, warehouses)

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Operational Infrastructure Operational Infrastructure ComponentsComponents

(Terminal paving)(Terminal paving)(Buildings, sheds, warehouses)(Buildings, sheds, warehouses)

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Superstructure ComponentsSuperstructure Components

Terminal EquipmentTerminal Equipment(Terminal paving)(Terminal paving)(Buildings, sheds, warehouses)(Buildings, sheds, warehouses)

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Port management modelsPort management modelsType Infra

structure Super Structure

Stevedoring labour

Other functions

Public service port

Public Public Public Mainly public

Tool port Public Public Private Mainly public

Landlord port

Public Private Private Mainly private

Private service port

Private Private Private Mainly private

General arguments in favour of General arguments in favour of (national) public port ownership(national) public port ownership

Avoidance duplication of facilities Avoidance duplication of facilities National economy interestsNational economy interestsProtection of environment and safetyProtection of environment and safetyAvoidance monopoly situation of private sectorAvoidance monopoly situation of private sector(Possible) short term horizon of private sector(Possible) short term horizon of private sectorDifficult coDifficult co--ordination public/private ordination public/private

General arguments against General arguments against national public port ownershipnational public port ownership

Political control may interfere with (overall) Political control may interfere with (overall) management decisionsmanagement decisionsRestrictions of management to take immediate Restrictions of management to take immediate market and/or pricing decisionsmarket and/or pricing decisionsRestrictions to hire and fire by performanceRestrictions to hire and fire by performance

Reasons for changeReasons for change

General reasonsGeneral reasonsAdministrative/managerial reasonsAdministrative/managerial reasonsFinancial reasonsFinancial reasonsEmployment reasonsEmployment reasons

Port Reform modalitiesPort Reform modalities

Improvement of port administrationImprovement of port administrationLiberalisation or deLiberalisation or de--regulation regulation CommercialisationCommercialisationCorporatisationCorporatisationPrivatisationPrivatisation

Examples Improvement of port Examples Improvement of port

administrationadministration

Corporate planningCorporate planningCareer planning and management developmentCareer planning and management developmentComputer application and MISComputer application and MISElectronic Data InterchangeElectronic Data Interchange

Liberalisation or deLiberalisation or de--regulationregulationor: Introduction of competitionor: Introduction of competition

Basis: Allow private and public entities to Basis: Allow private and public entities to operate in same environmentoperate in same environmentObjective: Increased efficiency and Objective: Increased efficiency and improved port user responseimproved port user responseLegal framework required to allow private Legal framework required to allow private sector to provide facilitiessector to provide facilitiesPublic port organisation is forced to Public port organisation is forced to compete effectively with private sectorcompete effectively with private sector

CommercialisationCommercialisation

Often first step to privatisationOften first step to privatisationChange of management system of public Change of management system of public enterprise to system similar to private enterprise enterprise to system similar to private enterprise -- but still public!but still public!Commercialisation always together with Commercialisation always together with liberalisationliberalisationCommercialisation includes elements such asCommercialisation includes elements such as–– Introduction of deIntroduction of de--centralised decision makingcentralised decision making–– Relaxation of hierarchy, including reRelaxation of hierarchy, including re--structuring of structuring of

organisation introducingorganisation introducing•• ResponsibilityResponsibility•• AccountabilityAccountability

CorporatisationCorporatisation

Transformation of public enterprise into share Transformation of public enterprise into share companycompanyShares owned by stateShares owned by stateTransfer of all assets and liabilities (together with Transfer of all assets and liabilities (together with appropriate contracts) to limited liability appropriate contracts) to limited liability companycompanyShare company operates as private company Share company operates as private company with remote public control, including adoption of with remote public control, including adoption of private sector attitudes and management private sector attitudes and management methodsmethods

PrivatisationPrivatisationInvestment:Investment: to invest to invest = to spend= to spendDivestiture: Divestiture: to sell to sell = to earn= to earnPrivatisation = Divestiture processPrivatisation = Divestiture processTransfer of ownership of assets from public to Transfer of ownership of assets from public to private sector, orprivate sector, orApplication of private capital to fund investments Application of private capital to fund investments in port facilities, equipment and systemsin port facilities, equipment and systems(De (De MonieMonie 1998)1998)

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Port Reform Port Reform toolstools

Contracting Contracting out / Management contractout / Management contractConcessionConcession•• LeaseLease•• BOTBOT schemesschemes

Full privatisationFull privatisation

Contracting outContracting out

Instead of executing certain functions Instead of executing certain functions ‘‘in in househouse’’ these may be contracted outthese may be contracted outIf executed against lower price If executed against lower price In case of sufficient competitive biddingIn case of sufficient competitive biddingEspecially for Especially for ‘‘nonnon--core of the businesscore of the business’’activities such asactivities such as–– DredgingDredging–– Repair and maintenance Repair and maintenance –– Engineering services, etc.Engineering services, etc.

Contracting out (contContracting out (cont’’d)d)

Possible pitfalls of contracting outPossible pitfalls of contracting outLimited number of capable biddersLimited number of capable biddersMonopoly of contractorMonopoly of contractorCartel formationCartel formation

Management contractManagement contract

Entire (or sector) of port is temporarily handed Entire (or sector) of port is temporarily handed over to private party against management feeover to private party against management feePossible model: Possible model: •• Private company provides managers for certain Private company provides managers for certain

activities and receives activities and receives ‘‘royaltyroyalty’’ for the activities (for for the activities (for instance royalty payment per move or TEU instance royalty payment per move or TEU handled)handled)

•• In addition: Payment of bonus in case of higher In addition: Payment of bonus in case of higher throughput or financial result or penalty in case of throughput or financial result or penalty in case of lower resultslower results

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ConcessionConcession

Three forms Three forms of of concessionsconcessionsLeaseLeaseBOT BOT schemesschemesFranchising Franchising ((not used not used in in portsports))

LeasingLeasing

ObjectivesObjectivesReduce commercial risks of large investmentsReduce commercial risks of large investmentsAttempt to make users more loyal to portAttempt to make users more loyal to portImprove efficiencyImprove efficiency

Lease systems most usedLease systems most usedFlat rate leaseFlat rate leaseShared revenue leaseShared revenue lease

Leasing Leasing -- Flat rate leaseFlat rate lease

CharacteristicsCharacteristicsSpecified sum of money (usually for Specified sum of money (usually for infrastructure) is to be paid for specified period infrastructure) is to be paid for specified period of timeof timeLease is Lease is fair returnfair return of value of propertyof value of propertyInflation adjustment of lease is optional (but Inflation adjustment of lease is optional (but recommended!)recommended!)

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Leasing Leasing -- Flat rate lease Flat rate lease ExampleExample

0

0.5

1

1.5

2

2.5

3

0 25,000 50,000 75,000 100,000 125,000

Throughput (moves/year)

Tota

l lea

se re

venu

e (m

io U

S$)

Leasing Leasing -- Shared revenue leaseShared revenue lease

CharacteristicsCharacteristicsLease is computed on basis of minimum lease Lease is computed on basis of minimum lease plus compensation (often referred to as plus compensation (often referred to as ‘‘RoyaltyRoyalty’’) per move (preferably) on decreasing ) per move (preferably) on decreasing scalescaleLessee guarantees minimum annual Lessee guarantees minimum annual compensationcompensation

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Total lease revenue (Mio US$)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

25 50 75 100 125

Throughput (1,000 moves/year)

Leasing Leasing -- Shared revenue leaseShared revenue leaseExampleExample

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Leasing (contLeasing (cont’’d)d)

Most suitable lease partnersMost suitable lease partnersShipping linesShipping linesStevedoring companiesStevedoring companiesImporters and exportersImporters and exportersInland transport companiesInland transport companies

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Top 5 Operators 2003Top 5 Operators 2003

Hutchison Port HoldingsHutchison Port Holdings 41.5 41.5 miomio TEUTEUPSA CorporationPSA Corporation 28.7 28.7 miomio TEUTEUAPM TerminalsAPM Terminals 21.4 21.4 miomio TEUTEUP&O PortsP&O Ports 16.0 16.0 miomio TEUTEUEurogateEurogate 10.8 10.8 miomio TEUTEU

TotalTotal 118.4 118.4 miomio TEUTEUOr: 62% of the World Top 25 OperatorsOr: 62% of the World Top 25 Operators

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Hutchison Port Holdings 2005Hutchison Port Holdings 2005

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PSA Corporation 2005PSA Corporation 2005

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APM Terminals 2005APM Terminals 2005

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P&O Ports 2005P&O Ports 2005

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Dubai Ports International 2005Dubai Ports International 2005

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DPI and P&O PortsDPI and P&O Ports

DPI

P&O Ports

Leasing Leasing -- Monopoly situationsMonopoly situations

Leasing may present monopoly situation of Leasing may present monopoly situation of operating companyoperating companySome form of control required to prevent Some form of control required to prevent operating company from overoperating company from over--charging for charging for captive traffic in particularcaptive traffic in particularRegulation is essentialRegulation is essential

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Regulatory FunctionRegulatory FunctionSome form of regulation essentialSome form of regulation essentialHigh level authority to control articles of High level authority to control articles of agreement between public and private partiesagreement between public and private partiesNot complying: PenaltiesNot complying: PenaltiesInvolves intervention in functioning of markets in Involves intervention in functioning of markets in terms of setting or controlling tariffsterms of setting or controlling tariffsAlso deals with control of market and fair and Also deals with control of market and fair and competitive behavior and practicescompetitive behavior and practicesRegulation essential in case of monopoly or Regulation essential in case of monopoly or significant market powersignificant market power

Build/Operate/Transfer (BOT)Build/Operate/Transfer (BOT)

Basic definition: Private company responsible for Basic definition: Private company responsible for construction, financing, operation and construction, financing, operation and maintenance of port facility (including maintenance of port facility (including equipment, buildings and quays)equipment, buildings and quays)Intermediate agreements possibleIntermediate agreements possiblePrivate company owns and operates facility Private company owns and operates facility during concession period and collects revenues during concession period and collects revenues to repay financing and investment coststo repay financing and investment costs

BOT (contBOT (cont’’d)d)Role of Port Authority often reduced to Role of Port Authority often reduced to regulatory body and landlord, responsible forregulatory body and landlord, responsible for–– Port planningPort planning–– Navigational itemsNavigational items–– Safety and environmentSafety and environment

BOT items can beBOT items can be–– FairwaysFairways–– TerminalsTerminals–– Port complexes (unusual)Port complexes (unusual)

BOT (contBOT (cont’’d)d)

BOT period normally at least 20 yearsBOT period normally at least 20 yearsAt end of BOT period private company returns At end of BOT period private company returns fixed assets to Port Authority (usually) at writtenfixed assets to Port Authority (usually) at written--down valuedown value

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BOT modelsBOT models

BOT (BOT (BuildBuild//OperateOperate/Transfer)/Transfer)BOO (BOO (BuildBuild//OwnOwn//OperateOperate))EOT (EOT (EquipEquip//OperateOperate/Transfer)/Transfer)BTO (BTO (BuildBuild/Transfer//Transfer/OperateOperate))BOOT (BOOT (BuildBuild//OwnOwn//OperateOperate/Transfer)/Transfer)BBO (BBO (BuyBuy//BuildBuild//OperateOperate))

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Full PrivatisationFull Privatisation

United Kingdom United Kingdom and New and New ZealandZealandRequires new legislationRequires new legislationIncompatible systemIncompatible system withwith regardregard toto nationalnational and and regionalregional interestsinterests in most in most countriescountriesUK UK experience experience does does not provide many not provide many arguments supporting full privatisation by sale arguments supporting full privatisation by sale of of land and transfer of public land and transfer of public functions to functions to private private sectorsector

Port reform processes and port Port reform processes and port labourlabour

Major reason for initiation of processes of Major reason for initiation of processes of change related to reduction of surplus labour change related to reduction of surplus labour and/or reduction of restrictive labour practicesand/or reduction of restrictive labour practicesLabour Unions afraid of losing jobs and Labour Unions afraid of losing jobs and influenceinfluenceIf labour problems in port (due to processes of If labour problems in port (due to processes of change) are passed on to other areas of national change) are passed on to other areas of national economy: creation of new (social) problemseconomy: creation of new (social) problems

Port reform processes and port Port reform processes and port labour (contlabour (cont’’d)d)

Redundancy payments could provide solutions but Redundancy payments could provide solutions but must bemust beAllowed/possible under national labour laws Allowed/possible under national labour laws and/orand/orNegotiated prior to initiation of selected process Negotiated prior to initiation of selected process of change and/or transfer of enterprise to private of change and/or transfer of enterprise to private sectorsector

Possible port labour reform guidelinesPossible port labour reform guidelinesPossible port labour reform guidelines

Clear statement by governmentClear statement by governmentAddress labour issue firstAddress labour issue firstInvolve high ranking Involve high ranking politician(spolitician(s))TimingTimingBan on recruitmentBan on recruitmentRedundancy payment fundRedundancy payment fundReduce on all levelsReduce on all levelsReform in stagesReform in stages

Possible port labour reform guidelines (cont’d)Possible port labour reform Possible port labour reform guidelines (contguidelines (cont’’d)d)

Outplacement officeOutplacement officeInvolve Unions in processInvolve Unions in processGood argumentsGood argumentsIndustrial democracyIndustrial democracyGood communication / avoid polarisationGood communication / avoid polarisation(Re(Re--)Training facilities / programmes)Training facilities / programmesJob creating projectsJob creating projectsPort labour should profit from port reformPort labour should profit from port reform

ConclusionsConclusionsConclusionsObviously in many ports requirement of certain Obviously in many ports requirement of certain level of autonomy level of autonomy Level of autonomy critical success factor for port Level of autonomy critical success factor for port rere--organisation organisation Institutional change exceedingly complex issueInstitutional change exceedingly complex issueMuch confusion about success of specific Much confusion about success of specific experiences with changesexperiences with changesLimited solid evidence about effectiveness of Limited solid evidence about effectiveness of the various strategiesthe various strategiesExisting situations will not automatically improve Existing situations will not automatically improve when applying any of processes mentionedwhen applying any of processes mentioned

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Thank you for your attentionThank you for your attentionThank you for your attention

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Examples of ReformsExamples of ReformsExamples of Reforms

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Recent examples of port reformRecent examples of port reformSri Lanka 2004Sri Lanka 2004

The new coalition Government announces to The new coalition Government announces to discontinue port privatization (considered as discontinue port privatization (considered as strategic state enterprises)strategic state enterprises)The previous Government privatized ColomboThe previous Government privatized Colombo’’s s QE Quay by leasing it to a P&O Ports led QE Quay by leasing it to a P&O Ports led Consortium in 1999Consortium in 1999The Government will establish the Strategic The Government will establish the Strategic Enterprises Management Authority to run state Enterprises Management Authority to run state organizations more efficiently to compete organizations more efficiently to compete effectively with the private sectoreffectively with the private sector

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Recent examples of port reform Recent examples of port reform -- 22

Jordan 2004Jordan 2004Agreement between Agreement between AqabaAqaba Development Development Corporation and APM Terminals to manage the Corporation and APM Terminals to manage the container terminal for a period of 2 years (MT)container terminal for a period of 2 years (MT)APM will upgrade the terminalAPM will upgrade the terminal’’s infrastructure, s infrastructure, develop a computer system and boost the develop a computer system and boost the terminal capacityterminal capacityJordan Shipping Agents Association Jordan Shipping Agents Association complained that the Government had not given complained that the Government had not given local companies the chance to run the terminallocal companies the chance to run the terminal

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Recent examples of port reform Recent examples of port reform -- 33

Vietnam 2004Vietnam 2004Plan to develop a new river container terminal, Plan to develop a new river container terminal, as recommended by JICAas recommended by JICAThe total investment costs: US$ 23 millionThe total investment costs: US$ 23 millionInvestors: Local companies 80%; remainder to Investors: Local companies 80%; remainder to come from the foreign private sector come from the foreign private sector

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Recent examples of port reform Recent examples of port reform -- 44

UAE 2004UAE 2004Kuwait company KGL Port Management Kuwait company KGL Port Management Company was awarded a US$ 45 million Company was awarded a US$ 45 million contract to build and operate a container contract to build and operate a container terminal at Mina terminal at Mina SaqrSaqr21 year BOT concession21 year BOT concessionKGL will invest US$ 15 million in two new KGL will invest US$ 15 million in two new berths, US$ 4 million to reconstruct 3 berths, berths, US$ 4 million to reconstruct 3 berths, US$ 3 million in new facilities and US$ 23 US$ 3 million in new facilities and US$ 23 million in new equipment million in new equipment

port management and reform port management and reform 20052005 5555

Recent examples of port reform Recent examples of port reform -- 55

Brunei July 2004Brunei July 2004The Government announced plans to develop The Government announced plans to develop PulauPulau MuaraMuara BesarBesar container transshipment container transshipment terminalterminalTotal investment cost: US$ 1.7 bio(!)Total investment cost: US$ 1.7 bio(!)The terminal will be developed in 2 phases; first The terminal will be developed in 2 phases; first phase to cost US$ 400 millionphase to cost US$ 400 millionFunding: 70% from Brunei Government and Funding: 70% from Brunei Government and 30% from the private sector (the new manager 30% from the private sector (the new manager of the facility) of the facility)

port management and reform port management and reform 20052005 5656

Recent examples of port reform Recent examples of port reform -- 66

Morocco 2004Morocco 2004The Government announced the reform of the The Government announced the reform of the port system to come into force in the first half of port system to come into force in the first half of 20052005The reform will involve redefining of the role of The reform will involve redefining of the role of the current National Port Operations Office the current National Port Operations Office (ODEP) and the creation of a National Port (ODEP) and the creation of a National Port AgencyAgency

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Recent examples of port reform Recent examples of port reform –– 6/26/2

Morocco 2004Morocco 2004Government wants to take the opportunity of Government wants to take the opportunity of the new Tangiers Med BOT contract with APM the new Tangiers Med BOT contract with APM Terminals to enhance cost efficiency of the Terminals to enhance cost efficiency of the other main ports in Moroccoother main ports in Morocco

port management and reform port management and reform 20052005 5858

Recent examples of port reform Recent examples of port reform -- 77

Malta 2004Malta 2004Shipping Company CMA CGM signed a Shipping Company CMA CGM signed a contract with the Maltese Government to control contract with the Maltese Government to control Malta Freeport TerminalsMalta Freeport TerminalsP&O Ports will manage the port on behalf of P&O Ports will manage the port on behalf of CMA CGM CMA CGM The concession period is 30 years and the The concession period is 30 years and the Government will receive in total US$ 421 millionGovernment will receive in total US$ 421 millionCMA CGM plans to invest US$ 7 to 12 million CMA CGM plans to invest US$ 7 to 12 million on the short term for new equipment and will on the short term for new equipment and will retain the present labor force retain the present labor force