Private sector investment and involvement in ports emerged as a significant issue in the 1980s. By this time, many ports had become bottlenecks to the efficient distribution chains of which they are an essential component. Three main problems, illustrated by port congestion and consequent chronic service failures, contributed to the gradual deterioration of service quality during this period.
The first problem was restrictive labor practices. Increasingly after World War II, antiquated work practices and methods for matching available labor with occasional work—practices that developed during a previous era characterized by breakbulk cargo handling—needed to be transformed and renegotiated to adjust to modern bulk handling methods, unitized handling, and containerization. All of these developments resulted in a rapid modernization of port handling equipment. At the start of this process, labor unions often refused to accept reductions in the labor force and ignored the need to upgrade skills. Later, however, unions realized that port reform was a necessity. Enlightened labor leaders accepted moderate reforms. As Module 7 describes in greater detail, it is no longer realistic for dock workers and their trade unions to oppose institutional reform and the technological advances that frequently precede and accompany it.
The second reason why many ports failed to respond adequately to the increased demands imposed on them was centralized government control in the port sector. Particularly between 1960 and 1980, central planning (in the port sector as well as in other sectors) prevailed not only as a norm in socialist economies, but also in many western and developing countries where national port authorities were often promoted by international development banks. Slow-paced and rigidly hierarchical planning, control, and command structures often accompanied central planning. Only in the 1980s did the dismantling of communist systems and the increasing introduction of market-oriented policies on a worldwide basis open the way for decentralized port management and for reduced government intervention in port affairs.
The third reason for a lack of port service quality was the inability or unwillingness of many governments to invest in expensive port infrastructure or the “misinvestment” in infrastructure (providing facilities that were badly matched with the needs of foreign trade and shipping). During this period, a number of beautifully constructed port complexes became “white elephants” when expected demand failed to materialize (see Box 1). As a result of systemic failures in managing port development, governments have learned to rely increasingly on private investors to reduce ports’ reliance on state budgets and to spread investment risks through joint undertakings.
During this period, fundamental questions arose about the appropriate division of responsibilities between the public and private sectors. “Boundary line” issues came into sharp focus during the 1980s and 1990s. Policy makers became increasingly aware of the need for coordination among various branches of government and for consultation with diverse port interests. They realized clearly that port development had collateral consequences and effects on public interests in land use, environmental impact, job creation, and economic stimulation for economically blighted areas. Moreover, among some leaders, first in the United Kingdom and then gradually in other parts of the world, it became increasingly clear that large-scale government involvement in port operations was self-defeating and destructive of private initiative. They came to realize that the role of government in a market economy should focus on the provision of public goods (goods and services that the private sector has no adequate incentive to provide and, consequently, are undersupplied without some form of government intervention).
In many countries today, still another trend has emerged: the private provision of public services. Increasingly, governments have transferred public tasks to private contractors. Outsourcing of key functions and roles has had a major impact on redrawing traditional boundary lines in the port sector. Hence, in many ports today, the public sector mainly acts as planner, facilitator, developer, and regulator while providing connectivity to the hinterland, whereas the private sector acts as service provider, operator, and sometimes also developer.
Experimentation in shifting the boundary line that divides the public and private sectors has resulted in a healthy pragmatism. Today, best practice is more concerned with results than with ideology, and is intended to achieve:
At the same time, various types of port terminals have become highly specialized in the cargo handling services they provide and manifest fewer of the characteristics of a public good. New greenfield container terminals have been built with private capital, and other container terminals have been redeveloped and recapitalized through some form of private sector participation. Box 2 presents two of the institutional formats used in recent years to develop greenfield terminals.
Increasingly, ports are being integrated into global logistics chains, and the public benefits they provide are taking on regional and global attributes. The value of services provided by regional ports increasingly transcends the interests of local users, and benefits businesses and communities located beyond regional and national borders. This global diffusion of benefits poses some interesting challenges with respect to the need for large-scale investments in the sector. At the same time, as discussed in Module 2, private port service providers themselves have become increasingly global in scope and scale. Even more recently, a number of strategic alliances have formed both within the global shipping industry and the port services industry. These alliances have profound implications for the ways ports are financed, regulated, and operated. Confronted with these global shipping and port service powers, port authorities will increasingly have challenges in defending public and local interests. Container terminal operators with global coverage, sometimes in alliance with major shipping lines, may be tempted to take advantage of their dominant position to strengthen their network, thereby reducing the scope of competition mainly at the expense of public interests. Moreover, countervailing powers at an international level that have not yet emerged are expected to do so soon due to the absence of suitable national regulating structures. At port level, a strict organizational separation of the commercial and regulating tasks of port management is required to safeguard public interests.
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