The shift in the role of the public sector from port services provider to landlord and regulator will require that the public sector develop new skills, institutional capabilities, and practices. These include regulating unfair or anticompetitive practices; designing and negotiating contracts with private providers of port services; monitoring performance and enforcing compliance with general standards; and creating processes for wider participation in developing and implementing transport policies and programs.
Changing the role of governments from having direct control over state-owned and operated ports to exercising indirect guidance through appropriate regulation and pricing policy is likely to put greater demands on institutional capabilities in developing and transition economies than can be satisfied immediately. In some cases, improving regulations is largely a matter of strengthening the existing monitoring and enforcement capability. In other cases, it involves setting up participatory development and appeal processes. In yet others, whether there is a need for transport-specific institutions will depend on how these issues are dealt with at an economywide level.
Regulation, however, must not become a straitjacket that stifles initiative. This would be a return to the past, where the port authorities were often so heavily regulated by the supervising authority that they could not take any initiatives or soon lost their drive to innovate, invest, and improve efficiency.
To help design an economic regulatory policy and avoid the pitfalls of heavy handed regulation, the following guidelines will be helpful:
In designing a port regulatory system to protect customers and the general public interest, governments need to keep several broad principles in mind. First, it is important to be realistic; a balance must be struck between what is ideal (that is, as close as possible to perfect competition) and what is achievable. Second, regulation should not be too restrictive or controlling. Overly restrictive regulation could deter private companies from providing services or limit their ability to introduce innovative and efficient practices. Regulation that seeks to control in detail how the private port operator runs its business risks defeating the central purpose of private sector participation—improving service delivery at the lowest possible cost to the user. Third, a regulatory system must be consistent with the institutional capabilities and resources of regulators.
Designing a port regulatory system to accommodate private sector participation can be broken down into eight basic steps:
| Step 1. | Specify the essential regulatory objectives and tasks. |
| Step 2. | Determine how far existing laws go toward assigning these tasks. |
| Step 3. | Determine institutional arrangements for regulatory oversight. |
| Step 4. | Consider how much regulatory discretion should be allowed. |
| Step 5. | Consider what regulatory tools and mechanisms will be used. |
| Step 6. | Specify port operating and financial performance indicators. |
| Step 7. | Establish an appeal process and procedures. |
| Step 8. | Incorporate regulatory details into laws and private sector contracts. |
Presented below is a discussion of issues to be considered in completing these steps, along with checklists and illustrations to provide guidance for the design of a port regulatory system.
Economic regulation of the port sector may have multiple objectives. These include:
The primary purpose of economic regulation is to control anticompetitive behavior resulting from shortcomings in the marketplace. It should be distinguished from technical, safety, environmental, and other forms of regulation, although in practice these may often be intertwined. Regulators typically have the power to adjudicate disputes between port operators or between port users and operators. This may be the most important function of a regulator when a sector is liberalized and an operator engages in anticompetitive behavior.
Competition regulators are normally in charge of verifying and enforcing compliance with antitrust legislation. Monitoring compliance with concession and lease terms and conditions is normally assigned to the port authority as the lessor of the facilities (or land). The port authority is also given the power to enact general norms and regulations governing operational practices within the port.
The competition regulator’s legislated powers typically authorize the regulator to require periodic submittals of tariff, financial, operational, and any other data necessary to support the regulator’s industry monitoring responsibilities; receive and issue complaints about alleged anticompetitive behavior; compel operators to provide proprietary and other data during investigative (discovery) proceedings; deliberate over cases of alleged violations of antitrust legislation; and impose remedies in the event that the regulator determines a violation occurred.
The objectives of regulation in most developing and transition countries, however, frequently are different. The level of profits earned by the private operator should be of secondary importance. The main challenge in many underdeveloped markets is to meet existing and latent demand for services. Hence, the primary objective of regulation should be to ensure that the operators (public or private) meet minimum performance standards, thereby taking action to close the gap between supply and demand. Consumers in most of these countries often prefer a high-priced service to no service at all. Furthermore, distributional objectives or concerns can, if needed, be addressed through subsidies or other mechanisms.
Depending on the objectives to be met, regulation may focus on tariff policy; direct and indirect subsidies; access to congested facilities; investment levels; performance targets; service quality and continuity; and so on. Most countries use a range of regulatory instruments (including specific stipulations in concession agreements or licenses and general rules) to govern the award of licenses, the oversight of the licensees, and more generally, the rights and obligations of users, competitors, and other parties.
In assessing how the broad regulatory framework will affect the design of a port reform regime and the attractiveness of that regime to the private sector, governments need to consider a wide range of constitutional provisions, laws, rules, regulations, and activities of government agencies. These include:
The minimum requirement for effective regulation is a framework of law pertaining to property rights, liability, conflict resolution, and contracting. There must also be capacity to enforce the laws and credible assurances that the laws will not be changed by political whim.
Box 12a and 12b presents the review and revision of port regulatory responsibilities in the state of Victoria, Australia. Further discussion of the legal aspects of the port regulatory system is presented in Module 4 of this Toolkit.
A key element in the design of a port regulatory system is determining the appropriate institution or institutions that should have primary responsibility for competition oversight. Items that need to be considered include:
Should governments set up a regulatory body for the port subsector, as has been done in Argentina, Colombia (Box 13), and the United Kingdom; a single agency for the transport sector as in the U.S. Surface Transportation Board; or a multisectoral agency for all or most infrastructure sectors, as in Australia? On the other hand, perhaps there should be no special regulatory body at all, as in New Zealand, where the Commerce Commission, the national competition agency, is in charge of economic regulation of the infrastructure sectors on the basis of the country’s general competition rules.
A strong case can be made for a multisectoral regulatory agency. A multisectoral agency should contribute a greater degree of coherence and consistency in the regulation of different sectors. It also allows lessons from one sector to be applied to others, creates administrative economies of scope, and may limit the risk of corruption or undue influence by a particular enterprise or ministry. It is particularly well suited for countries that lack the necessary financial, human, and administrative resources to equip separate agencies. Some argue that that it does not promote the development of indepth sector expertise, but this can be addressed by a degree of technical specialization within the agency. Basic legal, economic, and financial skills and experience are, in fact, largely common to various infrastructure sectors.
A new generation of transport agencies is being introduced, inspired by the integrated U.S. model and led by Bolivia and Peru. Both countries have regulatory agencies that are much more independent from policy makers. The agencies cover all transport sectors and have their own sources of funding. They rely on this funding to subcontract for skills that they do not have in house. To ensure good coordination between the agency monitoring competition and the transport regulator in Peru, one of the members of the Transport Regulation Board is also a member of the Competition Commission.
A typical regulatory approach is one in which countries monitor the port sector through an agency established to monitor and enforce antitrust law generally. Mexico, for example, has the Federal Competition Commission as the agency with primary responsibility for competition law. The Swedish and British counterparts are the Swedish Competition Authority and the Office of the Director General of Fair Trading, while in the United States it is the Federal Trade Commission.
The nonsectoral emphasis of these countries assures uniform application of competition policy across all sectors and allows consideration of the impact of corrective or enforcement action within one sector on another. Moreover, antitrust monitoring and enforcement is distinctly separated from other sector-specific regulatory aspects; this assures neutrality or objectivity and reduces the possibilities of regulatory capture sometimes associated with sector-specific regulatory agencies.
In spite of such advantages, having an antitrust agency responsible for all sectors is a significant burden on the agency itself because of the array of cases that it may need to pursue. Moreover, specialists assigned to particular cases may not have specific industry expertise; specialists with backgrounds in commercial advertising practices, for example, may be assigned to pricing collusion cases related to the automobile industry; individuals who are experts in grocery store pricing practices may be assigned to maritime terminal operator cases. This approach means that a cadre of specialists will not be developed to the extent that assurances can be given that they will make a decision based on analyses reflecting a thorough understanding of the sector. An alternative approach, therefore, could be to establish an antitrust practices office within an agency already responsible for planning, development, and regulation of the sector, but with ratemaking independence.
How can the regulatory entity best encourage direct participation or input from port users?
Consumers, both individuals and businesses, are not typically heavily involved in the port regulatory process, even though their input can be critical to efficient service when the regulator has only limited means of acquiring information. Final consumers are often the best monitors of service quality. Ways to obtain consumer feedback include establishing user advisory boards or having user representatives on port authority boards.
While providing a formal basis for user feedback can be useful to operational regulators, applying it to an antitrust regulator should be discouraged. User input, or input by other interested parties, will often be sought by regulators during the investigation associated with an alleged violation. Under these circumstances, alleged violators, complainants, and other interested parties are typically given the opportunity to express their views and present evidence during the case disposition process. If a port user sits as a regulator, as the Sri Lankan legislation proposes, this creates the potential for a user to sit in judgment over a customer or another competitor, giving rise to conflicts of interest (Box 14).
Advisory bodies should be considered seriously as sources of input to the port regulatory entity. They offer a degree of transparency and inject analysis and debate in discussions that previously would have taken place in the secrecy of a ministerial cabinet. The advisory body can see its role and influence increase when the authority competent to make a specific decision is not only forced to seek its advice and take it into account, but also to justify any departure from such advice. Furthermore, for certain matters, the competent authority may not be allowed to reach a decision going against the opinion or advice received.
How can the regulatory entity’s independence be protected from short-term political pressures and from the undue influence of port operators and service providers? The independence of a regulatory body is worth little unless it is upheld against undue influence by the regulated industry or by unreasonable political intervention. Cases of regulatory capture by the industry are not uncommon. The problem is particularly acute when regulatory agencies are set up as part of the civil service in countries where staff is not adequately compensated. By removing regulatory staff from civil service constraints, governments may remunerate them in ways that better protect them from industry capture and that allow the agency to attract qualified candidates, hence enhancing the “professionalization” of the regulatory function.
Rules need to be laid down concerning potential conflicts of interest among the regulator’s staff (for example, by prohibiting former staff of the regulatory agency from working for a regulated operator for a specified period after leaving the agency). If independence from undue industry influence is to be achieved, then competition and operational regulation should be assigned to two different entities. Traditionally, a public port entity had full responsibility for administration and operation of the port sector. This included regulating operational practices applicable to navigation and vessel calls as well as providing the full range of cargo handling and vessel services. In a privatized setting, the port authority (landlord form) will retain operational regulation responsibility in a privatized setting, along with other functions associated with its ownership of facilities (for example, infrastructure maintenance, lease management, and monitoring for compliance).
Today’s modern port authorities have a certain degree of independence, many having the authority to engage in contracting and leasing, setting their own capital and operating budgets, tariff setting (for port authority charges), and hiring and firing, all without the need for approval from other government entities. In the discharge of many of these duties, port authorities are in contact with port operators on a frequent basis.
Similar independence can be accorded the competition regulation agency. Box 15 enumerates a number of strategies that can be used to ensure a more independent agency culture. Two of the most critical factors are independence relative to budgeting and case disposition. As Box 15 notes, it is imperative that the competition agency develop budget independence, as the power and independence of the agency can be limited by the budget process itself. Agencies require funds to operate, and executive and legislative review can exert powerful influence over agency actions. Retribution, in the form of budget cuts, can be taken against regulators if their decisions or functions are politically unpopular. It is possible, therefore, for the competition regulatory body to enhance its independence by securing at least a portion of its budget from fees assessed on port operators.
A critical aspect of regulatory independence is the ability to reach decisions on cases based on a fully developed public record. Such decisions should only be affected by the evidence and data collected in the course of the agency’s monitoring responsibilities and in investigating complaints, which may include testimony as well as data collection and review of proprietary information that may be requested of the alleged violator. This suggests also that the industry need not be informed of which professionals within the agency are assigned to do the analysis of a particular case, although the agency would assign a contact person during the course of case disposition. This anonymity can contribute toward the independence of decisions related to a case and reduce the opportunity for industry and political forces to unduly influence them.
Independence needs to be reconciled with measures to ensure that the regulator is accountable for its actions. Checks and balances are required to ensure that the regulator does not stray from its mandate, engage in corrupt practices, or become grossly inefficient (Box 16).
How can requirements for staffing and technical capabilities be met? Many developing countries confront a challenge in assembling experienced professionals to staff a regulatory agency. Regulatory agencies have limited resources and are often unable to attract qualified people. The ability of independent agencies to sidestep civil service salary restrictions and to have access to earmarked funding makes it possible to recruit and retain better-qualified staff and to hire external consultants. Much of the work traditionally performed by regulators lends itself very well to contracting out to private experts. Complex regulatory functions need to be performed professionally. When limited administrative capacity is a constraint, at least in the short and medium term, contracting out of regulatory tasks should be considered.
Governments and regulators can, and often do, hire consultants, advisers and experts to assist them in all aspects of their regulatory tasks. Such contracting out can be taken one step further and formalized through, for example, performance audits or certifications performed by independent verification companies under contract with the regulator. Auditors could be asked to certify that information provided by the regulated port operators (including performance targets) is fair and reliable. The verification company will base this opinion on checks that they have performed and on their assessment of the systems the companies established to produce the required information. In addition, they could be asked to certify that the regulated company is in compliance with the legislation in effect, and if not, to determine the degree of noncompliance and the factors that may have contributed to it. Their task could also include surveys of port user satisfaction.
Finally, verification companies could measure the regulated companies’ performance against key parameters, prepare time series showing trends, and compare these results with international norms. But, performance comparisons require highly knowledgeable experts to do proper performance benchmarking. For example, to explain why a terminal achieving 20 container moves per hour may be a much better performer than a terminal achieving 25 container moves per hour requires in-depth knowledge of the business and full availability of all required information. None of these functions imply any discretionary decision making on the part of the auditor. What such audits would do, however, is provide the decision makers with a sound analytical basis for their decisions.
A key question in designing a port regulatory system is to determine how much discretion should be granted to regulators. Discretion helps regulators respond flexibly to changing conditions, but it also creates regulatory risks for private partners and may, therefore, discourage their participation or raise the price of their involvement. A delicate balance needs to be struck between allowing regulatory discretion and developing very tightly specified contracts that will have to be renegotiated when unexpected changes occur.
Once a contract has been awarded to a private company, it is that company’s job to run the business. This may seem an obvious point, but experience suggests that great care is needed to ensure that regulators do not interfere in the day-to-day management of the port. Regulations should focus on desirable public interest outcomes, not on the specific steps taken to achieve these outcomes. For example, it is the regulator’s task to monitor whether the stated performance standards are met. It is the operator’s task to decide what technical measures and operating practices are needed to meet the standard. When a government specifies the regulator’s duties and decides on the appropriate staffing and skill mix for the regulatory agency, it must have a clear understanding of the dividing line between regulation and operational management.
When discretion is retained on tariffs or other issues of concern to investors, the challenge is to manage it in a way that minimizes the risk of misuse. The exercise of discretion needs to be insulated from short-term political pressures and other improper influences and to be based on competent analysis. Entrusting regulatory discretion to ministers with broad authority often will not meet these tests, particularly when the government continues to own other port enterprises. In this case, there will be no arm’s-length relationship between the regulator and the government-controlled firm, and there may be concerns that, in exercising discretion, ministers will favor the state enterprise over rival private firms. But even if the government has no ownership role, ministers will still be subject to short-term political pressures and changes in regulatory policy. Restrictive civil service rules in many countries also make it difficult for ministries to attract and retain wellqualified professional staff. What is required is an agent at arm’s length from political authorities, regulated port firms, and consumers. Organizational autonomy helps to foster the requisite expertise and preserve those spatial relationships.
Before they can calculate the price they are prepared to offer, investors will want to know the regulatory system under which the company will operate. They will also form a view on how this regime can be expected to evolve in the years ahead. To reassure investors, the government may have to promise not to alter the regulatory system substantially, or at least not to do so to the detriment of the investors. To be effective, however, this commitment needs to be credible. Credibility could be enhanced by provisions in the privatization agreements allowing the company to automatically adjust its tariffs based on a given formula, or by a provision that the government will compensate the operator for any negative impact that results from government rejection or delay of a contractually agreed tariff increase.
The pricing regime, particularly the tariffs and their adjustment formula, is typically a cornerstone of the economic regulatory system. It will determine the return investors can expect and the incentives they may receive to provide quality service.
The chosen tariff formula must be one that can be effectively applied by the competent authority. This presupposes, in particular, that the information needed by the authority to perform its function is available, that the authority can require the regulated enterprise to disclose such information, and that it can check its accuracy and reliability. The degree of complexity of the price adjustment mechanism thus account for the regulatory agency’s technical resources and capacity. In other words, the regulatory mechanism should be tailored to the specific characteristics and constraints of the country and sector concerned.
Traditionally, governments have relied on rateof- return regulation as the primary instrument of economic regulation. In other words, governments have generally guaranteed to port operators that they would recover their costs (within very general guidelines) and get a mark-up to reward investors; thus, the label cost-plus regime. These regimes, however, do not give strong incentives to operators to cut costs. The introduction in the United Kingdom (U.K.) of price caps changed this by showing that the regulatory regime could be designed to minimize costs. Price caps allow the operators to keep a portion of the cost savings they realized, with part of these savings being shared with port users, and sometimes governments. In many countries, hybrid systems have been developed, which result in some degree of immediate rent sharing at the beginning of the period for private sector operations.
Rate-of-return regulation allows the regulated company to charge prices that would cover its operating costs and give it a fair return on the fair value of its capital. While rate-of-return regulation gives operators little incentive to cut costs, it protects investors in risky environments and may persuade some of them to bid for deals they would not otherwise have considered. A problem with this regime is its demanding information requirements. To allow regulators to determine reasonable rates of return, the regime places them in a position to make decisions about the wisdom of investments and operating procedures, confusing the role of managers and regulators. Box 17 presents a comparison of the benefits of price caps and rate-of-return regulation.
Price-basket controls such as the RPI-X formula used in the U.K. limit tariff and price increases to the increase in the retail price index (RPI) of a 12-month period minus a percentage that takes into account expected productivity gains.
One difference between the RPI-X and the rate-of- return formula is that the administrative burden of the former is lighter because it is less dependent on information supplied by the regulated enterprise itself, it requires less verification on the part of the regulator, and it allows the regulator’s discretionary interventions to be spaced more widely. Some argue, on the other hand, that the administrative burden of price caps may be higher rather than lower because in the end regulators need to perform the same analysis as required for rate-of-return regulation and they must forecast productivity improvements over the next four or five years.
In many ways, the biggest difference between price controls and rate-of-return regulation is one of emphasis. Regulators must not ignore the rate of return when they reset a company’s price cap, but the price cap is an indirect, rather than a direct, control on the rate of return. Rate-of-return regulation has depended on formulae designed to ensure that the regulated company receives the right amount of revenue, and it has often been bogged down in legal arguments. The formulae are only a guide to the level of the price control, however, and still leave room for judgment. The regulator must decide whether to set prices so that they equal the company’s predicted costs at the end of the review period or over the period as a whole. The regulator may look at the company’s cash flow, as well as the discounted value of its costs and revenues. The regulator may use formulae to check the impact of alternative assumptions about factors such as the growth of demand, and might adopt a price control that seems slightly generous on the base case because otherwise the company would be in a difficult position if the alternative assumption became true. Finally, if a company knows that a formula will be used in a mechanistic manner, it will have an incentive to attempt to manipulate the inputs to the formula. It may be that giving some discretion to the regulator can reduce this incentive. This discretion should not be excessive, however, because the company must remain confident that it can recoup its investment, but it should also allow the regulator to use its judgment of what is fair under a particular set of circumstances, rather than simply blindly following a set of rules.
Revenue-yield controls allow the regulated company to set tariffs as long as the total revenue or revenue per unit of activity stays within limits established by the regulatory body. An advantage of this approach is that the regulator does not have to specify or review individual port tariffs. Disadvantages include the possible fluctuation of tariffs as the regulated firm seeks to earn the maximum revenues permitted, the complexity of setting the maximum allowable revenue per unit of activity, and the difficulty in forecasting demand if the upper limit is based on total revenues.
If several ports or companies within a port are regulated together, the regulator may be able to make “yardstick” comparisons among them. If all entities face the same operating conditions, they could, in theory, achieve similar levels of costs. The regulator then could calculate the average cost among them (either over the whole group or among the most efficient companies) and set price limits based on this level (although one should take into account that terminals have very different sizes and hence very different unit costs). Each company, then, has an incentive to reduce its costs, since this will not affect its allowed revenues.
In an ideal competitive setting, market dynamics will force ports to offer efficient services at the lowest possible costs. But in many cases, port competition may be insufficient to induce a positive effect on port performance. For reasons explained elsewhere in this Toolkit, a variety of factors, particularly limited cargo volumes and the required levels of specialization (that is, limited cargo volumes for the different terminals or port facilities), will affect a country’s options to encourage competition. Low cargo volumes generally will either greatly restrict the number of terminal operators providing services, or may enable competition for vessel stevedoring while retaining the public sector’s monopoly over the yard or storage operation. Therefore, in environments where “ideal” levels of competition cannot be established, regulators must seek ways to replicate the conditions that discipline competitive behavior. One of these ways is through regulation of service performance.
Regulators, typically through provisions in concession, operating, or lease agreements, will incorporate performance standards (or minimum thresholds) expected of the concession holder during the life of the agreement. These thresholds may change in accord with the investment obligations scheduled during the term of the agreement. For example, when a facility is first turned over to the operator, performance standards should consider the technology available in the port at the time of the agreement. This effectively means that the performance standards should be regularly reconsidered and possibly revised.
When considering the use of performance standards, it is helpful to view port services as a production process. This process refers to the range of services provided to the vessel and cargo from the port’s entrance buoy to the berth and on to the gate, and then from the gate to the berth and back out through the port’s entrance buoy. Box 18 shows the production process for a typical port. At the port’s buoy, the marine pilot will board the vessel, which may or may not anchor, depending on berth availability. The vessel then proceeds to the berth, where a tug will assist in the vessel’s berthing operation. Line handlers stand ready to tie the vessel to the berth, following which gangs will appear to provide the vessel with stevedoring and quay cargo handling services. Once the loading and discharging and lashing operations are complete, the line handlers will reappear to untie the lines, the vessel will receive a tug assist once again in the deberthing operation, and a pilot will reboard the vessel to guide it to the entrance buoy for the vessel’s departure from the port.
The vessel may be delayed at each step in the production process, which in turn affects the total time (referred to as port time) a vessel spends in the port. For example, on arrival at the entrance buoy, the vessel may have to wait for the pilot’s arrival, a berth may not be available for the vessel, a tug may not be readily available for the berthing operation, stevedoring and cargo handling gangs may not be standing ready at the vessel’s assigned berth, a crane may not be available for the vessel’s hatch removal, a crane may break down during the loading or discharge operation, there may be nonoperational times (that is, times when work cannot proceed because gangs cannot be recruited as, for example, in ports where only one or two shifts per day are worked or where no work is carried out Sundays), and so on. Each of these events is associated with times, which, when summed, will result in the vessel’s total time in port. In addition to these, the vessel may be vulnerable to a number of uncontrollable factors that may substantially increase the vessel’s port time, such as having to wait for high tide at the entrance channel, inclement weather, or labor disruptions.
In the port planning process, analysts will frequently assess the relative performance of their ports against other ports in the region. They do this by developing a series of standardized indicators that reflect the degree of efficiency at each step of the port operation. As Box 18 shows, the times at which each step starts and stops are documented, allowing for the calculation of a variety of parameters, also shown in Box 18, that the industry uses to calculate performance.
There needs to be a clear nexus between the parameters being measured and the tasks being performed by and under the control of the operator. The scope of services provided by the operator is dictated by the concession agreement. In exceptional cases, an operator may be given a concession covering all of the services between the entrance buoy and the gate. This means that the operator will provide pilotage and tug assist as well as all of the services conducted within the confines of the terminal. This would suggest that the regulator can reasonably apply indicators that include these services. The regulator, therefore, must be careful in its selection of performance measures. The regulator should be sensitive to what is controllable and what is not from an operator’s point of view. For example, the “port accessibility” parameter may be affected by the government’s efficiency for clearing ship’s documentation. The time spent for this purpose can greatly skew the performance of the operator, who is responsible for other elements that define port accessibility, such as pilotage and tug services. Therefore, what is acceptable performance from the regulator’s point of view should consider only the factors that the operator can control. On the other hand, the terminal operator may be given responsibility only for services rendered between berth and gate, meaning that the regulator would exclude port accessibility as a parameter. One should not lose sight of the fact that indicators will only work if they have been set for specific tasks or operations and take into account the many factors that can influence performance.
An important factor for a country’s shippers is vessel service availability, which comprises connectivity and frequency. Connectivity refers to the number of times a shipper’s cargo is transferred or otherwise handled en route to its destination. Generally, the greater number of transshipment moves the cargo undergoes, the more time the cargo will take to reach its final destination. Frequency refers to the number of calls a vessel makes to the port within a prescribed period of time, usually referred to as weekly, twice-weekly, biweekly, fortnightly, or ten-day services (in the case of liner and feeder service trades). Increasingly, to maximize the utilization of their largest and most expensive vessels, shipping lines use a system of feeder vessels and transshipment ports to sort and redirect cargo. From a shipper’s perspective, this may improve (increased frequency) or degrade (increased transit time and damage) service.
Assuming volumes justify it, a port may benefit from both connectivity and frequency if it can minimize the vessel’s port time. If the carrier is subjected to congestion or delays, then it may avoid a call, minimize its calls, or impose penalty charges as part of its freight bill to shippers. Therefore, performance clauses within the concession agreement should focus on indicators that address the vessel’s time in port (or at the terminal, depending on the operator’s responsibility). As earlier noted, the clauses should also recognize the responsibility and span of control accorded to the operator in the concession agreement. For example, a terminal operator should not be penalized if port time was less than desirable because of inefficiencies associated with pilotage (which the operator does not provide) and not the operation at the berth.
Regulators should be concerned with a vessel’s time in port, regardless of the operator’s responsibility, if for no other reason than to have the ability to ascertain the causes of undue vessel time. In terms of imposing performance standards on operators, however, the regulator should focus on what occurs at the berth, as the vast majority of countries that have undertaken port privatization have awarded concessions to operators for activities at the berth and within the terminal’s backup area. Indicators that focus on berth performance also reflect what is happening on the vessel (while at berth) as well as in the backup area of the terminal. 28 Such measures should be general in that the regulator is concerned with the operator’s overall productivity, and not with the productivity of every subactivity and the incremental times associated with them.
For concession agreements, the regulator should consider incorporating gross berth productivity, which refers to the number of moves (in the case of containers) or tons (in the case of bulk cargoes) handled in a unit of time, usually expressed in moves per hour or tons per hour. In addition to the time in which the vessel and its cargo are actually worked, gross berth time includes the time the vessel waits for the gang, lashing and unlashing time, and other times associated with the preparation required to perform each activity.
The technology used is an important factor in determining what the number of moves per hour should be. For example, a terminal with no ship-to-shore crane must rely on the ship’s own gear to handle the cargo. In the container trades, acceptable productivity levels may be on the order of 10–12 moves per gross hour per crane for such operations. In a port with mobile cranes, expected productivity can be 15–20 moves per gross hour per crane, while gantry cranes can operate at 20–30 moves per gross hour per crane and higher.
Establishing such thresholds for bulk handling facilities is more difficult. There is a plethora of technologies available for solid bulk handling that offer a wide productivity range. For this reason, the regulator may consider regulating in accord with berth congestion factor or ship waiting rate, which compares the time a ship had to wait for a berth compared to the time it actually spent at berth. Simply put, berth occupancy denotes the total time a berth is occupied as a function of total available berth hours. An accepted standard would be a waiting rate that does not exceed 5 percent for a full container vessel, does not exceed 10 percent for a general cargo or breakbulk vessel, and 10–20 percent for a bulk vessel. In the event an operator exceeds this threshold, the operator could be required to invest in more productive technology to reduce the time that vessel would have to wait for a berth.
The performance threshold used by the regulator should, therefore, take into account the technology available at the port, or envisioned as part of the required investment program incorporated into concession agreements. In this regard, it is conceivable that the same agreement may have different performance thresholds by berth in accord with the port’s capabilities at different stages of an investment program. This is because a port may have different technologies available at different berths at different times during the concession period, or vessels may simply choose not to use gantry cranes, which are relatively costly for smaller vessels. Box 19 lists some of the more common indicators used to measure port performance and that may be appropriate for inclusion in concession agreements.
The design of an appeals regime should be a function of the specific institutional set-up and legal traditions of a country. Courts may play a role where they have or can reasonably acquire the expertise, integrity, and efficiency needed to settle appeals on regulatory matters. Generally, in the design of a regulatory framework, the interests of speed and certainty (which lead to denying appeals against regulatory decisions or limiting the grounds and time frame for filing such appeals) should be balanced against those of fairness toward regulated entities (and consumers) and accountability of the regulator.
In situations where private port investors and operators are concerned that local conditions may not provide a competent, fair, and impartial appeal, the regulatory framework may specify that such appeals will be adjudicated by an agreed-on international arbiter (Box 20).
Often, a concession agreement or management contract contains most of the regulatory provisions governing the performance of the private sector partner to the contract. In deciding what regulatory elements the contract should cover and in what depth, two questions arise31: Is it possible and desirable to encompass all the necessary regulatory provisions within the contract? If so, what degree of regulatory discretion should be available?
Though it is sometimes argued that a tightly written contract can remove the need for direct regulation, this is rarely the case. Even for a short-term management contract, someone needs to be able to monitor performance against the contract, have the authority to allow minor variations in contract specifications, and arbitrate disputes between the company and its customers and between the government and the contractor. And for longerterm concession and build-operate-transfer (BOT) contracts, it is usually neither possible nor desirable to have highly specified contracts, especially in countries undergoing rapid social, political, or economic change (although one should aim to have as much detailed specification in the contract as reasonably possible, therefore limiting the degree of uncertainty for investors, users, and governments alike). detailed specification in the contract as reasonably possible, therefore limiting the degree of uncertainty for investors, users, and governments alike).
Detailed, unambiguous, and very specific contract conditions do have advantages, especially in countries that do not yet have fully developed maritime and port legislation (see Box 21). In particular, they help protect the private company from politically motivated and frequent changes in service requirements. By reducing revenue risk, such protection may help attract more bidders for the contract, reduce the cost of capital, and help the government strike a more advantageous bargain.
The experience generally has been that weak regulatory bodies have been given too much discretion without sufficient policy guidance to make decisions on matters left out of the contracts. In developing countries, the combination of weak regulatory bodies and poorly written contracts has resulted in an extremely large percentage of contracts being renegotiated. The losers in these negotiations have usually been the taxpayers, as governments often end up granting the private parties significant financial concessions.
One solution is to use rule-based contracts because they tend to make regulation easier in the face of significant uncertainty. The challenge is to develop and incorporate rules that are fair and have reasonable information requirements. This is one of the advantages of price cap regulation.
The control of prices charged by a regulated firm is often characterized as a contest between the regulator and the service provider in which the two players do not share the same information. The asymmetry of information places the regulator at a disadvantage. Thus the regulator must define its information requirements and data processes early in the design of the concession contract and transaction. And it should take advantage of the government’s leverage during bidding to extract information from concessionaires as well as commitments to continue providing flows of information to aid tariff reviews.
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