Changes taking place in the port sector present difficult challenges to port administrators, terminal operators, and other port service providers. But these changes also present opportunities for new ways of doing business and open the door to entry of new players throughout the range of port activities. In short, it’s a brand new era for everyone involved in the port sector and the opportunities, as well as the challenges, are substantial.
The traditional closed fraternity of entrenched players with widespread involvement of public entities in the ownership and ports operation is no longer acceptable. Port authorities worldwide are under increasing pressure to turn over operations in the port to the private sector. They are being forced by competitive pressures to step into a landlord and regulatory role, focusing on administrative activities that public entities do best.
Traditional ways of doing business in ports are being challenged worldwide by demands for gains in port efficiency, increased customer responsiveness, and lower costs to move cargo through the port. It has been widely demonstrated that use of private sector companies throughout the range of port operations provides an opportunity to eliminate traditional, bureaucratic operating procedures and controls and modernize facilities and equipment through new financing channels. It is also widely accepted that service providers with operating and administrative experience in other ports can transfer this experience and bring to a port best practices and appropriate modern technologies employed elsewhere. But even more important, by passing the reins of port operations from the public to the private sector, port reform offers the ability to shift the financial burden of port expansion and development to the beneficiaries of the expenditures.
There are numerous success stories where port authorities have transferred to the private sector operations previously performed by public employees. A classic example is Buenos Aires, where the award of terminal concessions to four competing companies in 1994 has brought down handling charges significantly through improved labor productivity. In another example, after transferring major port facilities to the private sector between 1995 and 1998, Panama attracted more than $380 million in investments for modernization and expansion. When management of the Kipevu container terminal in Mombasa was transferred to a commercial terminal operator, outdated equipment was temporarily replaced, bureaucratic procedures streamlined, and productivity of the terminal improved. In the big picture, 220 privatizations from 1992 to 2004 have generated private investments exceeding $21 billion to rehabilitate terminals and renew superstructure in the ports that were privatized.
This is not to say that port privatizations have been without problems. There have been a number of cases of privatizations involving ports that have not worked out. In Indonesia, the Koja container terminal under private management ran into difficulties and the public port company took back the facilities. The City of Rostock (Germany) demanded return of the terminal it contracted to a private group for operation, citing lack of compliance with the original contract. Following a dispute with the Port Authority of Trieste (Italy), the commercial terminal operator (Europe Combined Terminals, ECT) selected to operate the container terminal in the port under a 30-year contract withdrew from the contract after 18 months. The terminal operator awarded the concession to operate the container terminal in the Port of Rosario (Brazil) is reported to have lost more than $40 million under the contract as a result of work disputes and has cancelled the contract. And unfortunately, the success story in Kipevu (Kenya) was reversed when the commercial terminal operator terminated its contract with the port as a result of breakdown of equipment that the government failed to refurbish or replace.
A major lesson learned in port privatizations is the need for transparency and open competition through a structured international tendering process. Many examples can be given of attempted port privatizations that have bogged down due to legal challenges to the selection of the company to be awarded a concession contract. Montevideo is a prominent example of how things can go wrong in a privatization process. Attempts at privatizing services in the port had failed four times due to court challenges before a successful round was completed. At a later stage, the government announced plans to auction off the terminal on the stock market.
Conflicts and legal challenges can be minimized by clearly presenting the bidding rules and selection process in the bid documents. Criteria to be used for selecting the successful bidder should be stated and a pro forma contract provided with the bid documents so that everyone is competing for the same contract. The role of the port administration after the privatization and any limits on the contractor’s ability to operate should be stated in the bid package. Bidders should be requested to provide a business plan that will become part of the final contract. In the plan, bidders should state how they will address labor issues that may arise as a result of any downsizing of port operating personnel or changes in work practice rules. They should be asked to give references of how these issues were dealt with at other ports in which they operate. The bidders should be requested to state quantifiable targets for productivity gains and market development. This business plan should be accorded significant weighting in the selection process. Incentives and penalties should be provided in the contract should there be a significant deviation from targets in the business plan.
It is important to develop beforehand a well-reasoned plan for transitioning to private operation and have a clear understanding of how the port will function after the various port services are privatized. A number of important questions should be addressed: What changes in laws and regulations are needed to allow the private sector operation in the port? How much management and operational autonomy will be granted to the private operators? What will be the role of the port authority in regulating the rates and practices of private operators in the port? Who will be responsible for common area maintenance and upgrades, and how will the cost of these activities be recovered from port users? Will the port continue to have a marketing and planning function after privatization, or will this be left to the individual service providers? What resources will be required to carry out the functions that remain with the port authority? What type of retraining program and severance package will be created to address the issue of redundant personnel?
The best and tightest contract will still not ensure that there will be no problems in the operation of port services under a private contractor. There should be a contingency plan for default by port service contractors to prevent work stoppage that could affect port operations. This plan should include defined penalties to compensate the port or government when resources made available by the operator are inadequate.
The worldwide market for port services is estimated to generate available revenues of $50–55 billion annually. While these numbers are very rough, they indicate the size of the available market to companies active in the port sector. This is a large available market that should be of interest to a wide variety of global, regional, and local port service providers (see Box 28). See Box 29, which illustrates the use of private sector capital for expansion to cope with growing demand at the Port of Hong Kong, currently the world’s largest port.
This area is the most advanced in terms of private operation of port services. Of the 220 port privatizations captured in the World Bank Private Participation in Infrastructure (PPI) database, 124 have been concessions or management contracts involving existing terminal operations. But there are many more opportunities. There are more than 2,800 ports worldwide, many of which still have publicly operated terminals that are candidates for private takeover involvement in management and operations under concession agreements or management contracts. We roughly estimate that the available revenue from container terminal operation is on the order of $38–40 billion annually.
Port authorities often own and operate the harbor tugs used for ship assistance. This activity is ripe for privatization and is relatively easy for the private sector to provide. It has, for instance, attracted the attention of Smit Internationale of the Netherlands, which has been actively pursuing this market internationally and now operates tug services in the Netherlands, Belgium, Germany, Panama, Nigeria, Mexico, Argentina, República Bolivariana de Venezuela, Gabon, Singapore, Malaysia, Indonesia, Netherlands Antilles, and The Bahamas. Other global, regional, or local tug operators are certainly also finding this market interesting, if they can break the existing public or private monopolies. A rough estimate is that the harbor tug service market represents available revenues of up to $3 billion annually.
This activity has traditionally been performed by commercial dredging contractors under contract to port authorities or by port authority personnel using publicly owned dredgers. It is estimated that maintenance dredging is a $4–5 billion available annual market that can be completely turned over to the private sector. Port authorities that own and operate their own dredging equipment could corporatize the dredging function and sell the business along with its assets to the private sector. But more innovative concepts for privatizing maintenance dredging might be considered. For example, maintenance dredging could be outsourced on a concession basis similar to the concession awarded for channel dredging and maintenance in the Rio Parana, where a portion of the project revenues will come from direct charges by the concessionaire to future channel users and the port authority receives a concession fee. A more radical concept could be a contract between a dredging company and a container shipping company or consortium of companies to maintain specified water depths at the carrier’s terminals on a worldwide basis. Much depends, however, on the volumes to be dredged and the timing of the dredging.
Increasingly sophisticated IT is spreading throughout the port sector as users demand more timely information to support their logistics systems. This is producing a variety of opportunities to design, install, and operate IT systems in ports throughout the world. IT services can be totally outsourced by port authorities and terminal operators and the market is estimated to represent $2–3 billion in annual available revenues. Among options that can be considered for structuring IT service contracts are joint ventures between the port authority and the IT provider, an arms length concession for IT services, or a concession based on in-kind service compensation.
This is an area ripe for innovative privatization concepts, as many of these functions can be performed by the private sector. For example, a private company could be given the concession to operate a ballast water treatment plant in the port, with revenues derived from receiving charges and resale of recovered oil (see Box 30a and 30b). A private company could install and operate the vessel management system in the port under a concession agreement. The functions of port state control could be contracted under a management agreement to a competent inspection company or classification society, assuming the latter properly apply the inspection rules. A company could be contracted to maintain and operate aids to navigation on a local or regional basis, such as now performed by the Middle East Navigation Aids Service (MENAS) in the Gulf area (see Box 31). Altogether, it is estimated that the available market from environmental and ship safety activities is $1 to 2 billion annually.
Warehousing and storage, container freight station operation, port security, pilotage, and equipment maintenance are all activities that can be operated by the private sector. It is estimated that worldwide these activities represent an available market of some $4–5 billion annually.