Labor Toolkit

Implementing Port Reform


For the next step in the strategic preparation process, the IWG should define the regulatory principles applicable to the sector and the methods to be employed in implementing reform. This work is complementary to the organizational arrangements, and usually has a bearing on the legal provisions to be developed as part of the new sectoral legislative framework. On the basis on the institutional and management framework decided upon as part of the strategic preparation phase, the IWG can then turn its attention to the establishment of the public entities that will be in charge of regulating and monitoring the sector, and the definition of their mandates.

Regulatory Principles

Following the assessment of the competitive situation in the sector (from both a national and regional perspective), the IWG should assess the need for an economic regulatory mechanism. If such a mechanism is determined to be necessary, the mandate, operating rules, and composition of the regulatory body should be established (see Module 6 for guidance in this regard). In all cases, regulatory principles will have to be drafted or updated to take into account the consequences of the new operational framework and of technological changes.

Port Authorities and Consultations

As part of the reform process, the status and mandates of the public port authorities will be redefined, along with their missions and responsibilities. Reporting and monitoring relationships with line ministries and private operators, respectively, should be defined precisely, together with the appropriate implementation guidelines. In doing so, particular attention should be paid to the establishment of official consultation procedures between the private port and maritime community and the local public monitoring bodies (for example, the public port authorities). These consultation procedures will be important in ensuring that customers’ concerns and suggestions regarding the functioning of the ports can be efficiently channeled to the ports’ management boards or to the sector regulatory body.

Public Infrastructure Pricing

The principles for port public infrastructure pricing will also have to be agreed upon at this stage. Recently, a great deal of attention has been devoted to this very issue within the European Union (EU), resulting in the publication of two papers of significant interest: a Green Paper on “Sea Ports and Maritime Infrastructure,” and a White Paper on “Fair Payment for Infrastructure Use: A Phased Approach to a Common Transport Infrastructure Charging Framework in the EU.” Those papers, following the conclusions of an earlier study, European Sea Port Policy, 1993, basically endorse the view that there is no fundamental difference between investments in port infrastructure and other capital-intensive investments in industrial complexes. Therefore, there should be no reason for adopting a completely different approach to port investments, and consequently no reason why direct users should not bear the costs of such investments. The study went on to suggest that the introduction of market principles in infrastructure pricing would be the most effective remedy to avoid the risk of creating wasteful overcapacity and possible distortions of trade flows (except in the case of pricing maritime access and protection infrastructure).

This distinction made between port access and protection infrastructure (which can take the form of basic infrastructure and operational infrastructure) and other forms of port-related investments relates well to the new sharing of responsibilities between public authorities (as owners and developers of basic infrastructure) and private service providers (as operators or concessionaires and licensees or investors in operational infrastructure).

The result is that operational infrastructure (for example, berths) increasingly is being priced on commercial terms. The commercial transaction may be structured as a build-operate-transfer (BOT) or a build-own-operate-transfer (BOOT) concession agreement, where the operator or investor will include its capital cost in the cargo handling charges to be levied on its customers. Or, the transaction may be structured as an operating concession (where the operational infrastructure already exists), where the port authority includes in the concession fee the amount required to cover the full depreciation of its previous investment, a cost that the concessionaire will again transfer to its own customers through its charges for services. The key to getting a fair tariff for the customer hinges on the competitive conditions prevailing for awarding the contact, and, sometimes, on the award criteria themselves. Generally, award criteria should rely predominantly on maximizing total discounted revenues to the port authority in cases where strong competition exists for the services to be concessioned, as well as on minimizing the cost for the customer in cases where competition is deemed weak or nonexistent.

Pricing of basic port infrastructure (mostly access and protection assets such as channels, breakwaters, and navigation aids) presents a different challenge. Most of these assets have unusually lengthy depreciation periods. It is common in official depreciation schedules for financially autonomous port authorities to find breakwaters being depreciated on a 80-year, sometimes even a 100-year, basis. This feature of basic port infrastructure raises two issues. First, these depreciation periods are, in the best of cases, about five to six times longer than any available commercial financing in the market (when there is a market for financing long-term infrastructure). And second, technical obsolescence (for example, insufficient access draft) may occur well before the end of these depreciation periods, effectively rendering worthless the original investment.

The EU papers referenced above list three wellknown pricing options for basic infrastructure:

The research recommends an infrastructure charging policy based on long-term marginal costs, which would cover the cost of new capital and operating and external costs of infrastructure use. In other words, port basic infrastructure charges should be set in line with marginal costs, which would also take into account the continuing need for new investments and the existence of externalities relating to environment, congestion, and accidents.

Public landlord port authorities increasingly are organized as autonomous financial entities required to recover their full costs to the largest possible extent. As a consequence, these authorities have been confronted with the question of whether full cost recovery of basic infrastructure investments through user charges would weaken their competitiveness in the market to the point of seriously undermining their attainment of public policy objectives. Government authorities, from their perspective, while eager to curtail budget contributions to port infrastructure investments, sometimes worry that increased port user charges may divert traffic flows to other routes, which might prove economically disadvantageous for the country as a whole. Competitiveness issues in relation to port infrastructure charges are certainly worthy of attention, but must also be seen in perspective—on average, they amount to only 10 percent of the costs incurred during a port transit. This may be critical for ports facing strong competition (particularly when competing for transshipment traffic), but relatively minor in other circumstances. Of course, because of specific geographic settings, some ports may face higher than average access and protection infrastructure costs (for example, periodic maintenance of a long entrance channel).

The level of cost recovery required for basic infrastructure is contingent not only on the amount invested, but also on the terms under which it is financed. Because balanced budgets are now a must for port authorities, financing schemes will heavily drive the depreciation schedule built into infrastructure charges (that is, amortization schedules will supersede technical or economic life depreciation formulas). Commercial financing of infrastructure, when available, offers much shorter maturities than the economic life of the port assets to be financed, therefore this would tend to drive up port charges significantly. To mitigate this phenomenon, governments sometimes agree to finance part of the access and protection costs of ports as part of the national budget, which effectively splits basic infrastructure costs between the user and the taxpayer. An example of one approach is in the United States, where dredging of access to ports from the high seas is carried out by the U.S. Corps of Engineers and is funded through the federal budget (while dredging of port basins is left to the port authorities). Another example is an approach taken in France, where the 1965 Law on Autonomous Port Authorities split port infrastructure costs between the port authority and the state budget, the latter bearing 100 percent of access dredging costs and 80 percent of protection costs (breakwaters). From an accounting standpoint, French port authorities register the government’s contribution in their balance sheets as a subsidy, which is renewable, and, consequently, not depreciated. However, scarcity of budget resources in many countries is making these arrangements increasingly difficult to sustain, and while infrastructure subsidies of this kind may still exist, more often than not there is no guarantee that such subsidies will continue. Consequently, port authorities must fully depreciate the investment, subsidies included. These port authorities still benefit from the subsidy scheme, though, since their tariffs can reflect the depreciation of assets over their full economic lives.

Finally, there is the question of allocating these infrastructure charges between the ship and the cargo. In the past 50 years, a number of port authorities and governments have attempted to rationalize this allocation through analytical methods (for example, the Freas Formula in the United States), and later through cost accounting techniques. Historically, when infrastructure charges were actually split between ship dues and cargo dues, cargo ended up paying a much higher proportion of the total cost than the ship. Notwithstanding any formula-embedded rationale, this situation may also have had to do with the respective bargaining power of the shipowners on one side (usually well organized) compared to the shippers on the other (typically not well organized and often much less able to negotiate effectively with port authorities).

This debate tends to become somewhat academic today, since in well-functioning shipping markets infrastructure charges assessed against vessels ultimately transfer back to shippers through the freight rates. Indeed, there is some rationale for the port to assess charges only against vessels, the physical characteristics of which largely determine the size and cost of the basic infrastructure required to accommodate them. There is, therefore, some logic in establishing a schedule of infrastructure dues based on those physical characteristics rather than on the characteristics of the cargo.

Labor Redeployment

Usually, port sector reform will entail a significant adjustment in the number and qualifications of port workers, both dockworkers and clerical staff. Module 7 provides a detailed overview of how to address this issue effectively. Authorities should organize interactions with the unions early on in the reform process to give reform the best chance for success. Areas that need to be discussed with unions include staff redeployment, retraining, and procedures and compensation principles in case redundancies prove unavoidable.

Contract Management Principles and Procedures

Once the mandates of all public entities are clearly defined, explicit procedures and regulations governing the award, management, and monitoring of contracts with private sector partners will have to be drafted. These procedures should be widely publicized through workshops organized with all domestic stakeholders and be open to interested foreign investors and operators so that the rules of the game are clear to all potential players.


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

Port Regulation:
Overseeing the Economic Public Interest in Ports

Labor Reform and Related Social Issues

Implementing Port Reform

Strategic Preparation: The Interministerial Working Group

Redefinition of Authorities and Powers

Legal Adaptation

Transaction Preparation


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