Labor Toolkit

Financial Implications of Port Reform

Characteristics of the Port Operator

In the majority of cases, private sector participation in port operations comprises industrial and commercial activities, the foremost of which are the handling and storage of merchandise passing through the port. These port activities involve business practices common to all companies as well as aspects that are highly specific to the port sector.

One can characterize the port operator through a description of these basic and specific aspects and, using this characterization, establish an initial classification of the risks that the operator is likely to encounter. This approach deliberately leaves the definition of the “port” very broad to demonstrate the complexity of the environment of the port operator, whose activity simultaneously takes place in a port community, a transport chain, and national and an international economies, while nevertheless preserving the principal characteristics of an ordinary company.

General Aspects

National Environment

In common with any other private company, a port operator must transact business according to the legal, economic, social, and political environment of the country in which it is conducting its activity. The legal and statutory environment incorporates the applicable common law rules and regulations, whether stemming from national legislation or international agreements of which the country is a signatory. These include company law; rules of fair competition; tax law; exchange control; regulations governing transfer prices and tax withholding on the payment of dividends; labor laws; laws relating to the protection of the environment; police; concession and property ownership regulations; and customs regulations. This environment also comprises specific measures applicable to ports, such as those concerning their legal status, rules regarding police and security services, and even special measures relating to property ownership, labor laws (as specific to dock workers), taxation, and so forth.

The economic environment is defined by the relevant macroeconomic factors (growth, inflation, exchange laws, debts, and so forth), as well as the wage and salary levels, the level of training and skills of local human resources, price levels, and so forth.

In its broadest sense, the political and social environments are based on prevailing geopolitical conditions, the stability of the existing national, local, or regional government, the possible risk of armed conflict, the labor climate, and so forth.

The port operator is thus subject to the full range of national legal, economic, social, and political influences that determine the stability of the nation and locale in which the project is located. This must be analyzed in detail, as this environment generates a number of risks, typically referred to as “country risks.”

Industrial and Commercial Dimension

A port operator is a service provider, although with a substantial industrial and commercial (infrastructure and investment) dimension. This is one of the reasons behind the desire to introduce private management in ports. It is generally admitted that a private company has a degree of flexibility and an ability to react quickly that enables it to achieve greater efficiency than a public entity.

In the course of its activity, the operator must finance, install, operate, and maintain the necessary infrastructure, superstructures, and equipment. In common with any other company, the operator must apply its own expertise and resources, while also establishing contractual relationships with various equipment suppliers or service providers (construction contracts and the purchase of tooling, water, electricity, and so forth), employing subcontractors for specific operations (maintenance, security, or even the operations themselves), and with the banking sector for the financial package on which the operation is based. This industrial dimension of the operator’s activity creates what are referred to as “project risks.”

The port operator deals daily with its customers, whether shipowners or shippers, who are sensitive to the quality of service supplied and the rates charged. These aspects, in turn, are directly affected by the extent of competition confronting the operator. This relationship with customers, on which the level of activity is largely dependent, generates a “commercial risk” or “traffic risk” for the operator.

Specific Aspects Particular to the Port Sector

Vertical Partnership with the Concessioning Authority

Apart from the legal environment as described above (common law and sector-related rules), under the terms of its contract with the operator, the port authority imposes a set of measures on the operator defining, directing, regulating, or simply authorizing the operator’s activity over a given period. This form of relationship between the port authority and the operator is described here as a “vertical partnership.” This vertical partnership reflects the extensive scope of public service activities the port authority often delegates to the port operator. Inclusion of these measures in the operator’s contract is justified for a number of reasons:

It is the integration of these constraints by the public authority that makes a vertical partnership and government oversight essential. These constraints also have substantial consequences for the port operator and the risk it incurs and its ability to manage this risk. These consequences flow from several factors including:

Horizontal Partnership with Numerous Players

The service a port operator provides to its customers, whether shipowner or shipper, is part of a more global service of which the operator only provides one element. The operator is thus in a de facto partnership with service providers handling the other components of an integrated transport and logistics chain. This is referred to as a horizontal partnership. This type of partnership may also exist with the port authority if it is a service provider, and with other players of widely differing specializations. It can also be an impromptu partnership, not formalized by direct contractual links between the parties concerned. The extent of and parties to this horizontal partnership depend on the legal position and activity of the customer.

One can broadly describe the integrated service expected by the port operator’s principal customers, shipowners and shippers. For a shipowner, the integrated service expected covers all operations required for the ship’s call. The services provided by the terminal operator (handling and storage) represent the most sensitive and costly parts of the call, although a vessel call also requires suitable maritime access, operational buoying, properly maintained basins protected from the swell, efficient services to the vessel (pilot, tugs, in-shore pilot), and modern electronic data interchange (EDI) and vessel traffic services (VTS), and so on. Above and beyond the service offered by the terminal operator, this means that the shipowner is sensitive to factors such as the level and reliability of the supporting services provided in the port zone. This identifies a first level of horizontal partnership within the port community, where the partners can be other public or private companies, and the port authority itself. Procedures implementing this partnership are formalized in contracts concluded between the port authority and the companies operating in the port zone, or via police and operating rules and regulations.

For a shipper, the relevant service is the end-toend transport service, using a transport chain in which transit via the port is merely one link, or more precisely a node. This means that the shipper is sensitive to the existence and competitiveness of the land transport modes serving the port as well as to the coordination of these services with the port services. This depends on a multitude of factors—controlled by numerous players—including the quality of road, rail, or inland waterway transport infrastructure; the quality of the services provided by the operators of the different modes of transport; and various regulatory measures (flag restriction, charges, and so forth). This leads to a second level of horizontal partnership, where the partners are of varying types and frequently remote from the port activities proper. This situation leads a number of transport companies to seek the integration of the port operator and land carrier business to achieve more efficient control of a larger part of the transport chain.

In addition, it is clear that the ways in which the government agencies carry out their functions in a port (for example, customs, veterinary and phytosanitary departments, or frontier police) represent another aspect of performance that is taken into account by customers when assessing the competitiveness of a particular port. In this context, for example, the European Union recognizes that the conditions under which customs control is exercised can distort the competitive situation (“Douane 2000” program). Similarly, a number of countries in Africa have recognized this problem and taken steps to harmonize their customs rules and practices (Central African States Customs Union).

It is therefore apparent that the port operator does not control all components of the global services delivered to its customers. The customer’s decision to use the operator’s services, then, also depends on factors external to the operator. These factors are under the control of numerous players with which the operator is not necessarily in direct contact. This situation creates a further commercial risk for the port operator and complicates the management task.

Long-Term Commitment

The port operator runs a business. Consequently, it seeks to maximize profit, although its primary objective is at least to achieve a minimum acceptable level of return on operations and investment to be able to cover its costs and to remunerate its lenders and sponsors. The investments that the operator makes typically display two special characteristics: they are substantial, indivisible, and have extended lifetimes, meaning that they can be depreciated and yield a proper return only over periods frequently exceeding 20 years, and they are “nonrecoverable,” either because they cannot be physically dismantled (for example, a coffer dam) or because the concessionaire does not own the infrastructure or equipment in question.

The justifiable demand of the operator for a reasonable return on investment necessarily requires that it have the right to exploit those investments for a sufficiently long period of time. The above-mentioned characteristics generally mean that an operator’s early withdrawal from a project would have substantial negative financial consequences. In some cases, though, a long-term commitment by the operator may also become a source of concern to the concessioning authority. It is therefore in the interests of both parties to seek a clear and stable legal arrangement by:


How To Use The Toolkit


Framework for Port Reform

The Evolution of Ports in a Competitive World

Alternative Port Management Structures and Ownership Models

Legal Tools for Port Reform

Financial Implications of Port Reform


Part A: Public-Private Partnerships in Ports

Characteristics of the Port Operator

Risk Management

Concluding Thoughts

Part B
Principles of Financial Modeling, Engineering, and Analysis

Measuring Economic Profitability from Perspective of the Concessioning Authority

Rating Risk from the Perspective of the Concession Holder

Financial Project Engineering

Financial Modeling of the Project


Port Regulation:
Overseeing the Economic Public Interest in Ports

Labor Reform and Related Social Issues

Implementing Port Reform


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