Embarking on port reform requires a strong vision combined with proper planning and organization. The following sections will highlight the main components for putting together a road map for the port reform process, which are elaborated further throughout the toolkit, and include setting of objectives to policy decisions; methods of involving the private sector; public interests oversight; financing and risk allocation; legal framework; labor reform; and implementation.
Port reform should only be undertaken after a full and complete assessment of the objectives that public officials are trying to achieve. Institutional reform or, indeed, private sector involvement, should not be an end in itself, but only a means to achieve specific and welldefined public interest objectives. The objectives underlying port reform may be as varied as the need to expand or to modernize container handling capacity, the desire to stimulate the growth of a distribution-based economy centered on a regional hub port, or the need to reduce government expenditures on the sector so that limited public funds can be applied to other more pressing social needs. In any case, the private provision of port services and infrastructure is only one tool among others that are available to officials to solve specific problems and to achieve specific public interest objectives. Thus, the decision process should begin with the consideration of the objectives that port reform is designed to achieve. Module 3 reviews those possible objectives in greater detail.
The delivery of port services has become an increasingly risky undertaking. Increased competition between or among ports, large capital outlays, more specialized investments, and the expansion of port activities beyond traditional services all increase the possibility of economic losses from port operations. Considerations of risk and return on social capital should figure prominently in deliberations of public policy makers concerning public interest objectives underlying port reform.
All of the reform design issues touched on above need to be assessed in the context of the operating scale of a particular port and the interest and willingness of private companies to invest in the particular set of services offered to them. For example, intraport competition for services such as stevedoring or terminal operations may be feasible in a large volume port, but not feasible in a small volume port.
Modules 3 and 6 describe circumstances under which competition for licenses, rights, or franchises may be an effective way to sustain competition and maintain incentives for continuous service enhancement. The modules also identify circumstances under which competition in the market may not be feasible. Furthermore, Module 3 in particular discusses advantages of designing competition between or among private operators into the tendering process for the delivery of specific categories of service.
Where competition “in the market” for specific categories of port services is not workable, competition “for the market” may still be an option for protecting the public interest. While continuing and robust competition among multiple service providers is the best way to ensure low prices for services rendered, such competition may not be feasible in all port environments due to physical constraints or small cargo flows. In such an environment, it is still essential to maximize the economic benefits of competition and to minimize the risks associated with monopoly service through competitive bidding. For the provision of still other categories of service (for example, those that have significant consequences for the efficient use of assets for both shipping lines and for terminal operators), retention of these services in the public domain may be the best option. Module 3 addresses this issue of packaging core and noncore services into bundles for private participation.
Port reformers should carefully choose the objectives they seek to achieve before settling on any specific reform model because different objectives will require different types of reforms. Options for private sector involvement, investment, and risk sharing range from open entry to service contracts, management contracts, leases, joint ventures, control of corporate entities and concessions all the way to full divestiture. Differing forms of private sector involvement result in different allocations of risk, different responsibilities for government, and different types of government oversight. Module 5 delves into the issue of risk sharing at greater length.
The port reform decision process must begin with the clear definition of the objectives that the reforms are intended to achieve. The next step is to delineate all of the key institutional design and reform decisions needed to move the process to a successful result. Next, for each decision point along an ordered reform path, options and alternatives should be developed and assessed. In particular, all of the possible outcomes resulting from the selection of any specific option need to be fully evaluated with respect to the stated objectives of reform.
A useful tool for laying out the port reform process and feasible options is a decision tree. Key branches comprising this port reform decision tree include:
For each of these key decision points, several options exist. Box 6 shows a notional decision tree leading port reformers through the many steps involved in the process.
The nature of private sector involvement in the port sector will be prescribed by the adoption of a specific institutional model. To assist port reformers in determining which model might best apply to their circumstances, Module 3 describes four port management models that cover the spectrum of private sector involvement in ports, including: the public service port, the tool port, the landlord port, and the private service port.
Within these models, a broad array of options exists with respect to the specific form the public- private partnerships may take. These can significantly affect the agility and responsiveness of service providers, their market orientation and efficiency, and their decision-making autonomy.
The appropriateness of specific models for particular ports needs to be judged, ultimately, by how well they help achieve the objectives of the reform program. However, a number of other factors should also be considered, including:
The two key issues involving public interest oversight are what powers and authorities need to be retained by a public oversight body after reform, and how that body needs to be constituted and at what level of government it needs to operate.
As noted above, increased private sector participation in the delivery of port services should be viewed as an instrument to achieve well-defined public interest objectives. Thus, a key element in port reform must be the creation of a mechanism to protect the public interest and make certain that the objectives of reform are met. In creating such a mechanism, it is important to keep public statutory and regulatory oversight responsibilities separate from commercial activities.
Government oversight typically takes several forms, such as strategic planning, technical regulation, and economic regulation. Planning the future development of ports and sharing those plans with private developers who can help implement them is a continuing responsibility of governments. As discussed above, every port’s vision of its future needs to be realistically set in the context of its commercial environment and its competitive position versus other ports. It must also take into account the likely effects of proposed increases in capacity on regional markets, since one country’s efforts to increase its share of regional trade typically evoke competitive responses.
Thus, regardless of which port reform model is selected, strategic transport planning will remain a critical responsibility of governments. Enhancing international competitiveness requires, among other things, implementing and maintaining a cost-effective transport system, with the port interface being a critical link to international markets. A national ministerial body, therefore, should be in charge of developing the long-term strategic vision for national waterfront development plans. The port reform vision should also encompass other land transport reforms to ensure the complementary development of interconnected links in the transport infrastructure. Many examples exist around the world of the inefficiencies and bottlenecks created when road and rail links are not developed at a pace adequate to handle increased port activity. Further, this planning effort will have to take into account various stakeholders’ interests in the long-term development of coastal areas within the framework of a national Integrated Coastal Zone Management (ICZM) policy.
Safety is a major concern with ship movements in and around port mooring and berthing areas and with cargo handling operations ashore. Requirements for handling and storage of hazardous cargoes must be clearly spelled out in port regulations and should be based on international conventions with due allowance for specific local conditions. Technical regulation of operations is required to ensure compliance with security, safety, labor, and environmental protection standards, as well as to set and monitor appropriate minimum performance requirements (especially if competition is weak). Forms of technical regulation and the necessity for them do not change significantly with port reform. Consequently, technical regulation is not dealt with in detail in the Toolkit (more information on the safety and handling of hazardous cargoes can be found at the International Maritime Organization’s Web site www.imo.org).
A complex set of mutual obligations typically bind private operators and users to act in concert and in compliance with the rules in the provision and use of port services. The development and enforcement of operating rules and regulations represents another oversight responsibility that most public authorities assume or retain as part of their essential functions. Module 4 elaborates on the kinds of mutual obligations among private service providers and between them and public service integrators that are needed to ensure the safe and efficient delivery of services. These technical regulations are typically articulated in a set of port rules and regulations. Module 4 will discuss the content of a model set of rules and corresponding enforcement mechanisms that have been used effectively in various port reform efforts. Finally, this module also describes the legal sources such as decrees, laws, contracts, licensing agreements, and sectoral policies used to define and enforce obligations on private operators and port users.
Economic regulation, which usually aims at monitoring market entry and pricing, is necessary when competition is weak or nonexistent. Conversely, when significant competition develops, either internally or externally, the need for strong economic regulation decreases. Indeed, when competitive pressure is well established, there may be little reason to maintain any price regulation other than a requirement to publish tariffs, a continuing prohibition against undue discrimination against similarly situated port users, and retention of a mechanism by which the government can monitor the competitiveness of the market and investigate alleged anticompetitive activity. The level of competition faced by an individual port, therefore, has important implications for the nature and degree of regulatory oversight of port operators. Ports with abundant intraand interterminal competition require minimal economic regulation.
In general, the difference in public sector responsibilities before and after institutional reform is the difference between “rowing” the boat and “steering” the boat, respectively. Postreform oversight powers are typically indirect and designed to induce socially beneficial actions on the part of the private sector. Oversight may involve the creation of incentives for private sector investment, the tendering of investment opportunities, compatibility of all private investments with a master plan, and coinvestment under certain circumstances. Module 6 discusses various aspects of economic public interest oversight in depth.
Once the areas for continuing government oversight have been defined, it is necessary to determine an institutional framework for administering the oversight. Port administration may be centralized or decentralized; each approach has its strengths and weaknesses. Centralized administration permits a broader national economic and multimodal perspective for directing port development policy. Decentralized administration permits a more narrow local perspective that aligns port development with the economic interests and priorities of municipal or regional economies.
In addition to discrete national and local approaches to port oversight responsibility, a two-tiered option also exists. For example, a national port council can be formed, to which local port authorities report. Under the best of circumstances, this two-tiered arrangement allows for the balancing of national and local interests and the reconciliation of both through deliberative processes. In the worst of circumstances, the two-tiered bureaucracy may lead to excessive interference in port operations and management or contradictory policies that interfere with planning and investment decisions.
The degree of decentralization in policy making and regulation should:
In addition, whether port regulatory responsibilities should be concentrated at the central level or decentralized to the local level should be looked at with two concerns in mind: the consistency of the approach with those generally followed throughout the country, and the need for a transparent and efficient user-friendly regulatory system. The former would call for some sort of nationwide unit, likely at the ministerial level, although at arm’s length from the ministry of transport to guarantee independence; the latter could lead governments to consider local (state/province) regulatory units closer to the field and, therefore, better able to tailor decisions to meet local conditions.
To provide for a clear separation of policy and regulatory responsibilities at both the national and local levels, a three-tier institutional framework has also been employed effectively. For example, under the assumption that reforms will result in a landlord port arrangement with commercial activities fully carried out by private operators, the new public oversight framework could be devised along the following lines:
In such a setting, the national body serves three key roles: it establishes the basic rules of participation to be applied by all entities, public and private; it regulates the public port authorities, in particular with respect to their infrastructure pricing policies; and it provides an appeal level for dispute resolution in case private commercial operators believe they are unfairly treated by their local port authority and regulator.
The two key issues concerning financial risk are:
Module 5 describes the many types of risks involved in port projects and assesses the risks associated with the reform models developed in Module 3. Module 5 also identifies the financial tools that decision makers can use to systematically assess the financial risks and potential rewards associated with specific investment programs. (A financial simulation model to assess the viability of specific investment operations is also included as an Appendix to Module 5). Port reformers should carefully consider what risks the public sector can afford to bear and on what basis specific risks should be transferred to the private sector. Port planners have available to them a number of risk mediation tactics, which are also described in Module 5.
Port operations require several categories of longlived assets, some of which are inherently more amenable to private investment and user fee recapture than others. For some long-lived, high cost infrastructure assets, such as breakwaters, channels, and turning basins, charges for incremental use can only be assigned arbitrarily to individual users because the marginal benefit derived from using this common infrastructure significantly outweighs the marginal cost of replacing it. Consequently, a charge schedule developed by a private developer and based on user benefits could result in monopoly profits and less use than economically desirable. Port assets also include long-lived, high cost infrastructure, such as quays and terminals, whose incremental use can be meaningfully assigned to users and whose marginal cost and marginal benefit can be balanced through a number of price regulation regimes or intraport competition. Finally, port assets include long-lived superstructure and equipment whose use is closely associated with specific users and specific service delivery systems. Equipment is a mobile asset and can be competitively provided or easily redeployed. On-dock storage and transshipment facilities can be awarded through competition and assigned to their most productive use through open tender.
All three categories of assets can be provided or maintained by the private sector. However, from the perspective of private investors, the first category involves the greatest risk, has the longest payback, and involves the highest risk tradeoff between their ability to set prices independently without regulatory constraint and the level of investment they are prepared to make. In general, private investors are prepared to make larger investments when they are unconstrained by regulators or when the price schedules (including escalation mechanisms) they propose in advance of awards are accepted and locked in for a long term. In other situations, the funding of longlived, high cost infrastructure remains in the public sector and is charged back to users though a number of different regimes. Modules 3 and 6, respectively, deal with the operational and institutional aspects and the regulatory aspects of charging for port infrastructure.
Most port charges involve some combination of public components for the support of publicly financed common use infrastructure and private components for the provision of terminal infrastructure. The combination of these two pricing factors determines the competitiveness of ports compared to other competing ports. In general, the greater the degree of competition, the less the need for regulatory intervention. Module 6 discusses the limited set of circumstances under which regulatory intervention into pricing decisions made by private service providers may be appropriate.
Box 7 illustrates how the four port management and operation models array themselves on scales measuring private sector risk and the need for independent government oversight.
To initiate wide-ranging reform, the legal framework that underpins the institutional arrangements of the sector may require significant amendment. To ensure credibility, openness, and transparency in the reform process, and to attract international participation and long-term financial commitments from potential investors, a sound and precise legal framework for defining public-private partnerships is essential. In particular, prior to any reforms involving buildoperate- transfer (BOT) arrangements, governments should enact a concession law spelling out the principles of the process and establishing the rules and responsibilities for each party. Further, governments should consider putting in place a complementary set of regulations describing how the concession law will be applied in practice.
Since there are ways other than concessions for securing private participation in port activities, the national legal framework for public-private partnerships must also incorporate these elements, or at least establish which entity will be responsible for monitoring them. The basis of any licensing process, for example, must be made clear in the law, which can then specify that port authority regulations will articulate more precisely the implementation criteria.
The following legal documentation should be reviewed to assess the need for modification or the need for complementary statutes:
Since amending a law most often requires going through a legislative process, the earlier in the reform process this can be initiated the better. Sector laws and laws governing contract award and management between public and private entities are the most critical elements to be enacted. Port regulations can usually be put in place by a ministerial decree. Module 4 offers guidance and examples in the drafting of sector laws reflecting the sector model to be implemented as well as guidance on the contents of concession contracts and port regulations.
Once the main institutional options for sector reform are decided upon, the issue of asset restructuring must then be addressed. The two key issues involving asset restructuring are what degree of competition should be designed into port service markets and what assets (and related services) should be tendered as packages for single source awards.
Port assets can be divided among sets of services and tendered as separate packages in a number of different ways. The consequences of either bundling assets (and corresponding services) or unbundling them has a direct effect both on competition among private service providers and on the efficiency with which a port can operate.
In larger ports, competition among terminal operators is both desirable and practical. In smaller ports, competition is less feasible because the economies of scale required to attract specialized service providers are not sufficient to assure them of a reasonable profit while maintaining charges at reasonable levels. Moreover, effective coordination of cargo handling and marine services can be better assured in smaller ports by integrating them in a single source service. Module 6 reviews the consequences of such options from an economic regulatory perspective.
The process of port labor reform often requires governments to eliminate provisions from existing labor regimes that unduly constrain flexibility and productivity. Overstaffing, in particular, has been a pervasive feature of most port organizations in both the developing and developed world. Achieving more cost-efficient operations will generally require significant reductions in the workforce. Therefore reducing the workforce in a socially acceptable way must be a prominent concern of public authorities and an integral part of the reform process. Addressing the overstaffing issue as one of the first steps in the reform process, before involving the private sector in operations, will usually facilitate the overall reform process. Since overstaffing in ports is often the result of government policies that view port organizations as instruments of social policy and natural shelters for the unemployed, governments should take the lead responsibility in resolving this issue. Often this means creating programs to ease the transition of port labor into other sectors. Doing this, in turn, requires the application of significant financial and management resources early in the reform process.
If port services and infrastructure are tendered to the private sector before the labor issue is resolved, for the process to stand a fair chance to succeed, care should be taken that the private operators are allowed to adjust their workforce over time to actual operational requirements and that existing social protection programs will ensure the labor adjustment process will be smooth and not provoke undue labor unrest. This may sometimes require the establishment of special government-funded programs to accompany staff retrenchment, possibly by complementing general social programs with sectorspecific assistance made available over a defined and limited period of time.
In all cases, this means that organizational and budgetary resources must be mobilized early in the reform process to ensure appropriate and socially acceptable treatment of potential labor dislocations. In particular, worldwide experience strongly suggests that port labor should be involved in the port reform process from its earliest conceptual phase. Again, experience indicates that the best way to build confidence in the reform process by all affected parties is to broaden the sphere of participation and responsibility to include port users, port labor, and port and maritime employers. Such broad participation will allow all stakeholders to share common concerns about competitiveness of port services and gain a better understanding of how any weakening of this competitiveness would be detrimental to all. This is particularly true for the workforce, which would be the first to bear the consequences of reduced economic activity, both inside and outside the port. Significantly, the International Transport Workers Federations (ITF), while cautious about the social consequences of port reforms, appreciates the need to improve port efficiency, possibly through increased private sector participation. It insists, however, on the critical need to involve labor unions from the start so that mutually acceptable labor rationalization strategies can be designed to make the whole process both economically and socially sustainable. Institutions for allocating available work among members of a qualified labor pool based on seniority or some other rank-ordering principle have grown up within most traditional ports. Unions typically control entry into these pools of qualified labor, the result being to close the port labor market to competition and to new entrants. Opening labor markets to competition is one of the objectives sometimes sought by port reformers. In this context, one of the key issues to be addressed is the role of these dock labor boards or union labor pools and how they affect management discretion over the recruitment, qualification, and use of specific employees.
Three key questions arise when considering workforce reductions in the port reform process: Who will be responsible for “buying out” surplus labor, when in the process will labor separation negotiations be completed, and on what basis will postreform labor-management relationships be conducted?
Theoretically, labor contract issues can be resolved either before or after port services and infrastructure have been transferred from the public to the private sector. Either the public sector or the new private sector operator can manage negotiations and can absorb the liability associated with separating surplus employees. Typically, however, resolving labor separation issues before transactions are completed relieves investors of uncertainty and enhances the perceived value of the investment. In general, it is a good idea to make a clean break in labor contract coverage and the basis for employee selection and work assignments at the same time that the rights to control port assets are conveyed. This may involve not only buying out individual laborers under the terms of existing contracts, but also buying out the contract itself, thereby giving private operators a clean slate to negotiate new agreements. Module 7 reviews in depth the issues relating to labor adjustment policies in port reform and proposes ways to handle them in a manner that meets the joint objectives of institutional reform and social sustainability.
For additional information on labor reform, consult the World Bank’s Toolkit Labor Issues in Infrastructure Reform and the International Labor Organization’s report, Social Dialogue in the Process of Structural Adjustment and Private Sector Participation in Ports: A Practical Guidance Manual.
The key issues of port reform implementation responsibility concern what government agency is responsible for port sector reform and what skills and competencies are required to implement a port sector reform program successfully. The delegation of responsibility for managing port sector reform typically comes in the form of a special decree, law, or other explicit delegation of authority. To what organization of government should this authority be delegated? It is rarely possible for a port authority to reform itself, since the inherent conflicts are too great for even a well-meaning port authority to adopt and implement significant change. Moreover, the work of implementing port reform is diverse and requires special skills. Some of it, for example, involves developing regulatory frameworks, some of it involves labor negotiations, and some of it involves preparing individual transactions.
In deciding which agency of government should manage port reform, many questions arise. Should reform be carried out by a temporary agency of government whose sole purpose is port reform, or should it be delegated to a standing government agency? Should the ministry responsible for ports also be responsible for the process of reform, or should this fall to an agency dealing with privatization generally, and over which the ministry responsible for ports has only indirect control? Should the process be managed at a national, regional, or local level? Should different reform units be organized for “greenfield” port developments and for the privatization of existing facilities? What powers should the reform unit have? How should the unit be funded? To whom will it answer? How will it obtain information from other organizations? Can part of its responsibilities be subcontracted? And importantly, what access will the unit have to key political decision makers?
Often, for the reform process to be implemented successfully, the mandate given to the reform unit must come from the highest levels of government, and the reporting must follow the same route. This avoids frequent interministerial conflicts over competence and jurisdiction. The agencies and individuals comprising membership of the reform unit also must be defined unequivocally by the political leadership.
Several organizational options are available for implementing port sector reforms. One agency can manage the entire process with individual transaction managers within that agency assigned responsibility for completing discrete transactions. Or, multiple agencies can be assigned responsibility for sector reform and task forces created from these several agencies to accomplish component tasks and to complete individual transactions.
In managing the politics of reform, it is important to account for stakeholder interests and concerns. Stakeholders in ports include labor, existing public agencies, environmental groups, shippers, shipping companies, and other users of port services (for example, fishermen or the navy). Module 8 will examine workable processes for actively including stakeholder interests in policy decisions, or for otherwise factoring their interests into key decisions.
The reform unit will typically require consultant services to assist in the reform process. Issues relating to the use of consultants include determining what skills are needed, the criteria by which consultants will be chosen, the degree to which consultant services should be bundled together, and how consultants should be compensated (for example, a flat fee or a success fee).
Module 8 will provide some insights on these various aspects of implementing the reform process.
In addition to preparing the variety of transactions associated with port reform for tendering or other actions, those charged with reform also have to consider the order in which the transactions will be undertaken.
When port operations are transferred to the private sector, the public sector retains only an indirect relationship with the service provider. The new relationship entails new tasks to be performed in the public sector. New skills are required to perform these tasks, requiring a period of training and possible assistance from consultants or advisers from other ports. A range of measures can be adopted to help to build the public sector’s capacity to perform its new role as contract monitor and regulator. Preparing for this new role should be one of the first steps in the reform transaction process.
From the commercial perspective, several possible strategies should be considered when scheduling and programming port reform programs that include several components and multiple transactions. For example, the most valuable assets might be tendered first to attract investors and to increase their confidence in and familiarity with procedures in which they would encounter in future transactions. Another strategy is to offer all components at the same time— a “big bang” approach. This has the benefit of allowing some transaction preparation costs to be shared among several transactions and also allows a new set of competitive conditions to become effective more or less simultaneously.
At implementation, port reform requires the completion of a number of complex transactions in connection with the tendering of service franchises and asset ownership, or use rights. Transactions can be completed only after an elaborate preparation and due diligence process. Two key issues associated with transaction preparation are whether transaction preparation should be outsourced or completed by in-house government staff, and what kind of technical assistance the group responsible for transaction preparation within government will require.
In general, three approaches to transaction preparation are possible:
Financial advisors add credibility to the claims and representations made in marketing a transaction. They are also helpful in assessing the market for port assets without compromising transaction integrity, and in packaging transactions to be marketable. However, some financial advisors are better than others. Engaging one is itself a significant transaction involving risks. Consequently, financial advisors should be selected with care, using a competitive process as with other transactions.
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