Module 3: Alternative Port Management Structures and Ownership ...

ALTERNATIVE PORTMANAGEMENT STRUCTURES AND OWNERSHIP MODELS

M O D U L E 3

PORT REFORMTOOLKITSECOND EDITION

THE WORLD BANK

© 2007 The International Bank for Reconstruction and Development / The World Bank

All rights reserved.

The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of Public-Private Infrastructure Advisory Facility (PPIAF) or the Board of Executive Directors of the World Bank or the governments they represent.

Neither PPIAF nor the World Bank guarantees the accuracy of the data included in this work. The boundaries, colors,denominations, and other information shown on any map in this work do not imply any judgment on the part of PPIAF or theWorld Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

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For all other queries on rights and licenses, including subsidiary rights, please contact the Office of the Publisher, World Bank,1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected].

ISBN-10: 0-8213-6607-6ISBN-13: 978-0-8213-6607-3eISBN: 0-8213-6608-4eISBN-13: 978-0-8213-6608-0DOI: 10.1596/978-0-8213-6607-3

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MODULE THREE CONTENTS1. Objectives and Overview 692. Evolution of Port Institutional Frameworks 703. Port Functions, Services, and Administration Models 73

3.1. Interaction with Port Cities 763.2. Role of a Port Authority 773.3. Role of Port Operators 783.4. Roles of a Transport Ministry 783.5. Port Functions 803.6. Port Administration Models 81

3.6.1. Service Ports 823.6.2. Tool Ports 823.6.3. Landlord Ports 833.6.4. Fully Privatized Ports 83

3.7. Globalization of Terminal Operations 843.8. Port Management and Competition 873.9. Port Sector Regulator 893.10. Value-Added Services 89

4. Port Finance Overview 924.1. Financing Port Projects 934.2. Financing Ports: From a Lender’s Point of View 974.3. Public-Private Partnerships 98

5. Port Reform Modalities 995.1. Strategies and Reform Options 100

5.1.1. Modernization of Port Administration 1015.1.2. Liberalization 1015.1.3. Commercialization 1025.1.4. Corporatization of Terminals 1045.1.5. Corporatization of a Port Authority 1065.1.6. Privatization 107

6. Reform Tools 1096.1. Contracting Out and Use of Management Contracts 1096.2. Concession Arrangements 110

6.2.1. Leasehold Agreements 1126.2.2. Concession Agreements 114

6.2.2.1. Master Concession 1166.2.2.2. BOT Arrangements 117

6.3. Comprehensive Privatization 1206.4. Ports as Transport Chain Facilitators 123

7. Marine Services and Port Reform 1247.1. Harbormaster’s Function 1257.2. Pilotage 1267.3. Tugboat Operations 1267.4. Mooring Services 1277.5. Vessel Traffic Services and Aids to Navigation 1277.6. Other Marine Services 128

References 130

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BOXESBox 1: “White Elephants” in Port Development 71Box 2: Institutional Formats of Greenfield Ports 73Box 3: Examples of Port Economic Multiplier Effects 74Box 4: Value-Added Development Efforts in the Port of Rotterdam 75Box 5: Strengths and Weaknesses of Port Management Models 84Box 6: Basic Port Management Models 85Box 7: Top 10 Carriers as of June 2006 86Box 8: Global Terminal Operators 2005 Throughput League Table 87Box 9: Portfolio of the Largest Terminal Operators as of June 2005 88Box 10: Elements Influencing Interport Competition 90Box 11: Overview of Value-Added Services in Ports 91Box 12: Potential for VAL and VAF 92Box 13: European Rules on Port Subsidies 94Box 14: Categories of Port Assets 95Box 15: Multiple Terminal Ownership in Sri Lanka 96Box 16: Reasons for Pursuing Port Reform 99Box 17: Creation of Commercialized Port Authorities in China 104Box 18: The Port of Aqaba: Corporatization and Privatization 108Box 19: The Experience of the Hanseatic Landlord Ports 110Box 20: Spectrum of Port Reform Tools 111Box 21: Comparison of Lease Systems 113Box 22: BOT Schemes and Port Development 118Box 23: San Martin-Rosario Waterway Concession 119Box 24: Impetus behind Full Privatization in the United Kingdom 122Box 25: Singapore Creates PSA Corporation 124Box 26: The Creation of a National Pilotage Monopoly in the Netherlands 127Box 27: Prevailing Service Providers under Different Port Management Models 129

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Acknowledgments

This Second Edition of the Port Reform Toolkit has been produced with the financial assistance of a grant fromTRISP, a partnership between the U.K. Department for International Development and the World Bank, for learningand sharing of knowledge in the fields of transport and rural infrastructure services.

Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure TrustFund (Netherlands Ministry of Transport, Public Works, and Water Management) for the enhancement of theToolkit’s content, for which consultants of the Rotterdam Maritime Group (RMG) were contracted.

We wish to give special thanks to Christiaan van Krimpen, John Koppies, and Simme Veldman of the RotterdamMaritime Group, Kees Marges formerly of ITF, and Marios Meletiou of the ILO for their contributions to this work.

The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technicalcontributions of the following organizations.

The Public-Private Infrastructure Advisory Facility (PPIAF)PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the qualityof their infrastructure through private sector involvement. For more information on the facility see the Web site: www.ppiaf.org.

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

International Maritime Associates (USA)

Mainport Holding Rotterdam Consultancy (formerly known as TEMPO), Rotterdam Municipal PortManagement (The Netherlands)

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

United Nations Economic Commission for Latin America and the Caribbean (Chile)

PA Consulting (USA)

The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel,Ronald Kopicki, Cornelis “Bert” Kruk, and Bradley Julian of the World Bank Transport Division.

Comments are welcome.Please send them to the World Bank Transport Help Desk.Fax: 1.202.522.3223. Internet: [email protected]

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Module 3 is organized into seven sections, and thefollowing sections are summarized briefly below.

Evolution of Port Institutional Frameworks pro-vides basic terms of reference and a conceptualframework for defining the respective roles ofthe public and private sectors in port manage-

ment. The section also describes a number ofpublic interest issues affecting port planning,port operations, and infrastructure development.

Port Functions, Services, and AdministrationModels defines a number of typical manage-ment structures that ports use around the globe.

3Alternative Port ManagementStructures andOwnership ModelsSECOND EDITION

1. OBJECTIVES AND OVERVIEW

This module, the third of eight comprising the World Bank’s PortReform Toolkit, lays out an array of alternative port managementand control structures, and explains for each structure the respective

roles most likely to be filled by the public and private sectors. It provides aframework for all of the modules by defining the characteristics of specificmanagement structures and the tasks and responsibilities to be performedby private and public sector entities. In particular, it identifies the problemsfacing port managers when adapting their organizations to the challenges oftoday’s global market place. The solutions and “tools” suggested in thismodule are adapted as much as possible to the port manager’s specific situ-ations. Examples have been included illustrating approaches that have beensuccessful, as well as those that have been less than fully successful. Thismodule also notes how ports have adjusted organizational and administra-tive arrangements due to the strategic shifts and competitive pressuresaffecting the maritime sector. These developments are described in moredetail in Module 2.

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This section spells out the kinds of tasks thatpublic ports undertake and defines for each ofthe alternative management structures ways inwhich discrete elements of these tasks areassigned to various parties.

Port Finance Overview focuses on the impor-tant subject of port funding, a topic that is dealtwith at greater length in Modules 5 and 8.Here, the private sector plays an increasinglyimportant role in providing funds for infrastruc-ture development, in addition to paying forsuperstructure, equipment, and systems. Thishas not only a profound impact on managementstructures, but also on long-term public partici-pation in port development. The analysis assessesvarious aspects of public versus privateinvestments in infrastructure, including whichcomponents of infrastructure are paid for by thegovernment or by the port authority, whichinvestments should be made by the terminaloperator, and how governments with limitedfunds can harness private funding for port-relatedinvestments. This section also analyzes the roleglobal terminal operators—both shipping linesand stevedoring companies—play in today’smaritime sector and assesses their impact onport management and finance.

Port Reform Modalities presents an overview ofvarious port reform options and describes thestrengths and weaknesses of each. There aremany ways to change the institutional structureof a port. Traditional methods of operating andmanagement structures have been abandoned,with ports increasingly operating as commercialentities in the global marketplace. The processof structural change can be a painful one, withthe potential for making costly mistakes.However, increasingly the international portcommunity agrees on the structural role andfunction of port authorities. The global markethas had a unifying influence on emerginginstitutional structures. The increasing influenceof international finance institutions (IFIs) onport development also facilitates the introductionof efficient models and structures all over theworld. Although there is still a large diversity ofport management and organizational structures,

the trend toward several successful portmanagement models is strong.

Reform Tools analyzes the various concessionarrangements or tools available to port man-agers. The role of the public sector in financingport development is eroding and the private sec-tor has assumed more responsibility, not only inport finance but also in port operations. Thiscauses a gradual shift in the balance of powerbetween the public sector and the private sector.It is not clear how far this shift will go, but it isevident that the balance is likely to be shiftedfrom port to port and from country to country.

Marine Services and Port Reform analyzestraditional marine services in the context ofport reform. Such services include activities thatare carried out by both the public and privatesector. Marine services ensure the safe and expe-ditious flow of vessel traffic in port approachesand harbors and a safe stay at berth or atanchor. In every port, the harbormaster (or portcaptain) is responsible for nautical safety andoften also for the protection of the environ-ment. Other services such as vessel trafficmanagement, pilotage, and dangerous goodscontrol are described as well. Finally, the sectiondescribes several possible reform approaches thatcan be applied to marine services.

Upon completing this module, the reader shouldhave attained a better understanding of thevarious types of port management and owner-ship alternatives, their respective strengths andweaknesses, and of which alternatives mightbest fit a port’s particular circumstances.

2. EVOLUTION OF PORTINSTITUTIONAL FRAMEWORKS Private sector investment and involvement inports emerged as a significant issue in the1980s. By this time, many ports had becomebottlenecks to the efficient distribution chainsof which they are an essential component.Three main problems, illustrated by portcongestion and consequent chronic servicefailures, contributed to the gradual deteriorationof service quality during this period.

Alternative Port Management Structures and Ownership Models

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The first problem was restrictive labor practices.Increasingly after World War II, antiquatedwork practices and methods for matching avail-able labor with occasional work—practices thatdeveloped during a previous era characterized bybreakbulk cargo handling—needed to be trans-formed and renegotiated to adjust to modernbulk handling methods, unitized handling, andcontainerization. All of these developmentsresulted in a rapid modernization of porthandling equipment. At the start of this process,labor unions often refused to accept reductionsin the labor force and ignored the need toupgrade skills. Later, however, unions realizedthat port reform was a necessity. Enlightenedlabor leaders accepted moderate reforms. AsModule 7 describes in greater detail, it is nolonger realistic for dock workers and their tradeunions to oppose institutional reform and thetechnological advances that frequently precedeand accompany it.

The second reason why many ports failed torespond adequately to the increased demandsimposed on them was centralized governmentcontrol in the port sector. Particularly between1960 and 1980, central planning (in the portsector as well as in other sectors) prevailed notonly as a norm in socialist economies, but alsoin many western and developing countrieswhere national port authorities were oftenpromoted by international development banks.Slow-paced and rigidly hierarchical planning,control, and command structures often accom-panied central planning. Only in the 1980s didthe dismantling of communist systems and theincreasing introduction of market-orientedpolicies on a worldwide basis open the way fordecentralized port management and for reducedgovernment intervention in port affairs.

The third reason for a lack of port service qualitywas the inability or unwillingness of many gov-ernments to invest in expensive port infrastruc-ture or the “misinvestment” in infrastructure(providing facilities that were badly matched withthe needs of foreign trade and shipping). Duringthis period, a number of beautifully constructedport complexes became “white elephants” when

expected demand failed to materialize (see Box 1).As a result of systemic failures in managing portdevelopment, governments have learned to relyincreasingly on private investors to reduce ports’reliance on state budgets and to spread invest-ment risks through joint undertakings.


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Development

During its early years, the container termi-nal of the Port of Damietta in the ArabRepublic of Egypt was often cited as a

white elephant in port development. In the1970s, the terminal was constructed and fullyequipped to handle anticipated container trans-shipment requirements in the EasternMediterranean. Yet, for various reasons, the ter-minal was without any business for years. Onlywhen the shipping company Scan-Dutch decid-ed to change its Eastern Mediterranean port ofcall from Cyprus to Damietta did throughputstart to increase sharply. Today, more than 25years later, Damietta is one of the leading trans-shipment container ports in the region.

During the 1960s, major West Europeanports such as Rotterdam, Antwerp, andMarseilles developed large industrial sites neartheir port facilities. These sites becamecenters for refineries and petrochemical indus-tries. In view of the apparent success of portsbecoming industrial centers, the Dutchgovernment created three regional ports tosupport the ailing economies of their respec-tive regions. Two of these ports, Flushing andTerneuzen, developed fairly well. They arelocated along the River Scheldt in the vicinityof their large neighbors, Antwerp andRotterdam. The third port was built along theRiver Eems near Germany, in the northernprovince of Groningen. Despite modern portfacilities and large government subsidies, thePort of Eemshaven never became a success;it was too isolated and lacked an industrialhinterland. It struggled on for years to graduallydevelop a few niche markets. The case ofEemshaven shows that the creation of a newport does not guarantee success when thereis no natural hinterland generating significantcargo flows and when the port does notattract large scale transshipment traffic.

Source: Author.

During this period, fundamental questions aroseabout the appropriate division of responsibili-ties between the public and private sectors.“Boundary line” issues came into sharp focusduring the 1980s and 1990s. Policy makersbecame increasingly aware of the need forcoordination among various branches ofgovernment and for consultation with diverseport interests. They realized clearly that portdevelopment had collateral consequences andeffects on public interests in land use, environ-mental impact, job creation, and economicstimulation for economically blighted areas.Moreover, among some leaders, first in theUnited Kingdom and then gradually in otherparts of the world, it became increasingly clearthat large-scale government involvement in portoperations was self-defeating and destructive ofprivate initiative. They came to realize that therole of government in a market economy shouldfocus on the provision of public goods (goodsand services that the private sector has no ade-quate incentive to provide and, consequently,are undersupplied without some form ofgovernment intervention).

In many countries today, still another trendhas emerged: the private provision of publicservices. Increasingly, governments have trans-ferred public tasks to private contractors.Outsourcing of key functions and roles hashad a major impact on redrawing traditionalboundary lines in the port sector. Hence, inmany ports today, the public sector mainlyacts as planner, facilitator, developer, andregulator while providing connectivity to thehinterland, whereas the private sector acts asservice provider, operator, and sometimes alsodeveloper.

Experimentation in shifting the boundary linethat divides the public and private sectorshas resulted in a healthy pragmatism. Today,best practice is more concerned withresults than with ideology, and is intended toachieve:

• Increased service levels for infrastructureusers.

• Increased efficiency in operations.

• Improved allocation of limited public funds.

At the same time, various types of port termi-nals have become highly specialized in the cargohandling services they provide and manifestfewer of the characteristics of a public good.New greenfield container terminals have beenbuilt with private capital, and other containerterminals have been redeveloped and recapital-ized through some form of private sector partic-ipation. Box 2 presents two of the institutionalformats used in recent years to develop green-field terminals.

Increasingly, ports are being integrated into glob-al logistics chains, and the public benefits theyprovide are taking on regional and global attrib-utes. The value of services provided by regionalports increasingly transcends the interests of localusers, and benefits businesses and communitieslocated beyond regional and national borders.This global diffusion of benefits poses someinteresting challenges with respect to the need forlarge-scale investments in the sector. At the sametime, as discussed in Module 2, private portservice providers themselves have becomeincreasingly global in scope and scale. Even morerecently, a number of strategic alliances haveformed both within the global shipping industryand the port services industry. These allianceshave profound implications for the ways portsare financed, regulated, and operated.Confronted with these global shipping and portservice powers, port authorities will increasinglyhave challenges in defending public and localinterests. Container terminal operators withglobal coverage, sometimes in alliance withmajor shipping lines, may be tempted to takeadvantage of their dominant position to strengthentheir network, thereby reducing the scope ofcompetition mainly at the expense of publicinterests. Moreover, countervailing powers at aninternational level that have not yet emerged areexpected to do so soon due to the absence of suit-able national regulating structures. At port level, astrict organizational separation of the commercialand regulating tasks of port management isrequired to safeguard public interests.


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3. PORT FUNCTIONS, SERVICES,AND ADMINISTRATION MODELS Ports produce a combination of public and pri-vate goods. Public goods include those that are

inherently nondivisible and nonconsumable,such as public safety, security, and a healthyenvironment on the one hand, and coastalprotection works necessary to create port basinson the other hand. Private goods are bothconsumable and divisible and their use entails aminimum of economic externalities.

Most of the value of private goods can be cap-tured in market transactions between privateparties. However, a substantial portion of thevalue of public goods cannot be captured inarms-length transactions. Consequently, privatefirms have little incentive to produce them.Public goods create positive externalities whenthey are used; the social benefits they generateare greater than the price that private partiescan charge for them. Thus, some form of publicintervention is appropriate in their productionto make certain that an adequate level of publicgoods is maintained.

Ports represent a mix of public and privategoods. They generate direct economic benefits(private goods) through their operations, as wellas additional indirect benefits (public goods) inthe form of trade enhancement, second orderincreases in production volumes, and collateralincreases in trade-related services. These “eco-nomic multiplier effects” have been used bymany ports to justify direct public sector invest-ment. It is in this dual production of both pub-lic and private goods that complexities arise,which makes defining roles for and boundariesbetween the public and private sectors challeng-ing in the ports industry. This is particularly thecase in the fields of marine and port safety, portsecurity, and the protection of the marine envi-ronment. Box 3 lists a number of areas whereports generate economic multiplier effects.

Both through targeted development policies andthe unplanned growth of interrelated industries,many ports have become the location for indus-trial clusters. Industrial clusters are geographicconcentrations of private companies that maycompete with one another or complement eachother as customers and suppliers in specializedareas of production and distribution. Industrial


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Box 2: Institutional Formats of GreenfieldPortsSalalah, Oman

In 1997, Salalah Port Services (SPS) wasawarded a 30-year concession to equip andoperate the Port of Salalah in Oman. SPS is

a joint venture with 30 percent foreign invest-ment and 70 percent Omani government andpublic/private investment. The concessioncontract covers the container terminal, theconventional port, and the free trade zone.

Investment in the port originally consistedof the following proportions:

Omani government: 20 percent

Government pension funds: 11 percent

Sea-Land Services: 15 percent

Omani private investors: 19 percent

Public offering: 20 percent

Maersk/A.P. Moller: 15 percent.

The initial capitalization was $260 million.The government built the infrastructure.

Vallarpadam, India

In August 2004, India’s Cabinet Committee onEconomic Affairs awarded Dubai PortsInternational (DPI) the contract to furtherdevelop the existing Rajiv Gandhi ContainerTerminal in Cochin (Kuchi) and build a newterminal at or nearby Vallarpadam Island.

The contract is on a BOT (build-operate-transfer) basis with total investment estimatedat Rs 21.2 Bn ($460 million). When completed,Vallarpadam will be able to handle vessels upto 8,000 TEU with 2,150 meters of berth and athroughput capacity of 3–4 million TEU.

DPI was announced as successful winnerof the public tender by submitting the highestbid to share 30 percent of gross revenueswith the Cochin Port Trust, which was subse-quently negotiated down to 25 percent. Thenext highest bid was based on sharing 10percent of revenues.

Vallapardam will primarily compete withColombo for share of regional transshipment traffic.

Source: Author and others.

clusters represent a kind of value chain, a webof interrelated activities that are mutually sup-portive and continuously growing. Clustering ofrelated activities improves the competitiveadvantage of cluster participants by increasingtheir productivity, reducing transaction costsamong them, driving technological innovation,and stimulating the formation of new businessspin-offs.

Large ports offer particularly attractive loca-tions for seed industries and distribution-inten-sive enterprises. Several notable port-centeredindustrial clusters have developed over the last50 years, for instance, those in Dubai, Colon,Norfolk, Rotterdam, Yokohama, Antwerp,Hamburg, Marseilles, and Houston, to namebut a few. From the 1950s, the larger Europeanports targeted refineries and chemical industriesfor colocation and codevelopment, with consid-erable success. Thus, for example, a large clus-ter of five refineries and many chemical-process-ing companies located in the Port of Rotterdamas a direct result of public policies developed in1950s. A cluster of world-class, specializedmarine services likewise established themselvesin the Port of Rotterdam as a result of the goodhinterland connections and the gas and oil findsin the North Sea. Another example of cluster

development is the Port of Colombo; a fashiongoods and apparel industry cluster has devel-oped around Colombo, which focuses on reli-able, short-transit container services to completejust-in-time (JIT) purchase orders. This develop-ment was business-driven and not the directresult of explicit public policy. The lessondemonstrated in Colombo is that quasi-publicgoods in the form of efficient industrial net-works can be created and developed throughprivate initiatives.

As a matter of strategic development policy,many ports encourage the codevelopment ofvarious value-added services through franchis-ing, licensing, and incentive leasing. Today,ports seek to attract enterprises that extendtheir logistics chains or provide them with spe-cialized capabilities to add value to cargoes thatare stored and handled in the port. Generalservices that many ports attempt to developinclude chandlering, ship repair, containermaintenance, marine appraisals, insuranceclaims inspections, and banking. Box 4describes the efforts of one port to expand anddevelop its ensemble of value-added services.

Many governments are directly or indirectlyinvolved in port development. They often use a“growth pole” argument to justify the directfinancing of basic port infrastructure. Thisgrowth pole rationale derives from the beliefthat investments in port assets have strongdirect and indirect multiplier effects on theentire national economy and, further, that thecommitment of public resources is necessary toencourage coinvestment by the commercial andindustrial sectors. These sectors are thus stimu-lated to make investments that they would notmake in the absence of public seed investmentin port infrastructure. However, determiningcausal links between public investment and spe-cific commercial activities and investments isdifficult and at times speculative. Still, it isimportant that governments envision and artic-ulate future development scenarios, maintainfrequent consultation with the private sector,and implement public policies that are appliedconsistently and that enable the private sector


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Box 3: Examples of Port Economic MultiplierEffects• Petro-chemical industry.

• Value-added services.

• Repair and maintenance.

• Packing and repacking.

• Labeling.

• Testing.

• Telecommunications.

• Banking.

• Customs.

• Inland transport.

• Warehouse and distribution.

• Ship chandlery.

• Cleaning and laundry.

Source: Author.

to invest with confidence in projects that sup-port the stated public policy objectives.

On the other hand, port operations are busi-nesses in their own right and should be man-aged to achieve optimal utilization of capital.Investments in port assets are affected by risk,competition for land and capital, or other fac-tors in the competitive business environment.Subsidies and government-provided incentivesdistort the allocation of resources for portdevelopment and may result in over- or under-investment.

It is the delicate alignment of public and privateinterests that determines the structure of portmanagement and port development policy.A full spectrum of institutional frameworks isavailable, differing primarily in where the

boundary line is drawn between the public andprivate sectors. At one end of this spectrum, fullpublic control over planning, regulation, andoperations results in a “service port.” At theother end, the almost total absence of publicownership, control, or regulatory oversightresults in a “fully privatized port.”

In a clear trend, the alignment of public andprivate interests in recent years has resulted in adiminishing role for governments in the portindustry. The total absence of public involve-ment in the port sector, however, still remainsan exception, limited primarily to specializedports and terminals.

When governments attempt to increase nationaleconomic welfare through port development,they may choose to apply one of two distinctnormative frameworks: the market surrogateframework or the public interest framework. Inseeking to increase economic welfare, govern-ments may attempt to remedy market imperfec-tions and capture nonmarket externalities with-in appropriately engineered and contested trans-actions. Alternatively, they may pursue explicitgoals developed through public consultativeprocesses designed to determine demand forpublic goods.

With respect to the market surrogate frame-work, the primary task of government is toidentify and eliminate market imperfections andanticompetitive behavior or to regulate its unde-sired effects. For example, competition “for themarket” can replace competition “in the mar-ket,” and competition “for the market” can beengineered into contestable offers of rights inways that assure procompetitive outcomes.

It follows that one of the objectives of publicpolicy should be to create contestable marketstructures for port services and to manage com-petitive behavior. This might be accomplishedthrough licensing, leasing, concessioning, orother methods designed to bring about an effi-cient allocation of resources. The market surro-gate view is followed in most countries withmarket-oriented economic policies.


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Box 4: Value-Added Development Efforts inthe Port of Rotterdam Distriparks

Distriparks are the Port of Rotterdam’sresponse to the growing demands onshippers and transport firms for just-in-

time delivery at lower costs. Distriparks areadvanced logistics parks with comprehensivefacilities for distribution operations at a singlelocation close to the cargo terminals andmultimodal transport facilities for transitshipment. They employ the latest informationand communications technology.

Distriparks provide space for warehousingand forwarding facilities, including the storageand handling of cargo and the stuffing andstripping of containers. They also offer acomprehensive range of value-added services.

In distriparks, companies can, either ontheir own or in partnership with local specialistfirms, process their goods according tospecific customer and country-of-destinationrequirements. These value-added servicesinclude packing and repacking, labeling andassembly, sorting, and invoicing. The distri-park’s on-site customs service promptlyhandles import and export documentation.

To date, three distriparks have been estab-lished within the Port of Rotterdam area.

Source: Port of Rotterdam

The need for some form of government inter-vention in markets for port services is related tothe unique economic characteristics of seaports,some of which tend to make them naturalmonopolies:

• The provision of port services entailslarge fixed costs and low marginal costs.The marginal benefits associated withusing port services exceed the marginalcosts of providing these services.

• A relatively large, minimum initial capacityof basic infrastructure is required fortechnical reasons.

• The infrastructure is frequently indivisibleand, as a result, increases in infrastruc-ture capacity can only be realized in“quantum chunks.”

• Both initial construction and port expan-sion require large amounts of capital. Asa result, the need to develop basic portinfrastructure (for example, sea locks,breakwaters, quay walls, and main roads)all at one time creates large capital oper-ating losses and foregone investmentopportunities as a result of underusedcapacity during the earlier phases of aproject’s life cycle.

• The life span of port infrastructureprojects often exceeds the time horizonacceptable for private investors andcommercial banks.

• Basic port infrastructure is immobile andhas few alternative uses.

This set of characteristics is the main reason forfinancial involvement of governments in portconstruction and expansion projects.

3.1. Interaction with Port CitiesPorts and the cities of which they are a partinteract across many dimensions: economic,social, environmental, and cultural. Any portreform process should take into account thelinkages between city objectives and the portobjectives. Transport integration—the smoothtransfer of cargo and equipment from land to

water-borne systems—is an essential port func-tion, but it does not take place in isolation. Aseaport node within a multimodal transport sys-tem is frequently associated with the develop-ment of an urban center and generates substan-tial employment, industrial activity, and nation-al and regional development.

Many big cities trace their roots to the estab-lishment of a port. This does not mean, however,that the port will be extended at the placewhere it was originally founded. Antwerp andRotterdam are examples of ports that developedrelatively close to the cities’ central cores. Overtime, however, they shifted operations awayfrom city centers. The underlying reason wasthe increase in ship sizes (requiring deeperdrafts and longer berths). Another reasoncontributing to the weakening of links betweenport and city centers is the rapid mechanizationand specialization of port work and the accom-panying increase in the operational scale andscope. These shifts led to increased storagespace requirements and make ports very space-intensive.

Another factor is the rapid industrialization ofmost developed country cities. The new indus-tries emerging after World War II required largeareas of land, preferably close to deep water,which often could not be found within theoriginal port borders. Therefore, MaritimeIndustrial Development Areas (MIDAs) werelocated at some distance from old city centers.

Technological changes and consequential portrelocation have left substantial areas availablefor redevelopment for other purposes. Suchareas are often located near city centers becausethat is where the port (and city) began.Therefore, land values are potentially high,although probably depressed prior to redevelop-ment because of the presence of decaying portfacilities.

Three approaches commonly have been used forthe development of surplus port land:

• Retaining it within the port authority forredevelopment as in the case of the Port


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of Barcelona. This implies a widening ofthe port’s function from that of a portinto a property developer. Such changemay require modifications to the statutesof the public port authority, or of thetrust port. The experience of AssociatedBritish Ports shows that when the port isin private hands, it is capable of effectivedevelopment of surplus lands. The PortAuthority of New York and New Jerseyis an example of a public port authoritywith wide redevelopment powers.

• Transferring it to the local authority ormunicipality for redevelopment. In prac-tice this is not always effective because themunicipality might lack the resources torealize the full value of the land in ques-tion. On the other hand, there are exam-ples (such as Baltimore and Rotterdam) ofsuccessful regeneration by the municipalityof port lands near the city center.

• Creating a special development corpora-tion for the specific purpose of redevelop-ing an old dock area. This is most appro-priate when the area is very extensive,involves various municipalities, andinvolves high redevelopment costs. Anexample of a separate corporation estab-lished for this purpose is the PuertoMadera Corporation in Argentina, whichis a joint venture by the City of BuenosAires and the national government for theredevelopment of old city docks for mixedcommercial, residential, and recreationaluse. Probably the biggest and best-knownspecial purpose corporation (SPC) is theLondon Docklands DevelopmentCorporation (LDDC), created to redevel-op the old docks of the Port of London.The LDDC was established by the govern-ment and endowed with extensive plan-ning powers as a result of the inability ofsix riparian municipalities to agree on acoherent and feasible plan for the docks’redevelopment.

Finally, the interests of ports extend beyond localtraffic and transport. Hinterland connections,

nationally and internationally, rely on road, rail,and waterway links. Both the port authorityand the port city should use their influence toestablish needed intermodal infrastructure andagreements. In addition, the port authority andthe port city should collaborate to efficientlyaccommodate traffic flows and limit transportcosts (including external costs).

3.2. Role of a Port Authority Ports usually have a governing body referred toas the port authority, port management, or portadministration. Port authority is used widely toindicate any of these three terms.

The term port authority has been defined in vari-ous ways. In 1977, a commission of the EuropeanUnion (EU) defined a port authority as a “State,Municipal, public, or private body, which islargely responsible for the tasks of construction,administration and sometimes the operation ofport facilities and, in certain circumstances, forsecurity.” This definition is sufficiently broad toaccommodate the various port managementmodels existing within the EU and elsewhere.

Ports authorities may be established at all levelsof government: national, regional, provincial, orlocal. The most common form is a local portauthority, an authority administering only oneport area. However, national port authoritiesstill exist in various countries such as Tanzania,Sri Lanka, Nigeria, and Aruba.

The United Nations Conference on Trade andDevelopment (UNCTAD) Handbook for PortPlanners in Developing Countries lists the statu-tory powers of a national port authority as fol-lows (on the assumption that operationaldecisions will be taken locally):

• Investment: Power to approve proposalsfor port investments in amounts above acertain figure. The criterion for approvalwould be that the proposal was broadlyin accordance with a national plan,which the authority would maintain.

• Financial policy: Power to set commonfinancial objectives for ports (for example,


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required return on investment defined ona common basis), with a common policyon what infrastructure will be fundedcentrally versus locally, and advising thegovernment on loan applications.

• Tariff policy: Power to regulate rates andcharges as required to protect the publicinterest.

• Labor policy: Power to set commonrecruitment standards, a common wagestructure, and common qualifications forpromotion; and the power to approvecommon labor union procedures.

• Licensing: When appropriate, power toestablish principles for licensing of portemployees or agents.

• Information and research: Power tocollect, collate, analyze, and disseminatestatistical information on port activity forgeneral use, and to sponsor research intoport matters as required.

• Legal: Power to act as legal advisor tolocal port authorities.

Increasingly, central governments implementseaport policies through the allocation ofresources rather than through the exercise ofwide-ranging regulatory powers.

While central governments should pursuemacroeconomic objectives through an activeseaport policy, port authority objectives shouldbe more narrowly focused on port finances andoperations.

It is a widely accepted opinion among portspecialists that a port authority should have asa principal objective the full recovery of allport-related costs, including capital costs, plusan adequate return on capital. The full recoveryof costs will help a port authority to:

• Maintain internal cost discipline.

• Attract outside investment and establishsecure long-term cash flows.

• Stimulate innovation in the various func-tional areas to guarantee a long-term

balance between costs and revenues,especially when faced with innovationsby terminal operators, port users, rivalports, and hinterland operators.

• Generate internal cash flows needed toreplace and expand port infrastructureand superstructure.

• Compete according to the rules of themarket system, without excessivedistortions of competition.

• Put limits on cross-subsidization, whichmay be rational from a marketing pointof view (market penetration, trafficattraction), but which can underminefinancial performance.

• Avoid dissipation of the port authority’sasset base to satisfy objectives of thirdparties (for example, port users demand-ing the use of land in the port area with-out regard to the land’s most economicuse or port and city administrations usingport authority assets to pursue generalcity goals).

Full cost recovery should be viewed as aminimum port authority objective; once thisobjective has been achieved, however, the portauthority can pursue other-than-financialobjectives considered desirable by thegovernment or by itself.

3.3. Role of Port Operators Just as central governments and port authoritiesplay key roles in the port communities, so toodo private port operators (such as stevedoringfirms, cargo handling companies, and terminaloperators). Port operators typically pursueconventional microeconomic objectives, such asprofit maximization, growth, and additionalmarket share. Only if port operators are free topursue such objectives can the benefits of amarket-oriented system be achieved.

3.4. Roles of a Transport Ministry In a market-oriented economic system, the min-istry of transport typically performs a variety offunctions at a national level. With respect to


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coastline and port issues, the main tasksand responsibilities of the ministry can besummarized as follows:

• Policy making: The ministry developstransport and port policies related to:

~ Planning and development of a basicmaritime infrastructure, including coast-line defenses (shore protection), portentrances, lighthouses and aids to naviga-tion, and navigable sea routes and canals.

~ Planning and development of existingand new port areas (location, function,or type of management).

~ Planning and development of porthinterland connections (roads, railways,territorial waterways, and pipelines).

• Legislation: The ministry drafts and imple-ments transport and port laws, nationalregulations, and decrees. It is responsiblefor incorporating relevant elements of inter-national conventions (for example, theInternational Convention of Safety for Lifeat Sea [SOLAS], United NationsConvention on the Law of the Sea, theInternational Convention for the Preventionof Pollution from Ships [MARPOL]) intonational legislation for signature members.

• International relations: Specializeddepartments of the ministry represent thecountry in bilateral and multilateral portand shipping forums. The ministrymay also negotiate agreements with neigh-boring countries relating to water-borneor intermodal transit privileges.

• Financial and economic affairs: A minis-terial department is usually responsiblefor planning and financing national proj-ects. In many countries, a ministry oftransport also finances basic port infra-structure as well as roads, waterways,and railways connecting ports with theirhinterland. It should be able to carry outfinancial and economic analyses andassess the socioeconomic and financialfeasibility of projects in the context ofnational policies and priorities.

• Auditing: These functions should beperformed independently from theaffected line organization and areusually included in a staff office. Theauditors should report directly to theminister.

In many countries, transport directorates areestablished as independent bodies within aministry and perform an executive function.They are usually responsible for one of themodes of transport, for example, the maritimeand ports directorate (maritime administration).The principal elements of a typical maritimeand ports directorate are:

• Ship inspections and register of shipping(oversight of ship safety and manningconditions).

• Traffic safety and environment (safemovement of shipping and protection ofthe marine environment).

• Maritime education and training (mar-itime academies, merchant officersexams, and licensing of seafarers).

• Ports (execution of national port policy).

• Hydrotechnical construction (construc-tion of protective works, sea locks, portentrances, and others).

• Port state control on the basis of theParis and Tokyo memorandum of under-standing terms.

• Security compliance (International Shipand Port Facility Security Code).

• Investigation into and adjudication of anymaritime incident, such as fire on board avessel, collision, stranding, piracy, orsimilar event.

• Performance of regulatory and licensingfunctions in respect to structures, partlyor entirely founded on the seabed withinthe territorial waters, in the exclusiveeconomic zone of a country, or in anynavigable water or on any beach withinthe territory of a country.


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• Vessel traffic systems and aids to naviga-tion (construction and maintenance).

• Search and rescue.

3.5. Port FunctionsWithin the port system, one or more organiza-tions fill the following roles:

• Landlord for private entities offering avariety of services.

• Regulator of economic activity and oper-ations.

• Regulator of marine safety, security, andenvironmental control.

• Planning for future operations and capitalinvestments.

• Operator of nautical services and facili-ties.

• Marketer and promoter of port servicesand economic development.

• Cargo handler and storer.

• Provider of ancillary activities.

In view of the strategic significance of land,port property is rarely sold outright to privateparties because of its direct and indirect effectson regional and often national economy andpublic welfare, its intrinsic value, and possiblescarcity. Therefore, a key role for many portauthorities is that of the landlord with theresponsibility to manage the real estate withinthe port area. This management includes theeconomic exploitation, the long-term develop-ment, and the upkeep of basic port infrastruc-ture, such as fairways, berths, access roads, andtunnels.

Port authorities often have broad regulatorypowers relating to both shipping and portoperations. The authority is responsible forapplying conventions, laws, rules, and regula-tions. Generally, as a public organ it is respon-sible for observance of conventions and lawsregarding public safety and security, environ-ment, navigation, and health care. Port author-ities also issue port bylaws, comprising many

rules and regulations with respect to the behav-ior of vessels in port, use of port areas, andother issues. Often, extensive police powers arealso assigned to the port authority.

The planning function of the port authority incoordination with the municipality is a compli-cated affair, especially for large ports locatedwithin or near a city. The port planner has toconsider:

• The consistency of plans with the generalterms of land use that have been set bythe competent authority.

• The impact of port development proposalson the immediate surroundings (environ-ment, traffic, facilities, and roads).

• The appropriateness of port developmentproposals in the context of international,national, and regional port competition.

Actual port services and balancing of supplyand demand occur at the levels of the portauthority and individual port firms. Hence, thedevelopment of realistic investment projects forinfrastructure and superstructure should be ini-tiated at these levels. Investment plans of indus-trial and commercial port operators or projectsfor specific cargo handling, storage, and distri-bution should be integrated at the level of theport authority to arrive at a strategic masterplan for the port. The individual master plansmay then be integrated into a national seaportpolicy, taking into account macroeconomicconsiderations. Integration of individual masterplans will help to avoid duplication of expen-sive, technologically advanced facilities whendifferent ports in a national system strive toattract the same customers as well as ensure theselection of the appropriate locations for specificseaport facilities that will interconnect maritimeand land transport systems.

To conclude, central governments should estab-lish a national port policy that supports nationaleconomic objectives and creates a reasonableframework for port development. The develop-ment of plans for specific port projects, however,should remain in the hands of port operators.


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Oversight of nautical operations should be withina port authority’s mandate and is often referredto as the harbormaster’s function. It generallycomprises all legal and operational tasks relatedto the safety and efficiency of vessel managementwithin the boundaries of the port area. Theharbormaster’s office allocates berths andcoordinates all services necessary to berth andunberth a vessel. These services include pilotage,towage, mooring and unmooring, and vessel trafficservices (VTS). Often, the harbormaster is alsocharged with a leading role in management ofshipping and port-related crises (for example, col-lisions, explosions, natural disasters, or dischargeof pollutants). In view of its general safety aspects,the harbormaster’s function has a public character.

The cargo handling and storage function com-prises all activities related to loading and dis-charging seagoing and inland vessels, includingwarehousing and intraport transport. A distinc-tion typically is made between cargo handlingon board of the vessel (stevedoring) and cargohandling on shore (landside or quay handling).Terminal operators can fulfill both roles.

There are typically two types of cargo handlingand terminal operating firms. The more com-mon structure for terminal operating firms is acompany that owns and maintains all super-structures at the terminal (for example, paving,offices, sheds, warehouses, and equipment).Other firms only use the superstructure orequipment that is owned by the port. Suchfirms typically only employ stevedores or dockworkers and have virtually no physical assets.

The port marketing and promotion function is alogical extension of the port planning function.Port marketing is aimed at promoting theadvantages of the entire port complex for boththe port authority to attract new clients and forthe port industry to generally promote its busi-ness. This type of broad marketing is distinctfrom customer-oriented marketing that is aimedat attracting specific clients and cargoes forspecific terminals or services.

A variety of ancillary functions such as pilotage,towage and ship chandlering, fire protection

services, linesmen services, port informationservices, and liner and shipping agencies existwithin the port community. Large port authoritiesusually do not provide these services, with thepossible exception of pilotage and towage. In anumber of smaller ports, however, these arepart of the port authority operations because ofthe limited traffic base.

3.6. Port Administration Models A number of factors influence the way ports areorganized, structured, and managed, including:

• The socioeconomic structure of a country(market economy, open borders).

• Historical developments (for example,former colonial structure).

• Location of the port (urban area or inisolated regions).

• Types of cargoes handled (liquid and drybulk, general cargo, or containers).

Four main categories of ports have emergedover time, and they can be classified into fourmain models: the public service port, the toolport, the landlord port, and the fully privatizedport or private service port.

These models are distinguished by how theydiffer with respect for such characteristics as:

• Public, private, or mixed provision ofservice.

• Local, regional, or global orientation.

• Ownership of infrastructure (includingport land).

• Ownership of superstructure and equip-ment (particularly ship-to-shore handlingequipment, sheds, and warehouses).

• Status of dock labor and management.

Service and tool ports mainly focus on the real-ization of public interests. Landlord ports havea mixed character and aim to strike a balancebetween public (port authority) and private(port industry) interests. Fully privatized portsfocus on private (shareholder) interests.


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3.6.1. Service Ports

Service ports have a predominantly public char-acter. The number of service ports is declining.Many former service ports are in transitiontoward a landlord port structure, such asColombo (Sri Lanka), Nhava Sheva (India), andDar es Salaam (Tanzania). However some portsin developing countries are still managedaccording to the service model. Under it, theport authority offers the complete range ofservices required for the functioning of theseaport system. The port owns, maintains, andoperates every available asset (fixed andmobile), and cargo handling activities areexecuted by labor employed directly by the portauthority. Service ports are usually controlledby (or even part of) the ministry of transport(or communications) and the chairman (ordirector general) is a civil servant appointed by,or directly reporting to, the minister concerned.

Among the main functions of a service port arecargo handling activities. In some developingcountry ports, the cargo handling activities areexecuted by a separate public entity, oftenreferred to as the cargo handling company. Suchpublic companies usually report to the sameministry as the port authority. To have publicentities with different and sometimes conflictinginterests reporting to the same ministry, andforced to cooperate in the same operationalenvironment, constitutes a serious managementchallenge. For this reason, the port authoritiesand cargo handling companies of Mombasa,Kenya, and Tema and Takoradi, Ghana, weremerged into one single entity.

3.6.2. Tool Ports

In the tool port model, the port authority owns,develops, and maintains the port infrastructureas well as the superstructure, including cargohandling equipment such as quay cranes andforklift trucks. Port authority staff usually oper-ates all equipment owned by the port authority.Other cargo handling on board vessels as well ason the apron and on the quay is usually carriedout by private cargo handling firms contractedby the shipping agents or other principals

licensed by the port authority. The Port ofChittagong (Bangladesh) is a typical example ofthe tool port. The Ports Autonomes in Franceare also examples, in particular the containerterminals, which are managed and operatedalong the principles of the tool port, althoughfor more recent terminals the private terminaloperators have made the investment in gantrycranes. This arrangement has generated conflictsbetween port authority staff and terminal opera-tors, which has impeded operational efficiency.

The above-mentioned division of tasks withinthe tool port system clearly identifies the essen-tial problem with this type of port managementmodel: split operational responsibilities.Whereas the port authority owns and operatesthe cargo handling equipment, the private cargohandling firm usually signs the cargo handlingcontract with the shipowner or cargo owner.The cargo handling firm however, is not able tofully control the cargo handling operationsitself. To prevent conflicts between cargohandling firms, some port authorities allowoperators to use their own equipment (at whichpoint it is no longer a true tool port). The toolport has a number of similarities to the serviceport, both in terms of its public orientation andthe way the port is financed.

Under a tool port model, the port authoritymakes land and superstructures available tocargo handling companies. In the past, thesecompanies tended to be small, with few capitalassets. Their costs were almost entirely variable.The cost of underuse of port facilities wasusually absorbed by the port authority, whichminimized risk for the cargo handling compa-nies. Often, the provision of cargo handlingservices was atomized, companies were smallwith activity fragmented over many partici-pants. The lack of capitalization of the cargohandling companies constituted a significantobstacle to the development of strong compa-nies that could function efficiently in the portand be able to compete internationally.

However, with the above in mind, a tool portdoes have its advantages, particularly when it is


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used as a means of transition to a landlordport. Using the tool port model as a catalyst fortransition can be an attractive option in caseswhere the confidence of the private sector is notfully established and the investment risk is con-sidered high. A tool port may mitigate this byreducing initial capital investment requirements.Another example could include a governmentlooking to expedite port reform initiatives, butrequires extensive amounts of time for legalstatutes to be established. Laws and regulationsfor establishing a tool port may be less exten-sive since no state assets are being transferred tothe private sector, and therefore make it an easiermodel to adopt in the first phase of reform.

3.6.3. Landlord Ports

As noted, the landlord port is characterized byits mixed public-private orientation. Under thismodel, the port authority acts as regulatorybody and as landlord, while port operations(especially cargo handling) are carried out byprivate companies. Examples of landlord portsare Rotterdam, Antwerp, New York, and since1997, Singapore. Today, the landlord port is thedominant port model in larger and medium-sized ports.

In the landlord port model, infrastructure isleased to private operating companies or toindustries such as refineries, tank terminals, andchemical plants. The lease to be paid to the portauthority is usually a fixed sum per squaremeter per year, typically indexed to some meas-ure of inflation. The level of the lease amount isrelated to the initial preparation and construc-tion costs (for example, land reclamation andquay wall construction). The private portoperators provide and maintain their ownsuperstructure including buildings (offices,sheds, warehouses, container freight stations,workshops). They also purchase and installtheir own equipment on the terminal grounds asrequired by their business. In landlord ports,dock labor is employed by private terminaloperators, although in some ports part of thelabor may be provided through a portwidelabor pool system.

3.6.4. Fully Privatized Ports

Fully privatized ports (which often take the formof a private service port) are few in number, andcan be found mainly in the United Kingdom (U.K.)and New Zealand. Full privatization is consideredby many as an extreme form of port reform. Itsuggests that the state no longer has any meaning-ful involvement or public policy interest in theport sector. In fully privatized ports, port land isprivately owned, unlike the situation in other portmanagement models. This requires the transfer ofownership of such land from the public to theprivate sector. In addition, along with the sale ofport land to private interests, some governmentsmay simultaneously transfer the regulatory func-tions to private successor companies. In theabsence of a port regulator in the U.K., for exam-ple, privatized ports are essentially self-regulating.The risk in this type of arrangement is that portland can be sold or resold for nonport activities,thereby making it impossible to reclaim for itsoriginal maritime use. Moreover, there is also thepossibility of land speculation, especially whenport land is in or near a major city. Furthermore,sale of land to private ports may also sometimesraise a national security issue.

The U.K. decided to move to full privatizationfor three main reasons:

• To modernize institutions and installa-tions, both of which often dated back tothe early years of the industrial revolu-tion, to make them more responsive tothe needs and wishes of the users.

• To achieve financial stability and financialtargets, with an increasing proportion ofthe financing coming from private sources.

• To achieve labor stability and a degree ofrationalization, followed by a greaterdegree of labor participation in the newport enterprises.

Box 5 summarizes the strong and weak points ofthe principal port management models. Box 6outlines the sectors (public or private) and theirvarious responsibilities under the four basicport management models.


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3.7. Globalization of TerminalOperationsPort authorities are increasingly confronted withthe globalization of terminal operations. Duringthe 1990s, a number of terminal operators and

major shipping lines merged to invest in and takecontrol of a large number of terminals all over theworld. This trend has far reaching consequencesfor the strategic position of port management inrelation to some of their major clients.


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Public Service Port

Strength:

• Superstructure development and cargo han-dling operations are the responsibility of thesame organization (unity of command).

Weaknesses:

• There is no role or only a limited role for theprivate sector in cargo handling operations.

• There is less problem solving capability andflexibility in case of labor problems, sincethe port administration also is the majoremployer of port labor.

• There is lack of internal competition, leadingto inefficiency.

• Wasteful use of resources and underinvest-ment as a result of government interfer-ence and dependence on governmentbudget.

• Operations are not user or market oriented.

• Lack of innovation.

• No or limited access to public funds forbasic infrastructure.

Tool Port

Strength:

• Investments in port infrastructure andequipment (particularly ship/shore equip-ment) are decided and provided by thepublic sector, thus avoiding duplication offacilities.

Weaknesses:

• The port administration and private enter-prise jointly share the cargo handling services(split operation), leading to conflictingsituations.

• Private operators do not own major equip-ment, therefore they tend to function aslabor pools and do not develop into firmswith strong balance sheets. This causesinstability and limits future expansion of theircompanies.

• Risk of underinvestment.

• Lack of innovation.

Landlord Port

Strengths:

• A single entity (the private sector) executescargo handling operations and owns andoperates cargo handling equipment. The ter-minal operators are more loyal to the port andmore likely to make needed investments as aconsequence of their long-term contracts.

• Private terminal handling companies gener-ally are better able to cope with marketrequirements.

Weakness:

• Risk of overcapacity as a result of pressurefrom various private operators.

• Risk of misjudging the proper timing ofcapacity additions.

Fully Privatized Port

Strengths:

• Maximum flexibility with respect to invest-ments and port operations.

• No direct government interference.

• Ownership of port land enables market-ori-ented port development and tariff policies.

• In case of redevelopment, private operatorprobably realizes a high price for the sale ofport land.

• The often strategic location of port land mayenable the private operator to broaden itsscope of activities.

Weaknesses:

• Government may need to create a port regu-lator to control monopolistic behavior.

• The government (national, regional, or local)loses its ability to execute a long-term eco-nomic development policy with respect tothe port business.

• In case the necessity arises to redevelop the portarea, government has to spend considerableamounts of money to buy back the port land.

• There is a serious risk of speculation withport land by private owners.

Source: A. Baird and P. Kent (2001).

Box 5: Strengths and Weaknesses of Port Management Models

This trend toward globalization has affectedmainly containerized operations. Today, a hand-ful of major carrier alliances and independentterminal operators increasingly dominate themajor global container trades. The global carriershave sought to secure their competitive positionsby concluding long-term contracts for dedicatedcontainer terminals in major, strategically locatedports. Their reasoning is that they believe theyneed to control all stages of the transport chainto remain competitive. These efforts to establishintegrated transport chains pose a challenge forport authorities in their relations with the largercarriers. For example, how should a portrespond if a large container operator demands tooperate a dedicated terminal and threatens toleave the port when it does not get its way?

It should be emphasized that full control of thetransport and logistics chain by one consortium(a global monopolist) is not a desirable develop-ment. Because of regulatory measures by theUnited States and the EU, the complexity of thetransport and logistics chain, and the number ofplayers, a carrier’s ability to control of the fullchain seems like an illusion. However, somealliances may attain a significant degree ofmarket dominance. Box 7 lists the fleets of themajor container carriers, showing the numberof vessels operated, the capacity expressedin TEUs, and the number of vessels underconstruction.

The container shipping market is still muchcommoditized compared to other industries(energy, rail, and the like) with global marketshares of the largest carrier not exceeding 18–19percent (2005). However, the carrier industry, as

well as the terminal operator industry, is movingtoward greater consolidation and larger globalplayers and operators are emerging.

Competition between major carriers is intense.The scale of investment in a new generation ofcontainer vessels represents a massive commit-ment. To fill these vessels, the carriers try tosecure local control and coordination overinland cargo haulage and feeder operations. Inthis way, they try to secure their market shareand meet perceived service needs. Port handlingcharges are considered as being of secondaryimportance in achieving these goals.

Relationships between ports and carriers fallinto four broad categories:

• First are ports that face strong interportcompetition in the container handlingsector. Container lines may easily shiftoperations to other ports if their financialand operational demands are not met. Toattract major container lines, the portauthority may offer them dedicated facili-ties while other, smaller lines are accom-modated at common user terminals.Without such dedicated facilities, majorlines could move to other competingports. Examples of this category are thePorts of Yokohama and Long Beach.

• Second are ports that derive the bulk oftheir business from a major containerline, and therefore, are dominated by thisclient. If the dominant line were to aban-don the port, 80–90 percent of the trafficcould be lost. Examples of such ports areAlgeciras and Salalah.


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Box 6: Basic Port Management Models

Public service port Public Public Public Majority public

Tool port Public Public Private Public/private

Landlord port Public Private Private Public/private

Private service port Private Private Private Majority public

Source: Author.

Type Infrastructure Superstructure Port labor Other functions

• Third are ports where, although no singleshipping line may dominate the port’straffic volume, there is a possibility forthat line to pressure the port authorityinto accepting a dedicated terminalbecause of competition for transit trafficin the larger region. An example of thistype of port is Miami, which is a hub forthe Caribbean and Central and SouthAmerica. Competitors include Kingston(Jamaica) and Freeport (The Bahamas).As the competitive positions of these portsimprove, carriers may increase pressureon Miami to grant dedicated terminals.

• Fourth are major world ports such asShanghai, Hong Kong, Singapore, andRotterdam. Such ports have a very well-developed container sector. Initially, theseports resisted pressures from shippinglines to accept dedicated terminals.

However in Rotterdam, the large EuropeContainer Terminal (ECT) has beenacquired by Hutchison Port Holdings(HPH), which was obliged by theEuropean Commission to sell ECT a 33percent share in the Maersk DeltaTerminal. Also at Maasvlakte(Rotterdam), P&O Nedlloyd started theconstruction of its Euromax Terminal,which is expected to be operational in2008. Thus the Port of Rotterdam cur-rently accommodates a mix of dedicatedand common user terminals. In Antwerp,developments are similar.

The Port of Singapore did not meet the requestsof Maersk Line, which resulted in the carrierinitiating the development of the nearbyMalaysian Port of Tanjung Pelepas with itsaffiliate A. P. Moller Terminals, which conductsbusiness under the name APM Terminals.


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Box 7: Top 10 Carriers as of June 2006

Source: Author.

Rank Carrier Current TEU % of Global Current Operating Vessels UnderCapacity Fleet Vessels Construction/Contract

1 Maersk Line 1,566,352 14.9% 519 1022 Mediterranean Shipping Co SA 892,548 8.5% 297 243 Evergreen Marine Corp (Taiwan) Ltd 530,172 5.0% 193 244 CMA CGM SA 486,453 4.6% 189 565 Hapag-Lloyd Container Linie GmbH 437,954 4.2% 136 106 Cosco Container Lines Ltd 369,531 3.5% 128 207 China Shipping Container Lines Co Ltd 328,245 3.1% 95 198 APL Ltd 325,919 3.1% 104 279 NYK Line 315,865 3.0% 117 25

10 Hanjin Shipping Co Ltd 313,698 3.0% 78 17Other 4,980,735 47.2%Total Global Fleet 10,547,472 8,024 1,108

Top Ten Container Carriers as of June 2006

Share of Global Fleet(by TEU capacity)

14.9%

8.5%

5.0%

4.6%

4.2%

3.5%3.1%

3.1%3.0%3.0%

47.2%

Maersk Line

Mediterranean Shipping Co SA

Evergreen Marine Corp (Taiwan) Ltd

CMA CGM SA

Hapag-Lloyd Container Linie GmbH

Cosco Container Lines Ltd

China Shipping Container Lines Co Ltd

APL Ltd

NYK Line

Hanjin Shipping Co Ltd

Other

However, in this particular case it should benoted that the container operations inSingapore are carried out by PSA Corporation,which itself is competing globally in thecontainer terminal market.

The changes in terminal management are fast.Container lines may use a common user termi-nal with the advantage that they can switch eas-ily to a competing facility when the need arises,which has competitive advantages. On the otherhand, major container carriers are increasinglyinterested in securing berth and throughputcapacity, with the larger ones aiming at operat-ing their own dedicated terminals directly orthrough affiliated global terminal operators.Strategic alliances between global terminal oper-ators and major container lines are likely tocontinue in the near future.

With such consolidation and alliances increas-ing in the industry, there is the growing concernof dominant market shares or monopolies oroligopolies developing at both local and region-al levels. Governments should be aware of thesetrends and the impacts.

Apart from the major container lines, a numberof global terminal operators have also emergedduring the 1990s and the top 10 have distanced

themselves from the rest of the market over thelast three to five years (see Box 8). Thesecompanies operate a large number of terminalsall over the world. Their main objective is not tocontrol the transport chain, but to make a profitby offering terminal services. However, when toomany terminals within a region are controlled byone operator, the competent authority orgovernment agency may decide that specialregulatory measures are needed to protect againstthe danger of a monopoly. This was the case inRotterdam when Hutchison Port Holdings(Hutchison – HPH) bought 49 percent of theshares of ECT. The European Commission decidedto refuse permission for this transaction on thegrounds that this would have allowed Hutchisonto establish a dominant market position inNorthwestern Europe since Hutchison alreadyowned Felixstowe, Thamesport, and Harwich.

Box 9 lists the portfolio of the largest terminaloperators as of June 2005.

3.8. Port Management andCompetition Competition within and between ports has a bear-ing on the management structure of the port andthe relations between the port authority and theterminal operators and cargo handling companies.


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Box 8: Global Terminal Operators 2005 Throughput League Table

1 Hutchison Port Holdings (HPH) 33.2 8.3

2 PSA - Singapore Port Authority 32.4 8.1

3 APM Terminals 24.1 6.0

4 P&O Ports 21.9 3.3

5 DP World 13.3 2.5

6 Evergreen 11.5 1.7

7 Eurogate 11.4 1.6

8 COSCO 8.1 1.5

9 SSA Marine 6.7 1.4

10 HHLA 5.7 1.3

Source: Drewry Shipping Consultants, Annual Review of Global Terminal Operators, 2006.

Ranking Operator Million TEU % Share

These changing relations are often cited as animportant reason for changing the port manage-ment structure. Many port authorities consider thecreation of competitive conditions among portoperators the cornerstone of their port policy.

One can distinguish between interport competi-tion (competition between different ports) andintraport competition (competition betweendifferent enterprises within one port complex). Toreduce the risk of monopolies, port authoritiesusually stimulate intraport competition. However,medium-sized and smaller ports, because of theirlimited traffic, often accommodate only one portterminal operator. In such cases, port authoritiesoften use their quasi-governmental powers toregulate port charges and tariffs.

Key factors affecting interport competitioninclude:

• Geographic location: A port that isstrategically located close to well-established transport routes has competi-tive advantages. A strategic location typi-cally possesses at least the followingcharacteristics:

~ Proximity to one or more major mar-itime routes.

~ Natural deep water, good protectionagainst waves and currents, large water-front and landside expansion possibilities.

~ Proximity to major production or con-sumption areas.


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Hutchison Port Holdings:

Hong Kong (4 facilities), Jiangmen, Nanhai,Ningbo, Shanghai (2 facilities), Shantou,Xiamen, Yantian, Gaolan, Jiuzhou (China);

Dar es Salaam (Tanzania); Damman (SaudiArabia); Buenos Aires (Argentina); Ensenada,Veracruz, Manzanillo, Lazaro Cardenas(Mexico); Freeport (The Bahamas); Balboa,Cristobal (Panama); Busan, Gwangyang (Rep. ofKorea); Jakarta (Indonesia); Karachi (Pakistan);Thilawa (Myanmar); Laem Chabang (Thailand);Port Klang (Malaysia); Duisburg (Germany);Rotterdam, Venlo (the Netherlands); Harwich,Felixstowe, Thamesport (United Kingdom);Willebroek (Belgium); and Gdynia (Poland).

PSA International:

Dialian (2 facilities), Fuzhou (2 facilities),Guangzhou (China); Antwerp (4 facilities),Zeebruge (Belgium); Voltri, Venice (Italy);Rotterdam (the Netherlands); Sines (Portugal);Tuticorin (India); Incheon (South Korea);Singapore (6 facilities); Laem Chabang(Thailand); Muara (Brunei); and Kitakyushu(Japan).

APM Terminals:

Baltimore, Charleston, Houston, Jacksonville,Los Angeles, Miami, New Orleans, Oakland,Port Elizabeth, Port Everglades, Portsmouth,Tacoma, Savannah (United States of America);Buenos Aires (Argentina); Itajai (Brazil);Kingston (Jamaica); Aarhus (Denmark);Algeciras (Spain); Bremerhaven (Germany);

Constantza (Romania); Gioia Tauro (Italy);Rotterdam (the Netherlands); Zeebruge(Belgium); Abidjan (Côte d’Ivoire); Douala(Cameroon); Onne (Nigeria); Port Said East(Egypt); Tangier (Morocco); Aqaba (Jordan);Pipavav, Jawaharlal Nehru (India); Port Qasim(Pakistan); Salalah (Oman); Kaoshiung (2 facili-ties) (Taiwan, China); Kobe, Yokohama (Japan);Laem Chabang (Thailand); Dalian, Qindao,Shanghai, Yantian, Tianjin, Xiamen (China); andTanjung Pelepas (Malaysia).

Dubai Ports World (DPW, including formerP&O Ports portfolio):

Adelaide (Australia); Yantian, Shanghai, Tianjin,Yantai, Yantian, Hong Kong (China) (3 facilities);Caucedo (Dominican Republic); Germersheim(Germany); Constantza (Romania); PuertoCabello (Venezuela); Djibouti (Djibouti); Cochin,Visakhapatnam (India); Jeddah (Saudi Arabia);Vancouver (Canada); Houston, New Orleans,Miami, Norfolk, Baltimore, Philadelphia,Newark (United States of America); BuenosAires (Argentina); Tilbury, Southampton (UnitedKingdom); Antwerp (Belgium); Le Havre, Fos,Marseille (France); Maputo (Mozambique);Mundra, Nhava Sheva, Chennai (India);Colombo (Sri Lanka); Vostochny (Russia);Quindao, Shekou (China); Laem Chabang(Thailand); Surabaya (Indonesia); Manila(Philippines); Fremantle, Melbourne, Sydney,Brisbane (Australia).

Source: Company Web sites.

Box 9: Portfolio of the Largest Terminal Operators as of June 2005

~ Good hinterland connections (road, rail,pipeline, and waterway) with high fre-quency service offering good connectivity.

• Legal framework: The well-balancednational and local legal frameworkapplicable to port management greatly bol-sters investor confidence. Many countrieshave enacted specific port laws dealingwith powers and responsibilities of the var-ious actors in the sector. Moreover, landand competition laws are equally impor-tant, as well as an independent judiciary.

• Financial resources: A port with sufficientfinancial means of its own or the capacityto raise the funds required to develop andimprove the port has a competitiveadvantage over ports with limitedresources or no financial autonomy.

• Institutional structure and socioeconomicclimate: The management structure of theport must be conducive to private sectorinvestment. Related to this is the socioeco-nomic climate in the port; privateinvestors prefer ports with a sufficient andwell-trained labor force and good rela-tions between employees and employers.

• Efficiency and price: Various investigationsindicate that port costs are an important,although not decisive, factor in makingchoices, especially for cargo owners or theirrepresentatives. In a world where manufac-turers seek to trim costs and improvecustomer service through the adoption ofsophisticated logistics processes, efficiencyand the price-performance ratio areincreasingly important.

• Image of the port: The image the port proj-ects is another factor in its competitiveness.The preferred image is an optimum mix ofthe above-mentioned components.

Box 10 summarizes the key elements influencingport competition.

3.9. Port Sector Regulator When interport competition is muted or absent,port authorities or public or private terminal

owners are apt to use their monopoly marketpositions to raise tariffs (in particular for captivecargoes), which may justify regulation. The needfor such regulation may lead to the creation ofan independent port sector regulator.

The objectives of the port sector regulator areto ensure fair competition among competingoperators in the port; to control monopolies(including public ones) and mergers; and toprevent anticompetitive practices.

A port sector regulator typically has legal powersto counter anticompetitive practices, such as:

• Use of a dominant position to prevent orlessen competition.

• Cross-subsidization by the provider ofmonopoly services of contestable services,thereby threatening fair competition.

• Price fixing among competitors.

• Use of other practices that are intended torestrict, distort, or prevent competition.

Smaller ports are more vulnerable to anticom-petitive abuses because their traffic volumeslimit the number of container, bulk, and oilterminals. Generally, when a monopoly ormerger situation does not operate against thepublic interest, it may be permitted provided itis properly regulated. Examples of regulation insuch cases could include tariff caps, volume ortraffic thresholds to trigger any additional futureconcession, or expansion limits to incumbentoperators that otherwise require an open tender.

The establishment of a port sector regulatorshould only be effected in the event of seriousthreats to free competition within the port. Itshould preferably have the character of anarbitrator instead of a court of law, and beaccepted by the port community as beingindependent. For a more detailed discussion ofthe economic regulation of ports, see Module 6.

3.10. Value-Added Services Generally, the function of a port as a node inthe transport chain depends on its location andon the economic and technical developments that


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exist in its hinterland. Modern production tech-niques and consumption patterns increase the useof transportation systems beyond levels suggestedpurely by the growth in trade and commerce. Asa result, more specialized handling, storage, andother logistics facilities are needed. More andmore, ports are becoming part of integratedlogistics chains. This process of specializationand changing demands, which has taken placeover the last two decades in most Western coun-tries, is now taking place with even greater speedin new market economies.

From the port’s point of view, creating newservices boosts economic performance as well asits attractiveness to existing and potentialclients. This, in turn, can help maintain andimprove a port’s competitive position. Whenassessing the wisdom of developing new servic-es, it is important to pay attention to the value-

adding potential of the services. This potentialcan vary product by product and activity byactivity. Numerous activities can be classified asvalue-added services (VAS). Box 11 identifies anumber of them.

VAS can be divided into value-added logistics(VAL) and value-added facilities (VAF). VALhas two major components: general logisticsservices (GLS) and logistics chain integrationservices (LCIS). GLS are, among other activities,loading and unloading, stuffing and stripping,storage, warehousing, and distribution. Theseare the more traditional logistics activities anddo not directly affect the nature of the productas it moves through the port.

Beyond these traditional activities, more complexLCIS are being developed. To carry out activitiesthat manufacturers do not consider part of their


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Inland Transport System

The inland transport system (road, rail,waterway, and pipeline) determines to agreat extent the captive area of a port.

Improvements to the inland transport systemplace ports in a more competitive environment. Incases where major ports may have a hinterlandthat covers a number of countries, their zone ofcompetitiveness overlaps that of other ports. Asa result, fierce price competition might exist.

Transshipment

Transshipment (sea-sea transfer of cargo) ofcargo, particularly containerized cargoes, is amajor market chased by many, if not almostall, major ports in the world. Transshipmenthas the advantage that it generates additionaltraffic (two moves for one box) and the weak-ness of being foot loose. Cargo owners andshipping lines constantly look for the portwhere the price-quality ratio best serves theirparticular interests. Because the penalty forchanging ports of call for transit traffic is notvery severe, carriers tend to switch their trans-shipment ports with little provocation.

Freight Forwarders and MultimodalTransport Operators

Freight forwarders and multimodal transportoperators (MTOs) play a decisive role in

today’s transport evolution, particularly withinthe framework of the door-to-door transport ofcommodities. As transport and distributionspecialists, they greatly influence port choiceand interport competition.

Freight forwarders and MTOs have theirown networks in the region that provide up-to-date information about technical, commer-cial, operational, and social differencesbetween (competing) ports. They contributeto the loss of identification with and loyaltyto specific ports on the part of the con-signees and shippers. Freight forwardersand MTOs often have representative offices incompeting ports.

Switching ports is much easier for trans-port specialists such as freight forwardersand MTOs than it is for shippers andconsignees. In addition, as consolidators ofsmall consignments and shipper representa-tives, they are relatively strong compared totransport providers and other relevant parties,which makes modification of transport rout-ings easier. Assisted by freight forwardersand MTOs, large shipping lines now canchange the ports of call with much lessdifficulty.

Source: TEMPO—Port of Rotterdam.

Box 10: Elements Influencing Interport Competition

core business, logistics service providers may takeover parts of the production chain (for example,assembly, quality control, customizing, and pack-ing) and after sales services (for example, repairand reuse). However, LCIS are only appropriatefor certain types of goods. The products thathave the highest potential to benefit from suchservices include consumer electronics, pharma-ceutics, chemical products (except for thosecarried in bulk), clothing, cosmetics and personalcare products, food, machinery, and controlengineering products.

The second group of VAS, that is, VAF, is verydiverse. These types of activities cannot general-ly be assigned to a particular type of product orfreight flow. It is possible, however, to impute acertain VAF potential by analyzing freight flowssuch as dry and liquid bulk, general cargo, con-tainerized cargo, and roll-on roll-off. A largecontainer throughput might create the economicbasis for establishing container repair facilities,handling vast quantities of chemicals requiresport reception facilities, and substantial roll-onroll-off traffic might justify truck maintenance

and repair shops. Box 12 broadly depicts thepotential for both VAL and VAF activities fordifferent types of cargoes.

Containerized and general cargoes typicallyhave the highest VAL potential. GLS and LCIShave the best opportunity to serve these car-goes. The VAL potential for roll-on roll-off isvery limited. Trucks with drivers are too expen-sive to be delayed while the cargo is modified;additionally, these loads are usually customertailored. VAF, such as tanking, cleaning, repair,parking, security, renting, and leasing facilitieshave a better potential to serve the roll-on roll-off market. Dry and liquid bulk flows have thelowest potential for both VAL and VAF.

To provide a favorable environment for VALand VAF, many ports are developing distriparks.A distripark is an area where companies areestablished to perform trade and transport-related value-added services and can alsoinclude locations within the port’s larger hinter-land region. There is no standard developmentplan for a distripark. As can be seen from the


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Box 11: Overview of Value-Added Services in Ports

Source: Author.

value-added services

value-addedfacilities

general logisticsservices

logistics chainintegration services

value-addedlogistics

loading/unloadingstripping/stuffingbulk storagetank storagegeneral warehousingconditioned warehousingdistribution centers

parking facilitiesweighbridgescustoms facilitiestruck maintenance and repairfacilities

container repair and maintenance

cleaning facilitiestanking facilitiestrailer renting and leasinginformation and communication

safety and security servicesoffices/wtchotels, restaurants, shops

quality control repackingcustomizingassemblytestingrepairre-use

various developments in the Netherlands,France, Germany, and the U.K. for instance,there is a large variety in distriparks. For exam-ple, in Rotterdam, there are three distriparks.The oldest one (Eemhaven) is devoted to con-tainer cargo distribution, the second one(Botlek) is devoted mainly to chemicals, and thethird and most recent one is also dedicated tocontainerized cargoes, and includes large ware-houses containing goods for European distribu-tion (for example, Reebok).

4. PORT FINANCE OVERVIEW Before 1980, service ports and tool ports weremainly financed by the government. The generalinfrastructure of landlord ports typically wasfinanced jointly by the government and the portauthority, and the terminal superstructure andequipment by private operators. Fully privatizedports were the exception. In the event a govern-ment had no funds for expensive port infra-structure, either port development was halted ormoney was acquired at preferential rates froman IFI such as the World Bank.

Ports require expensive infrastructure to be ableto compete successfully. Until recently, portauthorities mainly relied on contributions andsubsidies from national governments for build-ing or improving basic port infrastructure. Suchcontributions usually were excluded from port

financial accounts and therefore helped ports toexhibit positive financial positions.

Whether national governments finance basic portinfrastructure depends on the government’s polit-ical and economic policies. For example, if portsare considered part of the general transport infra-structure of the country, then investments inthem may be considered to promote the nationalinterest. Research shows that in 63 percent of thetop container ports, the public sector (either thenational government or the public port authori-ty) was responsible for creating and maintaining(public) basic port infrastructure.

In some countries, financing basic infrastructureis considered a public task (for example, inFrance, Italy, and Croatia) because this part ofinfrastructure belongs to the public domain,which is protected by law. To carry out con-struction activities or port operations in thisdomain, a public license is required. Thisrequirement could reduce intraport competitionif the licenses are granted only on a limited anddiscriminatory basis.

An often occurring problem with public (thuspolitical) investment decisions is that the deci-sion to invest does not necessarily originate atthe same level of government as that of thefinancing sources and responsibilities. Becauseof this disconnect, the interest of public officials


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Box 12: Potential for VAL and VAF

Source: Author.

high

lowVAL potential

high

roro

containers

general cargo

liquid built

dry bulk

VA

F p

oten

tial

to increase efficiency and profitability of portassets is usually limited because they are notheld accountable for the success or failure oftheir investment decisions.

As mentioned earlier, the increasing role ofprivate enterprise in the port sector exerts a directinfluence both on port management andoperations, as well as on the way capital projectsare financed. The private sector has becomeinterested in financing the construction of entireterminals, including quay walls, land reclamation,dredging, superstructure, and equipment. Thishas given rise to a large variety of financing andmanagement schemes such as BOT (build-operate-transfer), BOOT (build-own-operate-transfer), and BOO (built-own-operate). Each isdesigned to mobilize private capital whilebalancing public and private interests.

Government’s views on ports are evolving.Increasingly, ports are considered separate eco-nomic entities, although still subject to nationalregional and local planning goals. As such, theyshould operate on a commercial basis. By thesame token, subsidies for operational port infra-structure construction, such as port land, quaywalls, common areas, and inner channels,should be avoided.

Box 13 summarizes the EU’s views on subsidies,particularly those for infrastructure.

There still is, however, a category of portinfrastructure for which it will be hard to findprivate investors: investments for expensive andlong-lived infrastructure (for example,breakwaters and locks, entrance channels andfairways, and coastal protection works). Themain stumbling block for private financing ofsuch projects is their life span, which oftenexceeds 100 years, and the sunk investmentaspect of these projects. Cost recovery of suchworks often cannot be achieved in 20 to 30years (see Module 4), which is a normalrepayment period for long-term loans forinfrastructure works by IFIs. Nevertheless, thesecond- and third-order benefits from suchinfrastructure investments for national andregional economies may be substantial. Hence,

many governments are still willing to financepart or all of long-term port investments asthese contribute to the achievement of publicpolicy objectives. Caution is warranted, however,whenever governments contemplate underwritingsuch investments.

4.1. Financing Port Projects To further clarify financing approaches, it isimportant to distinguish among investments inbasic port infrastructure, operational port infra-structure, port superstructure, and port equip-ment. Understanding these distinctions will helpin deciding which investments should be paidfor by the port and which should be paid for bythe local or regional community, the centralgovernment, and private investors. Box 14 listsvarious types of port assets under these fourcategories.

In addition to financing the construction, reha-bilitation, acquisition, and maintenance ofphysical assets, ports may also need to financeorganizational restructuring and associatedlabor compensation as well as working capitalto support operations. Each of these categoriesand their potential sources of financing arediscussed below.

In many countries, the government is responsi-ble for financing basic infrastructure, eitherdirectly or through a contribution to offset itscost when the project is conducted, for exam-ple, by a highway authority or a port authority.In the Netherlands, construction of maritimeaccess and protection works used to be carriedout by and for the account of the governmentwith the port authorities obliged to pay one-third of the relevant costs. In France, this issueis regulated in the Port Authority Law of 1965(Law No. 65 – 491 of June 29, 1965), whichallocates a minimum of 80 percent of the costsof basic port infrastructure of the AutonomousPorts to the national government.

For the government, there are two key issuesassociated with making large direct investmentsin port facilities: how to find the necessaryfunds and how to recover the investment.


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The ways in which the government (or anyother public body) funds investments arediverse:

• Direct investments coming from the gov-ernment investment budget.

• Direct investments coming from a special(port) fund.

• Loans from IFIs.

Direct investments, paid for by the investmentbudget or a special fund, are based on theassumption that they will have a substantialpositive effect on the economy, as shown by thepositive results of a cost-benefit analysis (alwaysheavily dependent on traffic forecasts). Forinvestments broadly benefiting the entire nation,it is not unusual that a government would notseek direct financial repayment.

However, there are also situations where thegovernment may receive direct reimbursementfor the funds it invested via a variety of ratesand charges assessed against the beneficiaries ofthe investments. These may take the form of:

• Compensation paid by the port authorityin proportion to the volume of goodstransported through a newly dredgedchannel (per ton or per TEU).

• A fixed amount per year paid by the portauthority to the government.

• A percentage of the annual port dues paidby the port authority to the government.

Often, basic infrastructure elements arefinanced by an IFI under a government guaran-tee. However, even when IFI financing is madeavailable, ports and governments must still facethe challenge of providing matching shares for aperiod of 30 to 50 years and making interestpayments over a period of some 20 years.

When considering financing of operationalinfrastructure, port authorities have a numberof options from which to choose. For serviceports or tool ports, governments will usuallyfinance the operational infrastructure, with orwithout the assistance of an IFI. For landlordports made up of self-contained terminals,investment in the terminal should be financed


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Beginning in the 1960s, heated discus-sions took place in Europe on the issueof port subsidization. The United

Kingdom in particular accused continentalEuropean countries of secretly subsidizingtheir ports to improve their competitive posi-tion. Indeed, most European governmentssubsidized directly or indirectly the develop-ment of their ports. No European rules or regu-lations were in place because the port sectorwas not included in the Treaty of Rome.However, rules were laid down within theframework of regulating subsidization of infra-structure. Article 93, paragraph 3 regulates theadmissibility of state subsidies in port infra-structure as follows:

• Subsidies should be necessary for the proj-ect in question to be realized.

• The period of subsidization should be limited.

• Subsidies must be in the interest of theEuropean Union.

• Subsidies must be compatible with theobjectives of the common transport policy.

• Subsidies should not disrupt competition.

• The investment must be profitable from thefinancial and socioeconomic points of view.

• More than one party should benefit from thesubsidy.

• Subsidy of mobile assets is not permitted.

• Subsidies to cover operational costs are notpermitted.

The main criterion to assess whether subsidy ispermitted is the issue of selective favoring ofthe country’s business sector. With respect toports, the European Commission is of the opin-ion that investments in basic port infrastructure,such as coastal works, port accesses, andoperational infrastructure are not selectiveenough to be considered state subsidy.Investments in operational infrastructure haveto be reported to the European Commission.Investments in a dedicated terminal that are notfully charged to the client are considered illegalstate subsidies and are not allowed.

Source: Author.

Box 13: European Rules on Port Subsidies

by the terminal concessionaire or the lessee,while the port provides the land (often in a con-dition ready for construction). The port mayalso provide the quay wall with the land, but,increasingly, private concessionaires have beenwilling to invest in this infrastructure.

Other financial arrangements are also common.For example, in U.S. public ports, the portauthority may have access to “cheaper” moneythan a private sector operator. In this case, theauthority has the option to issue tax-free portrevenue and general obligation bonds. Both giveports access to capital markets; the former relieson the revenues generated by operation of the newfacility to repay debt, the latter assures purchasersof the debt that the government will make goodon any repayments should revenues fromoperation of the new facility prove inadequate.

The most attractive situation, both from thepoint of view of the landlord port authority as

well as of the operator, is the conclusion of a long-term lease contract with the operator(running for a period of 20 to 30 years) for theuse of part of the port area. This type oflong-term lease has the legal character of aproperty right and has four advantages:

• At the end of the contract, possession ofthe land reverts to the government orport authority.

• The contract represents a property rightthat under certain conditions can betransferred to a third party. There usuallyis a clause in such contracts stating thatsuch transfer of property rights requiresprior permission from the port authority.

• All superstructures (buildings and equip-ment) may be financed and owned by theoperator.

• It can be used as security for a bank loan.


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Basic Port Infrastructure:

• Maritime access channels.

• Port entrance.

• Protective works, including breakwaters andshore protection.

• Sea locks.

• Access to the port for inland transport(roads and tunnels).

• Rail connection between the hinterland andthe port.

• Inland waterways within the port area andconnecting port areas with their hinterland

Operational Port Infrastructure:

• Inner port channels and turning and port basins.

• Revetments and slopes.

• Roads, tunnels, bridges, and locks in theport area.

• Quay walls, jetties, and finger piers.

• Aids to navigation, buoys, and beacons.

• Hydro and meteorological systems.

• Specific mooring buoys.

• Vessel traffic management system.

• Patrol and fire-fighting vessels.

• Docks.

• Port land (excluding superstructure and paving).

• Access roads to general road infrastructure.

• Rail connection to general rail infrastructure,and marshalling yards.

• Dry docks for ship repair.

Port Superstructure:

• Paving and surfacing.

• Terminal lighting.

• Parking areas.

• Sheds, warehouses, and stacking areas.

• Tank farms and silos.

• Offices.

• Repair shops.

• Other buildings required for terminal operations.

Port Equipment:

• Tugs.

• Line handling vessels.

• Dredging equipment.

• Ship and shore handling equipment.

• Cargo handling equipment (apron and terminal).

Source: Author.

Box 14: Categories of Port Assets

For the financing of common areas (all areaswithin the port area not being part of a terminalor other port enterprise), the port authority maymake use of retained earnings, issue its ownbonds (where permitted to do so by its statutesand legal system) or make use of bonds, orsimply take a bank loan. Except in the firstcase, the associated risk is with the borrower.The problem confronting public ports is whatto use as collateral or guarantees for the lender,particularly since there may be restrictions withrespect to the use of the port’s assets.

In the event of a major reorganization programfor the port authority, substantial amounts ofmoney may be required for compensation pay-ments to personnel. (See Module 7 for adetailed discussion of labor issues affecting portreform.) Such payments often have a shortpayback period. Nevertheless, traditionalsources of finance may be unwilling to lendmoney specifically for this purpose. There is,however, a possibility for “triangular” financing,that is, lending the money for some other transac-tion on condition that the funds thus liberated areused to compensate displaced workers. Moreover,a national government might be willing toprovide funds for labor redundancy schemes withor without the involvement of an IFI.

Port operators and providers of services whotake over existing installations and equipment

from a port authority may have a greater needfor working capital than investment capital, espe-cially in their start-up periods. With respect todebt financing, operators face the problem ofproviding security because installations andequipment often may be leased under conditionsthat prevent them from being mortgaged. Sinceport operators are essentially private companies,an attractive alternative to debt financing isthrough the flotation of equity shares, the successof which will depend largely on the degree ofconfidence prospective shareholders have in thenewly founded company and in its management.

Supplier credit, provided that it includes thefinancing of necessary spare parts over a period ofat least three years, offers another potential sourceof funding for the procurement of equipment,with the usual limitations of this type of financing.

Finally, a joint venture between the port author-ity and the operator offers what may be anattractive source of finance for the operator. Fora specialized terminal, where the likelihood of acompeting terminal being constructed is remote,a joint venture may be reasonable. In most cir-cumstances, however, the likely effect of a jointventure between a port authority and an opera-tor is to obscure the transparency of the rela-tionship between the different port functionsand, more pragmatically, to discourage theentry of new operators to the port. Box 15


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The Sri Lanka Port Authority (SLPA) faces anumber of challenges. In 1999, the gov-ernment of Sri Lanka entered into a 30-

year concession for the South Asia GatewayTerminal (SAGT). SAGT is operated under aBOT scheme by P&O Ports (now owned byDubai Ports World – DPW), with other partnersincluding Evergreen Marine Corporation andJohn Keels (Sri Lanka). SLPA has retained a rolein the terminal as well. The Port of Colombo iscurrently a service port, and its lead containerterminal, Jaya Container Terminal (JCT), is andwill continue to compete actively with SAGT.

Given SLPA’s stake in both JCT (100 per-cent) and SAGT (7 percent), as well as in

many services in the port area including intert-erminal transfers, SLPA’s position as a neutrallandlord is compromised. Looking into thefuture, a major expansion, the South Port, willrequire that the role of SLPA become one of anondiscriminatory landlord without a directhand in operations. This should improve effi-ciency and minimize the conflicts of interest.However, port reform in Sri Lanka is stalling.Despite official government plans, JCT is notcorporatized and no port sector regulator hasbeen established on or before October 2004,as required by the concession agreement withSAGT.

Source: Christiaan Van Krimpen.

Box 15: Multiple Terminal Ownership in Sri Lanka

describes the challenges mounted by such rela-tionships in the case of the Sri Lanka PortAuthority.

4.2. Financing Ports: From aLender’s Point of View Port authorities or port operators seeking tofinance new facilities or equipment typicallyhave to offer some sort of security to a prospec-tive lender. Generally, they have assets andother support from political and business circlesfor the project they want to undertake. In manyports, however, land is government-owned andcannot be used to secure financing. And, whena port needs money to dredge a channelentrance to remain attractive and competitive,the channel itself does not constitute crediblesecurity for the lender. There are however, vari-ous options for ports to provide lenders“comfort.”

Prospective lenders will examine closely theposition of the borrower, which might be a portauthority or a port enterprise. In the vastmajority of cases, the latter are structured aslimited liability companies. In the case of loansto a public port authority, the state or munici-pality usually provides a guarantee. A portauthority might also be corporatized with thestate or the port city as main shareholders. Inboth cases, the lender will assess the financialstrength of the port authority and the publicbodies owning it. This is often sufficient toensure financing of the venture without toomuch regard to the assets supporting it. InAnglo-Saxon jurisdictions, a borrower may cre-ate a “floating charge” (similar to a mortgage)over all assets. This avoids the need to considerspecific elements of the port assets as collateral.

A port’s most valuable asset is its land; however,land’s value as a security for financing variessignificantly. Generally the land is owned by apublic body or by the port authority itself. Inlandlord ports, the land is concessioned orleased to private operators, with the exceptionof common areas, which usually have a lowcommercial value. In the majority of cases, portland cannot be mortgaged under a concession

agreement. Sometimes it is legally possible tomortgage superstructure on the terminal. Usingthe land itself as collateral is therefore compli-cated. The land must have inherent worth and auser should be able to exploit it. If a right touse the port area concerned does not accompa-ny the mortgage on port land, its value is con-siderably diminished. Another problem mightbe that the national legislation grants only limit-ed rights to a mortgage. Lastly, in the event of apublic port authority, the lender might be con-fronted with political processes complicating itsability to exercise rights under a mortgage. Thismakes the security less valuable to a lender.

In most ports, the concession or lease to privateoperators is the principal security for lenders,provided that the conditions of the concessionor lease allow transfer of the contractual rightsto another party. In the case of a full-fledgedconcession (including a BOT scheme), the finan-cier often desires to have the ability to arrangefor the operation of the terminal itself if theoperator defaults. In the case of a concession orland lease, a port authority is usually obliged totransfer the concession or lease to a third party,such as transfer to another port-related firm,when certain conditions are met. This might bea cargo handling firm or terminal operatingcompany, or a port-based industry such as arefinery or a chemical plant. Conditions attach-ing to the transfer typically require the new firmto use the facilities in accordance with their ini-tial assignment and to generate sufficient seago-ing traffic.

A port complex comprises a large variety ofother assets that might be mortgaged or used ascollateral, such as warehouses, quay cranes,offices and other buildings, tugs, dredged chan-nels, and others. Some of these assets mightprovide security to a lender, especially when theassets can be used in other ports (for example,cranes and tugs). Others, because they areimmobile or have few alternative uses, consti-tute little or no security (for example, dredgedchannels). An important aspect of securingfinancing is the legal right of a port operator toown buildings on land leased from the port


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authority. Lenders are usually prepared tofinance buildings and certain types of equip-ment in view of their intrinsic value.

Port firms, and sometimes privatized or corpo-ratized port authorities, typically take the legalstructure of a joint stock or limited liabilitycompany. The equity of such enterprises doesnot constitute security in itself, but may help toattract investment funds. Rights of equity hold-ers to repayment usually rank immediatelybehind the rights of a lender. When balancesheet financing is undertaken, a high level ofequity (in relation to debt) means that morefunds are available to absorb losses beforelenders come under threat.

One of the most important elements of financialsecurity is the cash flow generated by the portor terminal. A lender almost always wants theearnings of the project to provide security forthe loan. Estimation of such earnings is highlycomplex because it involves assessing elementssuch as future traffic levels, port revenues andexpenses, the expected general economic devel-opment of the country, potential exchange raterisks, the future political climate, and otherfactors. The more accurate and reliable the trafficand financial forecasts are perceived to be byprospective investors, the higher the probabilitythat a port authority or port operator will beable to attract risk capital and obtain loans.

Governments may also guarantee commercialloans against political risk and possibly use theguarantee programs offered by the IFIs. In theport sector, lenders often take security viaassignment of port charges. However, much willdepend on the terms of the concession or leaseagreement, terms of earlier financing, and therights of third parties. Finally, financing can beaffected by the provision of additional govern-ment support. A government may invest equityin a firm it deems essential for the generaldevelopment of the port. It may also providesubordinated loans. Direct financial involvementof governments and public port authorities isincreasingly common, despite potential conflictsof interest. Sometimes a government may assigncertain rights or grant concessions such as a

duty-free status (as was the case at Jebel Ali) toenhance the success of the venture. Properlyfocused government support can be veryimportant to provide additional comfort tolenders.

4.3. Public-Private Partnerships As private sector involvement in financing portand other infrastructure works has increased,the tools for financing these facilities havebecome increasingly sophisticated and the legalconditions to be satisfied by the project morestrict. The private sector evaluates its participa-tion in port infrastructure and superstructureprojects based on the following elements:

• Expected yield.

• Adequate debt/equity financing structure(for example, 65/35, 70/30, 75/25).

• Strong sponsorship.

• Solid legal contracts.

• Transparent legal framework.

• Fair and open bidding procedures.

• Credible feasibility analyses (technical,institutional, financial, economic, andenvironmental).

Funding large infrastructure investments ingreenfield port projects is more risky because ofcertain complicating factors, including:

• The large proportion of necessary equitycontributions (for example, a minimumproportion of 60 percent) due to the highrisk associated with long constructionand payback periods.

• The difficulty of projecting future trafficvolumes.

• The capital-intensive nature of the invest-ments.

• The continuing risks associated with opera-tions, such as a refusal of requests for tariffadjustments, changes in tax policy, orintroduction of new handling techniquesthat make existing facilities obsolete.


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5. PORT REFORM MODALITIES Today, the term port reform connotes thechanging institutional structure of the port busi-ness and the much greater involvement of theprivate sector in the exploitation and financingof port facilities, terminals, and services. Portreform, therefore, results in changing relation-ships between the public and private sectors.

The sharp increase in world trade over the last60 years focused the attention of national gov-ernments on the economic importance of ports.This was especially the case in major portsdeveloping large industrial sites within theirdomain. In the 1950s and 1960s, many nationsintroduced institutional changes with the aim ofcoordinating port development at national andregional levels and preventing overinvestment inexpensive port infrastructure. For example, theUnited Kingdom established its National PortsCouncil for this purpose.

In the former Soviet Union, Eastern Europe,and in many socialist-oriented developing coun-tries the situation was entirely different. Portswere considered part of the national statestructure (for example, as an element of theministry of merchant marine or ministry oftransport) and were often controlled by nationalshipping companies. Every matter involvingmaritime policy was decided centrally, with portauthorities carrying out the various day-to-daynautical and operating functions.

At the beginning of the 1980s, the belief in themanagement and operating capacities of nation-al governments faded in most market economycountries. Central structures came under fireand often lost some of their powers. The priva-tization wave launched in the late 1970s andearly 1980s by Margaret Thatcher in the U.K.also affected the port sector and resulted in areassessment of the role of the government andprivate enterprise.

The demise of the communist system in thebeginning of the 1990s resulted in the virtualcollapse of centrally controlled port systems inthe former socialist countries. They too

embarked on port reform and adapted the insti-tutional and financial structure of their port sec-tors to market conditions.

Despite the social and economic reforms of thepast 35 years, the public sector has retained astrong role in port development. Generally, in amarket-oriented economy a government contin-ues to be responsible for the development of pub-lic goods, goods that have a social utility, butthat cannot be provided by the private sectorbecause of low profitability. Moreover, anotherreason for continuing government involvement inthe port sector is the strong ties to governmentresponsibilities in the areas of land use planning,environmental protection, job creation, and theeconomic stimulation of underdeveloped areas.Box 16 is a compilation of a considerable num-


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Box 16: Reasons for Pursuing Port ReformGeneral Reasons:

• Improve port efficiency.

• Decrease costs and prices.

• Improve service quality.

• Increase competitive power.

• Change the attitude with respect to portclients (become more client friendly).

Administrative and Managerial Reasons:

• Depoliticize the public port administration.

• Reduce bureaucracy.

• Introduce performance-based management.

• Avoid government monopolies.

Financial Reasons:

• Reduce public expenditure.

• Attract foreign investment.

• Reduce commercial risks (investments) forthe public sector.

• Increase private sector participation in theregional or national economy.

Employment Reasons for Change:

• Reduce the size of the public administrations.

• Restructure and retrain the port labor force.

• Eliminate restrictive labor practices.

• Increase private sector employment.

Source: Various World Bank surveys between 1990–2000.

ber of surveys seeking to summarize the most fre-quently cited reasons for change in the manage-ment or ownership of ports.

5.1. Strategies and Reform Options Many port managers and government officialsbelieve that the only way to improve the per-formance of public port organizations isthrough the process of privatization. They holdthis view because they believe that certain char-acteristics of the private sector are indispensableto achieve commercial success. The term priva-tization has therefore become synonymous (andconfusingly so) with port reform. Privatization,however, more accurately refers to one aspect ofport reform—the introduction of the privatesector into areas previously reserved to the pub-lic sector, finally resulting in the transfer of portland into full private ownership.

Governments and port managers can selectfrom among a variety of strategies for improv-ing organizational and operational perform-ance, including:

• Modernization of port administrationand management.

• Liberalization or deregulation port services.

• Commercialization.

• Corporatization.

• Privatization.

Each of these options may be equally valid andsuccessful forms of port reform, depending onthe setting of the port in question. Each of theseoptions is defined below.

Modernization of port administration assumesthat performance can be improved by introduc-ing more suitable systems, working practices, orequipment and tools within the existing systemof bureaucratic constraints. The advantage ofthis strategy is that certain changes in theorganization can be made without the require-ment to change laws or national policy.

Liberalization and deregulation are the reformor partial elimination of governmental rules and

regulations that enable private companies tooperate in an area where previously only thepublic sector was allowed to operate.

In the case of commercialization, although thepublic port is not transformed into a privatecompany, it is given more autonomy and madeaccountable for its decisions and overall per-formance. A commercialized port authorityapplies the same management and accountingprinciples as private firms and can adopt pri-vate sector characteristics and practices tobecome more customer oriented as well as moreefficient and profitable.

In the case of corporatization, a public portenterprise is given the legal status of a privatecompany, although the public sector or govern-ment still retains ownership. All assets aretransferred to this private company, includingland lease rights. Land ownership usuallyremains with the port authority.

The most complex form of reform is privatiza-tion. A useful definition of this term can befound in the UNCTAD publication of 1998Guidelines for Port Authorities andGovernments on the Privatization of PortFacilities: “Privatization is the transfer of own-ership of assets from the public to the privatesector or the application of private capital tofund investments in port facilities, equipment,and systems.”

More specifically related to the port sector aretwo more variations of privatization:

• Comprehensive privatization: A schemein which a successor company becomesthe owner of all land and water areas aswell as of all the assets within the port’sdomain (this is equivalent to the sale ofan entire port to a private company).

• Partial privatization: A scheme in whichonly part of the assets and activities of apublic port body are transferred to theprivate sector (such as the sale of existingberths, the transfer of pilotage or towagefunctions, or a concession by a publicport authority to a private company to


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build and operate a terminal or a special-ized port facility).

Hence, privatization expands the role of the pri-vate sector in the ownership or operations ofexisting port facilities and services, as well as inthe development of new port facilities. In thefollowing sections, the various port reformoptions are described in greater detail.

5.1.1. Modernization of Port Administration

The strategies of liberalization, commercializa-tion, corporatization, and privatization allattempt to improve the efficiency of the portadministration and the operations through theintroduction of a business-like environment.Although these strategies can be effective, somegovernments are reluctant to implement thembecause they fear that such institutional modifi-cations may lead to a disruption of services orloss of government authority, prerogatives, andpower. As a result, governments sometimes pre-fer other less sweeping methods to improveorganizational performance, such as the mod-ernization of the port’s administration. Such astrategy assumes that the performance can beimproved even in the prevailing environment ofbureaucratic constraints. The advantage of thisstrategy is that certain changes in the organiza-tion can be made without the necessity to makelegal or policy changes.

Examples of improvements that can be intro-duced without legal or policy changes are:

• Adoption of corporate planning practices.

• Application of human resources develop-ment (HRD) planning.

• Use of computer applications and man-agement information systems (MIS).

• Development of electronic data inter-change (EDI) and information and com-munication technology.

Many ports have refrained from introducingcorporate planning (strategic management orstrategic planning) because port managers fearthat its positive effects may be undermined bybureaucratic or cultural considerations.

Effective corporate planning is dependent onstrategy formulation involving group interac-tion. While group-based strategic decisionsoften can offer the best available alternatives, astrict hierarchical organizational structureplaces the majority of important decisions in thehands of a single executive. In such cases, thesuccess or failure of port development and poli-cy is dependent on one person only, which is arisky situation. But this is precisely the most fre-quently observed form of management in tradi-tional ports.

Career planning and management developmentare important elements in a port modernizationstrategy. Many ports have failed to introducecareer planning and career development in theorganization, or omitted to link the two activi-ties. As a result, such organizations are character-ized by low employee motivation levels, highabsenteeism, and high turnover rates at manage-ment level positions. Efforts to improve theadministrative environment and performanceshould include the rational use of computerapplications and the application of modern com-munication technologies. Such developments areperhaps the most significant technological effortsundertaken by ports. Many have developedadvanced computerized management informationsystems. EDI and information and communica-tions technology are excellent tools to improveport administration and communication.

In the final analysis, the modernization optiongenerally has not led to fundamental changes inthe port sector, which is what the reformprocess sets out to do. It should, therefore, beconsidered as a stepping stone toward a morecomprehensive reform program.

5.1.2. Liberalization

Liberalization sets the stage for a private organi-zation to carry out certain port activities previ-ously reserved exclusively for the public sector(public monopoly). With this reform, the privatesector is authorized to provide selected port serv-ices to users in a competitive environment withthe intent of increasing efficiency and improvingport-client responsiveness. The essential feature


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of the liberalization option is implementinglegislation that permits the private sector toprovide facilities and services and to competewith the existing public port organization. Themost important advantage of this systemcompared to other port reform systems is thatthe public port operator, even if inefficient, willcontinue to exist as a form of insurance againstdisruptions in service, while unsuccessfulprivate port operators can be replaced.

Since liberalization may temporarily introducecompetition between public and private portoperators, the two must be able to competeeffectively and fairly. This might require theintroduction of an independent port sector reg-ulator. Actually, the logic of liberalizationshould lead the public port authority to fullywithdraw from commercial activities and con-centrate on any necessary regulatory functions.

Liberalization is often opposed because of theexistence of internal as well as external cross-subsidies. This, for instance, occurs when portswith a statutory monopoly cross-subsidizeunprofitable services in competitive marketswith profits earned in monopoly markets. Forexample, in many ports the most profitableactivity is the container terminal operation, therevenues of which frequently support bulk orgeneral cargo facilities and services. Otherforms of cross-subsidy occur when a public portorganization realizes substantial revenues fromnonmaritime-related activities, such as realestate development, and uses these revenues tounderwrite port-related costs. With this type ofsupport to draw on, the public organizationhas a competitive advantage over its privatecounterpart.

On the other hand, the price advantage that thepublic port body may have had diminishes ascompetition erodes its monopoly power andprices are set in a more competitive environ-ment. Its price levels cannot match those of theprivate sector if it has to rely on inflated pricesto subsidize other port services. The formermonopoly may, as a consequence, be forced toscale back or cease the unprofitable activities(which, although unprofitable, may be vital to

the nation) to compete effectively with the pri-vate sector.

On many occasions, the public sector continuesto rely on public subsidies, thereby underminingfair competition between the public and the pri-vate sectors. This strongly argues for the clearseparation of the regulatory and commercialroles in a port, with the port authority taking onthe former and the private operator the latter.

Another potential problem associated with theliberalization option is the possibility that thepublic port organization will use other unfairpractices to compete against private operators.The port authority, for example, may takeactions that are beneficial to the public termi-nals, but are disadvantageous to the private ter-minals. One example is the dredging of certainAsian ports; often, the government ministry orthe public port authority provides exclusivedredging services. This public entity can refuseto offer this service to the private operators,thereby putting those operators at a competitivedisadvantage. Another possibility is that theservice would be provided to the private sectorat a higher price than the one charged to thepublic sector. To avoid such potential conflictsof interest, the government may also decide toliberalize or privatize these essential comple-mentary services to create a level playing field.Because of these situations, the logical conclu-sion for the liberalization option is for all com-mercial activities of the port to be ultimatelytransferred to the private sector.

5.1.3. Commercialization

Commercialization is the introduction of com-mercial principles and practices into the man-agement and operation of a port authority orpart thereof, requiring it to operate under mar-ket disciplines. The process can be achievedthrough negotiated performance contractsbetween the government, acting as the owner ofthe port, and the port management. The agree-ment specifies the port’s objectives in terms ofperformance goals, service quality, and socialobligations. Commercialization is characterizedby the following:


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• Decentralization of the decision-makingprocess.

• Relaxation of the hierarchy of the portorganization, thereby allowing port man-agement to exercise much greater controlover:

~ Budgeting.

~ Procurement and purchasing.

~ Maintenance strategies and programming.

~ Salary scales and employment condi-tions of labor and staff.

~ Hiring and firing.

~ Setting objectives and performancetargets.

~ Formulation of strategies.

Essentially, commercialization aims to createan environment in which the port authorityruns on a commercial basis. This involves avariety of business-type decisions. The chiefexecutive typically has a certain freedom ofaction and refers only specific matters relatingto overall policy or strategy to the controllingbody (the relevant ministry or city council).Commercialization is designed to allow portmanagement to conduct, to a large extent, itsown affairs and at the same time imposes onit responsibility and accountability for itsdecisions and performance. In practice, how-ever, a common problem has been that gov-ernments continue to interfere in port deci-sions, undermining the authority of port man-agement.

Commercialization seeks to provide port man-agers with decision-making authority andresponsibility similar to that existing in privatesector organizations. However, since the portenterprise may still have substantial monopolypower, managers may not be confronteddirectly with the hardships and necessary disci-pline imposed by market competition.Therefore, a commercialized governmentorganization often will not be as efficient as acomparable private firm, unless it is subject tocompetition.

Since the essence of commercialization is torequire and empower port management to per-form as well as the private sector, changes in theinstitutional and legal structures of the portorganization are required to remove bureaucrat-ic obstructions. A common first step in theprocess of commercialization and the elimina-tion of bureaucratic inefficiencies is to trans-form the port organization into a trulyautonomous port authority. Box 17 notes thatthe governments of China and Mexico followedthis course.

Commercialization should result in the creationof a port authority board to oversee the organi-zation’s activities, removing that responsibilityfrom the central government ministry or city. Atthe same time, however, the government maystill need to exercise some form of oversight tosafeguard the public interest. Commercializedport authorities should:

• Be financially independent (own theirassets, establish their own budgets, andmake their own investment decisions).

• Have their own personnel schemes sepa-rate and distinct from the national civilservice, patterned on the schemes of pri-vate companies.

• Have a management that is responsiblefor and held accountable for the port’sperformance by a board. Board memberscan be appointed by the national or localgovernment, port users, or representativelabor organizations.

In many countries, the process of commercial-ization is only partially implemented becauseprocurement and contracting practices remainsubject to national government regulations.

A weakness of the commercialization process isthat during its introduction, the acting publicsector manager becomes the chief executiveresponsible for pushing through the changes inthe organization. The manager’s performanceand commitment to the commercialization ofthe port authority greatly influence the manage-ment team and the shape and pace of reform.


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In other words, managers accustomed to civil serv-ice procedures and practices have to drastically

change their management styles. This hasproven to be a difficult transition and is thereason why, in many such processes, managerswith private sector experience soon replace theformer civil service senior management. A well-thought-out training program may be an effectivetool to change attitudes and prepare manage-ment and staff for the different style and culturecommercialization brings.

5.1.4. Corporatization of Terminals

The next gradation on the path to full privatiza-tion is corporatization. Corporatization goesfurther than commercialization in that itinvolves the transformation of the public portauthority or part thereof into a corporation.This means that the port authority or one ormore of its constituent parts, such as a portauthority–operated container or general cargoterminal, is converted into a legally and finan-cially independent legal entity with its ownboard of directors. The government or publicport authority retains ownership in all shares ofthe venture. By applying market principles, thecorporatized port authority is expected to func-tion more efficiently. A corporatized portauthority may also accommodate both nationaland local interests, as in the case in Poland. Inthe case of a publicly managed terminal, corpo-ratization is usually the first step onto the roadto privatization. Thus, a corporatized portauthority, especially when based on a specificlaw, can be considered a permanent organiza-tional structure while a corporatized terminalusually is a transitory organization.

Corporatization, then, is the process in which apublic sector undertaking, or part thereof, istransformed into a company under private cor-porate law. This is achieved by selling shares ina new company that conducts the port’s busi-ness and holds its assets, although the sharesare issued and may be owned entirely by thegovernment (or port authority). The mainobjective is to decrease direct government con-trol over the company and to make it moreresponsive to market forces. Similar to privati-zation, corporatization can include financial


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Box 17: Creation of Commercialized PortAuthorities in China

Although the country has a long coast-line, China had a long history of being a“continental” country until the 1980s. In

1985, a strategic document known as “TheInterim Regulations of the State Council of thePRC on Preferential Treatment to Sino-ForeignJoint Ventures on Harbour and WharfConstruction,” was circulated and implement-ed by the State Council of the PRC.

Consistent with the first steps towardreforms, the Eighth (1991–1995), Ninth(1996–2000), and Tenth Five Year Plans(2000–2004) placed port development amongthe top priorities on the Chinese developmentagenda, particularly since the 1990s.

Before 1980, the port industry typically fellunder highly centralized control. In 1980, thedual leadership mainly was led by the Ministryof Communications. In the late 1990s it wasgradually shifted to the “dual leadership main-ly led by local authorities,” implying that localmunicipal governments were expected to actboth as “landlord” and “regulator,” therebyenhancing local governments’ intervention inport affairs.

Port authorities were either created ortransferred to municipal authorities as well asendowed with financial autonomy in the rou-tine administration and operation of ports.

Source: Dr. James Wang, University of Hong Kong.

Creation of Independent Port Authorities inMexico

In 1993–1994, the management of the majorports in Mexico was transformed into theAdministracion Portuaria Integral (Integral

Port Administrations). This decentralized theport system, set up individual port administra-tions coordinated by the CoordinacionGeneral de Puertos, and opened the way tofor introduction of the private sector in opera-tional activities in the ports such as cargohandling, storage, and towage. TheSecretariat of Communication andTransportation retained economic and safetyoversight of the decentralized port system.

Source: C.Bert Kruk, World Bank Staff.

restructuring and be a catalyst for the introduc-tion of commercial principles. Corporatizationis, in effect, privatization without divestment.

For political or legal reasons (often both), com-prehensive or partial privatization may be nei-ther appropriate nor possible. In such cases cor-poratization may offer an effective alternativefor achieving more efficiency and greater mar-ket orientation. Corporatization usually featuresmost of the following characteristics:

• A complete separation of the public man-agement and regulatory functions fromthe commercial activities that are beingcorporatized.

• Clear and nonconflicting objectives forthe new firm, set by the government.

• Greater management responsibility andautonomy for decisions on operations,investments, revenues and expenditures,and on commercial strategy.

• Where no market-based scrutiny is possi-ble, performance measurement against arange of financial and nonfinancial criteria.

• Rewards and sanctions for managersbased on performance.

• Government ensures that the corpora-tized firm does not have any comparativeadvantages or disadvantages relative toprivate port firms operating under similarmarket risks and conditions (for example,with respect to tax and interest rates).

Corporatization can be implemented eitherthrough incorporation under a commercial codeas a limited liability company or as a statutoryauthority under its own articles of incorpora-tion. The statutory option is the most commonapproach for corporatizing port authorities. Inview of the public interest involved, it is alsothe most appropriate one.

During the initial phase of the corporatizationprocess, the following principal actions are required:

• Preparation and enactment of any neededlegislation, such legislation often serves to

eliminate the state monopoly within theaffected sector.

• Development of the company charter (forexample, the memorandum and articlesof incorporation) for the corporatizedport enterprise, and its subsequent incor-poration.

• Development of a corporate plan includ-ing traffic forecasts, a business develop-ment plan, and pro forma income state-ment and balance sheet.

• Capitalization and vesting of part of theassets and liabilities of the former publiccompany in the new corporation.

• Creation of a new labor statute, provi-sion of financial and social measures tocope with excess personnel (such as pen-sion fund guarantees, redundancy pay-ments, or retraining), and transfer of per-sonnel from the former public entity.

• Retraining of management and staff toincrease commercial orientation andimprove managerial procedures.

The key difference from the other reformoptions discussed is that the goal of corporati-zation is to constitute the corporatized firm as asingle, self-contained entity. The corporatizedcompany’s management should be free fromdirect government interference or control(bureaucratic constraints) to allow them tooperate the company on commercial terms. Atthe same time, management should also be heldaccountable for its actions.

The new corporation can be organized withclearer lines of communication and responsibility.Distinct targets can be set and adhered to.Stricter internal financial controls can be intro-duced and, where necessary, information andaccounting systems established. This all seeks tomake the business more aware of market andclient requirements.

One of the corporatized terminal’s greateststrengths is its financial autonomy. This meansthat tariffs should no longer require approvalfrom the government or ministry (unless it is a


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monopoly environment and the governmentwishes to exercise strict control) and that thecompany should be allowed to establish its ownprocurement, contracting, and hiring and firingpractices. In addition, such companies do notrely on government support for investments andhave the authority to negotiate loans directlywith commercial banks. The government, how-ever, typically will continue to exert some meas-ure of political control. Usually this is achievedthrough the appointment of board members.

5.1.5. Corporatization of a Port Authority

Among the reasons for pursuing corporatizationover other alternatives are:

• To allow time for the management to set-tle into its new role before contemplatingfull privatization (as is the case of theRotterdam Municipal Port Management,until January 1, 2004, a commercializedport undertaking).

• To overcome the reluctance of privatecapital suppliers to invest in the company.

• To protect the public interest.

Having completed the corporatization of portoperational activities, subsequently one canconsider the corporatization of the port authori-ty as a regulatory body (for example, the caseof the port enterprise of Antwerp).

Negative aspects of corporatization include:

• In a majority of cases, the new corporateentity still has a monopoly over the portland.

• Unless competition is created, the corpora-tion may not be as efficient as anticipated.

• Governments are still able to politicizethe corporatized firm by retaining theright to appoint board members andexecutive directors.

• There will often be a need to introduce aport sector regulator to create a levelplaying field among competing serviceproviders.

However, the most problematic issue affectingcorporatized port authorities is the mix of pub-lic and private objectives. The rationale behindthis type of reform is the expectation that cor-poratized ports operate as viable and effectivebusinesses. However, while part of the ports’enabling legislation may state that they shouldpursue commercial objectives and operate aseffective businesses, the public shareholders(ministers, commissionaires, aldermen, or coun-cil members) have responsibilities other thanstrictly commercial ones, such as the delivery ofpublic goods.

There are two types of corporatization models.The first model’s goal is to transform formerstatutory authorities into government-ownedenterprises. This means that a corporatized portauthority would have a constitution consistingof a memorandum and articles of associationthat define the nature of the company and themanner in which the affairs of the company areto be conducted based on the “companies act”or “corporations act” in force. A regulatorybody in existence should oversee performanceof the newly formed port authority and ensurethat conditions of the company’s constitutionand of the applicable companies act are met.This model has been applied to RotterdamMunicipal Port Management.

The second model involves the creation of astatutory government-owned enterprise (corpo-ration) by specific legislation. This would meanthat there is the potential for some degree ofpublic (national, regional, or municipal) inputand scrutiny. It also means the introduction oftailor made provisions, such as those relating toaccountability and public control.

The distinction between the models focuses onthe issue of whether the organization is subject tocorporate law or to the conditions of the statueand specific legislation. The difference between acompany incorporated under corporate law orby or pursuant to a statute is that the company’sconstitution spells out the nature of the companyas well as regulations for the internal governmentof the company. This requires a rigid operatingframework and a regulatory regime that ensures


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that the conditions of the company’s constitutionare neither breached nor abused to suit politicalor other gains.

Corporative port authorities established by lawas government-owned enterprises, on the otherhand, are quasi–private sector companies. Theyare expected to operate like their private sectorcounterparts, but are not subject to corpora-tion’s law, instead they are subject to the provi-sions of the statute under which they wereenacted. Under this model, the public sectorholds a pivotal role in the structure and opera-tion of the organization.

Ultimately, the choice of one of the alternativemodels when corporatizing a public port author-ity is a political issue. In some countries, (larger)ports are considered part of the public domain,representing vital public interest. Other countriesview ports mainly as commercial entities. Thequality of governance also plays a role. Stableand democratic countries will be less inclined tocorporatize their port authorities, unless for veryspecific reasons, which often have little bearingon efficiency. In Poland, the ports were corpora-tized to combine state and municipal ownershipof port land. In Australia, the policy for portreform was an endeavor to improve efficiency inthe port environment, notably by distancinggovernment from day-to-day operations. Box 18describes the process of corporatization for theAqaba Container Terminal in Jordan.

5.1.6. Privatization

Privatization can be either comprehensive orpartial. The latter takes the form of a public-private partnership and is usually combinedwith the introduction of a landlord port author-ity. Comprehensive privatization remains anexception and is not a preferred option formajor ports.

The reasons that might prompt governments ora port authority to enter into the privatizationprocess are discussed below.

Removal of trade barriers. Outdated work prac-tices, obsolete facilities, inadequate institutionalstructures, and excessive charges in ports cause

inefficiencies that can create obstacles to foreigntrade. Indirectly, the entire population of acountry pays for port inefficiencies, which arereflected in the prices of both import andexport commodities.

Harnessing the efficiency and expertise of theprivate sector. Increasing specialization in theshipping and port industry requires highlytrained personnel, advanced systems and equip-ment, and capital-intensive cargo handling tech-niques to meet the fast changing demands ofport users worldwide. Government-owned firms,with their cumbersome administrative proce-dures, poor cash flow generation, inflexible pay-ment schemes, and lack of market orientationusually cannot cope with these requirements.

Elimination of political interference. Althoughthere are countries with well-balanced politicalsystems and minimal political interference in thefunctioning of the state- or municipal-ownedport enterprises, the appointment of politicalnominees with inadequate experience to highlevel positions in government-owned ports is awell-known phenomenon. In contrast, privatiza-tion of port operations often results in the selec-tion of professional port managers with anundiluted focus on the market and its changingneeds.

Reduced demand on the public sector budget.Partial privatization does not necessarily mean atotal withdrawal of the government from portinvestments. However, a large (often major) partof port investments can be undertaken by the pri-vate sector without compromising wider socialand economic benefits. Development of a mod-ern port still requires a balanced public-privatefinancial package with balanced risk sharing.

Reduced expenditure on port labor.Government-owned enterprises traditionallyhave been a large source of direct employment;in the port sector, the greatest employment is incargo handling services. A privatization schemethat maintains restrictive working practices can-not be effective. In the long run, creating aninternationally competitive port system, with allits direct and indirect economic spin-off effects,


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is more valuable than the short-term objectiveof maximizing local dock labor.

Other objectives. Governments sometimes pur-sue privatization for other reasons, such as rais-ing revenues for the state treasury, disposing ofassets, and encouraging competition and broad-er citizen participation in share ownership.

In its many variations, privatization usuallyincludes the following core features:

• Divestiture (selling off government-ownedassets).

• Deregulation.

• Competitive tendering.

• Private ownership of operational assetswith market-based contractual arrange-ments.

In theory, privatization provides the same flexi-bility to management as commercialization.


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The Port of Aqaba recently became partof the Aqaba Special Economic Zone,resulting in a considerable change in its

institutional structure. In 2000, the Jordanianparliament enacted the Aqaba SpecialEconomic Zone Law (ASEZ Law, no. 32,2000) and established the Aqaba SpecialEconomic Zone Authority (ASEZA). Thisauthority enjoys financial and economicautonomy and is governed by a Board ofCommissioners nominated by the Council ofMinisters, endorsed by a Royal Decree. Itsucceeded the former Regional Authority andthe Municipality of Aqaba, administers theentire zone, and owns all public land in thearea. The authority is also responsible for thedevelopment of Aqaba port, the KingHussein Airport, and all public utilities. Thedevelopment of the zone has been very suc-cessful under the new regime and invest-ments have soared. In 2003, the Council ofMinisters approved the establishment of theAqaba Development Corporation (ADC) as awholly owned government enterprise underASEZA, enabling ASEZA to transfer all of theport and airport’s operational assets to thenew corporation.

While port operations are still conductedby the Aqaba Port Corporation, ADCbecame the corporatized landlord port withthe task to privatize port operation. Its firstaction was the issuance of a managementcontract for the Aqaba Container Terminal toA.P. Moller Terminals, which within two yearsrestored terminal operations to world-classstandards. ADC also developed plans to pri-vatize the marine operations (pilotage,towage, mooring, and unmooring) as well asbulk and general cargo terminals in a laterstage.

ADC’s philosophy is to participate as a majorshareholder (up to 49 percent) in the privatizedterminals and services, issuing as grantor con-cession agreements to foreign and local enter-prises. Currently negotiations are being con-ducted with a large international terminal oper-ator for a 30-year concession or BOT agree-ment for the Aqaba Container Terminal, whichplays an increasingly important role in theregion.

Thus ADC will be acting both as a grantorof the concession, representing the nationalinterests of Jordan, and as a major share-holder of the terminal. It should be noted thatgreat care should be taken not to confuseboth roles. On the one hand, it is under-standable that ADC desires to stay closelyinvolved in the terminal developmentbecause the Aqaba Container Terminal is theonly container terminal in the country. On theother hand, national interest should not beenforced via the board of directors of the ter-minal operator, but by ADC as grantor of theconcession. This would imply the carefulstructuring of the concession agreement inrespect to guaranteeing the quality of theoperations, the future extension of the termi-nal, the employment of Jordanian nationals,the development of value-added services,and the termination of the agreement in theevent that the operator does not develop theterminal in the interest of the country. TheADC nominated representatives in the boardof directors should not be broughtinto the uncomfortable and confusingposition of safeguarding both the nationalinterest and the economic interest of thecompany.

Source: Christiaan van Krimpen.

Box 18: The Port of Aqaba: Corporatization and Privatization

Unlike under commercialization (where in theworst case scenario the government is likely tosubsidize the company if it fails to perform ade-quately), a privatized terminal operation can bepermitted to fail, provided other facilities canhandle its traffic. Or, existing facilities may betaken over by a new operator who continuesthe operations. The management determines itsown fate, free from significant governmentinfluence, as long as it complies with regulatoryrequirements.

6. REFORM TOOLS Before deciding on a port reform process, gov-ernments should articulate clearly the ultimategoals of reform. Broadly, there are two alterna-tives:

• The public authority in charge of the portsector (either a service port or a toolport) wants to restrict its public role byprivatizing cargo handling operations andother nonlandlord activities. In this case,existing operations have to be privatizedor corporatized and service or tool portsreconstituted as a landlord port. Partialprivatization is the goal.

• The public entity that has final responsi-bility for the port sector (most probably anational government) wants to privatizethe entire sector, including responsibilitiesthat generally are considered belonging tothe public domain. Ownership of portland, planning, investment and manage-ment are all transferred to private sectorentities, which have no formal commit-ments to any public institution.Comprehensive privatization is the goal(see Box 19 for an example of this typeof privatization process).

This section focuses on the implementation ofpartial privatization, since that approach hasbeen used successfully to balance public andprivate interests and still meet the objectives ofport reform. Box 20 shows the spectrum of portreform tools that will be discussed in greaterdetail in this section.

6.1. Contracting Out and Use ofManagement ContractsOne tool available to governments to improveport efficiency and performance is contractingout to the private sector certain functions previ-ously executed by the public port management.A public enterprise may decide to contract outcertain of its operations through a tender-bidprocedure instead of conducting them in housewhen the following circumstances apply:

• The functions can be performed at a pricethat is substantially lower than the costof conducting them in the public sector.

• There is a large field for competitive bid-ding.

• Government policy is to transfer gradual-ly certain noncore activities of the publicsector to the private sector.

Contracting out, however, should be handledwith caution as it involves several risks:

• If the number of potential bidders is lim-ited, a meaningful comparison of the bidsmay not possible.

• Potential bidders may form a cartel orotherwise collude when bidding for acontract.

• Contracting out may create a monopolyfor those activities, which would be con-trary to the public interest, unless there isa proper regulatory oversight framework.

Also within the framework of commercializa-tion, a separate contract for the management ofthe public port authority or public terminaloperator may be awarded. Use of such a toolmay be appropriate in cases where a portauthority has experienced poor management foran extended period of time; the financial condi-tion of the port authority needs to be substan-tially improved with a view to its corporatiza-tion or privatization at a later stage on termsfavorable to the ministry of finance of the coun-try concerned; or the port authority would gen-erally benefit from the introduction of privatemanagement.


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The usual practice is for the government toagree on a management contract with a privatesector operator. The operator agrees to employthe existing port staff and to provide adequateand efficient service to all customers. This for-mer requirement (retention of existing staff),however, often emerges as the main reason forthe failure of management contracts (for exam-ple, the Port of Mombasa). The managementcompany may be saddled with excess labor andlabor costs that cannot be sustained in a com-petitive market.

A management contract is usually entered intofor a specified period, generally between three

and five years. Upon expiration of the contractperiod, it may either be renewed or awarded toanother party. A management contract may alsobe used as a stepping stone toward the grantingof a more extensive concession. It is importantwhen entering into a management contract thatthe government or ministry has the right toimpose financial penalties or terminate the con-tract in case the private operator does not meetspecified minimum levels of efficiency, financialperformance, or throughput.

6.2. Concession Arrangements In concession agreements, governments are stillwidely involved in port management, mainly


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On the northwest European continent,five universal ports—Antwerp,Rotterdam, Bremen, Bremerhaven, and

Hamburg—compete intensely for businessgenerated in overlapping hinterland areas.Surprisingly, the basic organizational structureof all these ports is quite similar. They areoperated in a public-private partnership,where the public entity takes responsibilityonly for:

• Setting the legal framework and the guide-lines for port development.

• Providing the port infrastructure.

• Administering and renting out the publiclyowned land.

• Regulating and supervising ship movements.

The port business proper—cargo handling,storage, and physical distribution—is leftentirely to the private sector. The combinationof public port ownership and private portbusiness is often referred to as the landlordmodel or, because the above-mentioned portshave a Hanseatic tradition, as the Hanseaticmodel.

But is a landlord port also an efficientport? There are two main arguments to sup-port a positive answer to this question. First,the landlord model opens up opportunities toadapt the port infrastructure quickly tochanging requirements of world trade.Second, this organizational system providesthe possibility of competition in the portbetween the different suppliers for nearly

every service to ships, passengers, and cargoon condition that traffic and derived activityare sufficiently large.

Often port administrations are confrontedwith the problem that land at the waterfront islimited and opportunities for port expansionare constrained due to geographical andhydrological restrictions or political borders.Even where no physical restrictions exist,growing environmental consciousness or lackof funds may make the transformation ofgreen land into port sites or land reclamationoutside the port area difficult and time con-suming. As a consequence, port land is pre-cious and has to be used very carefully, notonly taking into account the present day situ-ation but also changes in the future. Thelandlord model offers a good way to achievethis balance.

Because under the landlord model portsites are only rented out and not sold to pri-vate port operators, the sites in the establishedport area are at the disposal of the port admin-istration, at least at the end of the contractperiod. Often the port administration also hasthe right to terminate a contract early to relo-cate a company in the port area, provided itpays for the relocation costs. This would notbe possible if the sites were sold. In Hamburg,this has proven useful, especially for restruc-turing older parts of the port no longer suitablefor cargo handling activities.

Source: Heinrich, Michael. 1999. “Port Efficiency—ThePublic-Private Partnership.” (Port of Hamburg) World PortsDevelopment, p.16.

Box 19: The Experience of the Hanseatic Landlord Ports

through public landlord port authorities. At thesame time, the role of private enterprise in thesector will continue to grow. Service and toolports will gradually disappear and be transformedinto landlord ports; in some cases, fully privatizedports will emerge. For landlord ports, public bod-ies will retain the ultimate ownership of assets(especially land), but will transfer a major part ofthe financial and operational risks to the privatesector. Governments will act mainly as regulatorsand land developers, while private firms willassume the responsibility for port operations. Themain legal instrument used to achieve this realign-ment of public and private sector roles andresponsibilities is a “concession.”

Concessions are widely used in the port sectortoday. A port concession is a contract in whicha government transfers operating rights to pri-vate enterprise, which then engages in an activi-ty contingent on government approval and sub-ject to the terms of the contract. The contractmay include the rehabilitation or constructionof infrastructure by the concessionaire. Thesecharacteristics distinguish concessions frommanagement contracts on one end of the reformspectrum and comprehensive port privatizationon the other. Concessions, by permitting gov-ernments to retain ultimate ownership of theport land and responsibility for licensing portoperations and construction activities, further


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Box 20: Spectrum of Port Reform Tools

Source: Author.

Public management andoperations

Outsourcing

Management contracts

Lease and rent contracts

Full concession includingBOT, BOOT, etc.

Build-own-operate (BOO)

Divestiture by license

Divestiture by sale

Private supply and operations

Con

cess

ions

permit governments to safeguard public inter-ests. At the same time, they relieve governmentsof substantial operational risks and financialburdens.

There are two main forms of concession used inports today: lease contracts, where an operatorenters into a long-term lease on the port landand usually is responsible for superstructureand equipment, and concession contracts, wherethe operator covers investment costs andassumes all commercial risks. Such contracts areoften combined with specific financing schemessuch as BOTs.

Lease contracts and concession contracts sharethe same principal characteristics:

• The government or public port authorityconveys specific rights to a private com-pany.

• They have a defined term (10–50 years).

• They are geographically delimited.

• They directly or implicitly allocate finan-cial and operational risks.

6.2.1. Leasehold Agreements

Landlord ports derive a substantial part of theirincome from leases. Typically, only land orwarehouse facilities are leased. Berths may beincluded or excluded from the lease rent. Ifexcluded, the port authority collects and keepsall revenue derived from berthing fees. Thereare two basic forms of leases most commonly inuse today: flat rate and shared revenue leases.Both types of leases can be used for multiuser aswell as single-user (dedicated) terminals orberths.

Flat rate leases give the lessee the right to use afixed asset for a specific period of time inexchange for periodic payments of a fixedamount. In the case of a land lease, this can bea fixed payment per year per square meter.Lease rates may vary depending on the degreeof port site development (for example, unpavedversus paved land or land with or withoutstructures). The main advantage of this form of

lease is that the lease rent is known to both par-ties in advance. The flat rate lease also providesto the lessee the greatest incentive to fully usethe available capacity of the terminal.

The main characteristics of the flat rate lease are:

• A specific sum of money is paid persquare meter of port area for a specificperiod of time.

• In principle, the lease represents a fairreturn to the port authority on the valueof the property.

• Lease payments may be adjusted forinflation over the life of the lease.

To set lease payments at the proper level, theport authority must be able to forecast accu-rately the level of business (and, hence, the wearand tear on port infrastructure and the trafficfrom which the lessee will benefit). It shouldalso try to assess the true value of the land (forexample, in its best alternative use) and attemptto recover this value through the anticipatedlevel of business transacted by the lessee.Because the lessee must make the same leasepayment regardless of the revenue his businessgenerates, he has a strong incentive to make fulluse of the leased land and structures. A flat ratelease is often the preferred form of lease for aport whose primary objective is to maximizethroughput and benefits to the local economy.

In a shared revenue lease, the lessor also givesto the lessee the right to use a fixed asset for afixed period in exchange for a variable amountof money. With a shared revenue lease there is aminimum payment regardless of the level ofactivity, but no maximum payment. The maincharacteristics of the shared revenue lease are:

• A minimum level of compensation.

• No established maximum level.

• Maximum compensation depends on thefacility’s capacity.

• Minimum compensation may not fullycover the interest and amortization of thelessor (port authority) for the lease area.


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A shared revenue lease represents true partner-ships between the port authority and thelessees. Under this arrangement, the port mustcarefully determine the minimum lease pay-ment, taking into consideration its financialobligations, its own forecasts of traffic vol-umes, and its statutory and business tolerancesfor risk. Once minimum throughput levels areattained, the lessee and the port share the bene-fits deriving from any additional activity. Theshared revenue lease is the only approach inwhich the port authority can maximize rev-enues, employment levels, and throughput.Along with this potential for added rewards,however, come added risks.

Box 21 shows how the two different forms oflease would work for a notional terminal.

Potential lease partners for a port authority are:

• Terminal operators.

• Cargo handling companies.

• Dedicated terminal operators and ship-ping lines.

• Forwarding agents.

• Inland transport operators.

Today it is increasingly common for shippinglines to lease terminals from port authorities.

For these leases to succeed for all parties, how-ever, two key conditions should exist: the ship-ping line lessee should generate a large volumeof cargo at the port (that is, it should be amajor customer), and the port should possessadditional facilities of the same type leased tothe shipping line to prevent creating a monop-oly (a public access facility should be available).

If the port does not have other similar facilities(and other customers), the creation of a monop-oly may conflict with the interests of both theport and the national economy. In this respect,the following points should be kept in mind:

• Shipping lines may, at any point in time,decrease, reroute, or altogether halt theirservices as a result of changes in financialconditions or shifts in patterns of trade.A well-known example of this is the can-cellation of the round-the-world serviceof United States Lines in the 1980s.

• Shipping lines often merge or enter intocooperation agreements (alliances) withother shipping lines. Such practices mayresult in changing sailing schedules or theestablishment of special ties with otherports.

• Shipping lines may reorganize their sailingschedules for reasons of internal policy.


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Box 21: Comparison of Lease Systems

Source: Author.

Leas

e pa

ymen

t

Traffic volume

Flat rate lease

Shared value lease

Signing a lease contract with an operating com-pany may be less risky than with a shipping linebecause the operating company usually does notrely on a contract with one single user, but willspread the risks and safeguard its business inter-ests by having contracts with several clients,and in the case of a contract with a locallyincorporated port operator, should a legal (con-tract) issue arise, it is generally easier to enforceliens and other measures needed to compel leasecompliance than in the case of a companywhose home base is in another country.

Which form of lease is to be preferred? In gen-eral, one may conclude that if the port’s princi-pal objectives are to maximize throughput andprovide maximum benefits to the local economythrough increased employment, a flat rate leasemay be preferable. This is often the case when aport is newly established and wants to developits business. Or if the port’s principal objectiveis to maximize revenues, with an initial need tosubsidize the terminal lessee, the shared revenuelease may be the optimal choice.

6.2.2. Concession Agreements

A landlord port for the most part does notinvolve itself directly in port operations.Instead, private port operators and serviceproviders conduct their business independentlyand compete in the market. The port authorityacts as a neutral landlord promoting the port asa whole. Together, they represent the interestsof the entire port, with the port authority in thelead.

Relations between the port authority and theprivate sector cover two areas: commercial rela-tions based mainly on concession and leaseagreements, and relations based on the publicoversight functions of the port authority, suchas enforcement of port bylaws, dangerousgoods regulations, and vessel management.

Relations between landlord port authorities andprivate port operators have become increasinglycomplex, and the alignment of responsibilitieshave further shifted. One of the valued featuresof a landlord port is its clear division of respon-

sibilities. Each party is distinctly aware of itsrights, liabilities, and financial responsibilities.Moreover, many governments today are seekingto diminish their financial involvement in portsand to use private sources to finance new portdevelopment, including construction of basicinfrastructure such as quay walls. This impliesnot only an increased role for the private sectorin port development, but also increased finan-cial exposure. In such situations, a simple andstraightforward lease contract often is not suffi-cient to cover all responsibilities and liabilities.As a result, a more complex contractual rela-tionship, a concession agreement, has beendeveloped.

The primary objective of concession agreementsis to transfer investment costs from the govern-ment to the private sector. Concessionaires areobliged to construct and rehabilitate infrastruc-ture and operate a facility or service for a fixednumber of years. Concessions may be “posi-tive,” when a concessionaire pays the govern-ment for concession rights, or “negative,” whenthe government pays a concessionaire for theservices it provides under the agreement.

The benefits of concessions in the port sectorinclude:

• Better and more efficient port manage-ment (especially port operations) per-formed by private operators.

• Avoidance of the drawbacks associatedwith monopolies through the inclusion ofdetailed concession conditions.

• The application of private capital tosocially and economically desirable proj-ects, freeing up government funds forother priority projects.

• Under certain circumstances, the creationof new revenue streams for governments.

• The transfer of risks for construction,finance, and operation of the facility tothe private sector.

• The attraction and use of foreign invest-ment and technology.


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Disadvantages associated with concession con-tracts include:

• The need for continuing close govern-ment regulation and oversight.

• The system requires a legal frameworkthat permits transfer of land rights to aprivate party.

• Winning bids are sometimes based onunrealistic financial projections, placingthe sustainability of the concession agree-ment in jeopardy.

• The danger that a concessionaire will notproperly maintain the facilities underconcession, returning them to the govern-ment in bad condition, or the danger thatthe concessionaire and the port authoritydisagree on the operational need for andfinancial feasibility of critical invest-ments.

Concession agreements are often developed as apart of a BOT scheme and represent specificagreements between a government or portauthority and the special purpose company(SPC) established by the concessionaire to carryout construction and operation of a port devel-opment project. Under concessions, the ultimateownership of the affected assets is retained bythe national or local government, or by the portauthority. At the same time, part of the com-mercial risks of providing and operating theassets is transferred to a private concessionaire.

In agreements involving an SPC, a port authori-ty should ensure that:

• The SPC provides adequate servicethroughout the term of the concession.

• The SPC observes relevant safety andenvironmental protection standards.

• The charges levied on port users are rea-sonable and do not endanger the compet-itive position of the port.

• The SPC performs proper maintenanceand repair of all assets to ensure that ontheir return at the end of the concession,

the port authority receives an operationalproject and facilities in good workingorder.

The port authority may (depending on legalstrictures) hold a financial interest in the SPCcreated by the concessionaire, or it may not. Ifthe port authority chooses not to participatefinancially in the SPC responsible for develop-ing the port assets under a concession contract,then its role as an independent and impartialpublic entity does not significantly change. Theonly real change is in the shift in responsibilityfor investments from the port authority to theconcessionaire.

If a port authority not only enters into a conces-sion agreement with the SPC, but also partici-pates in the company as a shareholder, then theport authority’s role changes more dramatically.By investing risk capital, the port authoritybecomes more directly involved in port opera-tions. Sometimes this situation is prohibited bylaw (Poland). If the venture has a monopoly inthe port (such as having the only container ter-minal), the situation might be acceptable,although a conflict of interest may arisebetween the roles of port authority as aninvestor and as the regulator of the monopoly.If the venture competes with other terminals inthe port, however, participation of the portauthority in the SPC will give rise to a seriousconflict of interest and will undermine its inde-pendent, neutral position.

Depending on the specific situation, a conces-sion agreement may consist of a combination ofcontracts including:

• A leasehold agreement on nondevelopedland, the formal document under whichthe port authority grants the SPC posses-sion of the concession area.

• A terminal access agreement, which regu-lates the SPC’s access to the concessionarea, and also the access by the portauthority to the area.

• A port services agreement, which regu-lates the provision by the port authority


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to the SPC of various port services suchas pilotage, towage, and dredging.

• A sponsor’s direct agreement, which is anagreement between the government orport authority and the SPC dealing withthe issue of competition.

• A design contract between the SPC and atechnical consultant for the design of newfacilities (the port authority usually has nodirect control over who does the designwork or the terms of appointment, butoften retains the right to review any design).

• A building contract between the SPC anda construction company for constructionor development work (with the portauthority typically exercising some formof quality control).

• Financing documents drawn up betweenthe SPC and its lenders to provide financefor port development; a port authoritymay provide partial financing.

• A management contract between the SPCand its chosen manager (operating com-pany) for provision of management serv-ices in operating the port.

Generally, a typical concession agreement willclearly set out the terms relating to:

• The land, facilities, and cargo handlingequipment included in the concession.

• The functional requirements of the portor terminal, the proposed design solutionfor any construction, the constructionprogram, and time schedule, includingmilestones.

• Rights and responsibilities of the conces-sionaire and port authority (concessionsponsor) with respect to the completionof the construction program.

• Human resources development and theemployment of former port authorityemployees, if applicable.

• Activities permitted to be carried out inthe concession area.

• Equal access to common areas in the port.

• Payment of fees, royalties, revenues, andcanon (lease rental) to the port authority.

• Maintenance requirements for infrastruc-ture, superstructure, and sometimesequipment.

• Termination of the concession.

• Return of land, facilities, and equipmentafter the concession period has expired.

• Other issues as may be required.

It is common practice that during construction,the concessionaire and the port authority use anindependent test certifier to certify that all workhas been carried out in conformity with therequirements of the concession agreement.Upon the return of facilities, the SPC should berequired to carry out any work needed to bringthem up to an agreed-on standard. Accordingly,provisions must be included to inspect facilitiesand identify any deficiencies.

A concession agreement for a greenfield projectis less complicated than the takeover of an exist-ing terminal or port. In such a case, no personnelor existing facilities are acquired by the SPC.However, a terminal access agreement still mustbe drawn up between the government or portauthority and the SPC to cover such things as thebuilding of access roads and rail, the provision ofwater and electricity, and other facilities.

6.2.2.1. Master Concession. In some instances,port reform is implemented through a masterconcession contract, which enables a privateoperator to carry out many of the port func-tions. This type of contract has rarely been used,but it is an option. Usually, the principal choiceis between granting a full master concession, inwhatever form, and implementing a landlordport structure comprising the public portauthority and private terminal operators. Thechoice between the two options considerablyinfluences further port privatization process.When choosing a master concession, the govern-ment leaves the unbundling of port activities fora large part in the hands of the concessionaire.


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It might also be expected that retrenchmentcosts resulting from granting a concession wouldprimarily be borne by the government.

The government should allow the concessionaireenough freedom to structure its business accord-ing to its own requirements, otherwise the exer-cise does not make much sense. Lack of freedomwill lower the concession’s attractiveness. Tomake a master concession attractive for a privateinvestor, the concessionaire should be allowed tounbundle the port business in the way it thinksfit. On the other hand, introducing a landlordport system will require a much more active rolefor the government in structuring the variousconcessions of terminal and marine activities, aswell as reorganizing the port authority.

6.2.2.2. BOT Arrangements. A landlord portauthority is typically responsible for constructingfairways, quay walls, and terminal areas. Suchconstruction is usually based on a port masterplan and carried out in close consultation withthe future operator. Sometimes construction ofsuch facilities has already started before agree-ments have been concluded with the prospectiveoperators. This may be the case when the marketdemand is strong and the port authority is confi-dent of finding clients and is prepared to take therisk that port capacity will go unused. As a rule,port authorities should permit private operatorsto finance most of the additional capacity (includ-ing the quay wall expansion). The port authoritycan then concentrate on access infrastructure andprotective works relating to port extension andon renovation projects. Port authorities maysometimes have difficulties amassing the invest-ment funds from dues or retained profits. In suchcases, they have sought to acquire funds eitherfrom an IFI (such as the World Bank) or from pri-vate lending institutions. For specific port facili-ties, such as container or bulk terminals, privatefunding can be arranged through a concessionagreement as described above. BOT schemes area specialized form of concession designed toincrease private financial participation in the cre-ation of port infrastructure and superstructurewithout changing the landlord structure of theconcerned port (see Box 22).

When designing BOT schemes, it is important toconsider carefully which parts of the port can beconcessioned and which parts should remainwith the port authority. Generally, BOT schemescan be applied to all assets that can be exploitedas a separate business. Key among these are:

• Fairways and channels: This part of theport infrastructure can be concessionedunder a BOT scheme to require the con-cessionaire to dredge and maintain thefairway (and, optionally, to operate aids tonavigation) for a specified period duringwhich it derives an income from vesselsusing the fairways under an agreed faresystem (for example San Martin-RosarioFairway, Argentina, described in Box 23).

• Terminals: BOT schemes are usuallyapplied to specific terminals. There aremany examples of such terminals, such asthe former P&O terminal at Nhava Sheva,India; the South Asia Gateway Terminal atColombo; the Aden Container Terminal;and the Port of Buenos Aires, Argentina.

• Entire port complexes: A BOT structuredas a master concession contract could coveran entire port complex comprising variousterminals. Here, the SPC (or port operator)assumes de facto the role of a landlord portauthority for the assets it has agreed to con-struct. The master concessionaire thenoffers subleases of various terminals tothird parties. Such a scheme can approachcomprehensive privatization. The only realdistinctions are that under a BOT and mas-ter concession, the transfer of assets is tem-porary and the concessionaire has no regu-latory responsibility for marine safety, envi-ronment, or vessel traffic management.There are no examples of effective imple-mentation of this type of BOT master con-cession scheme, but new legislation inMadagascar provides for une concessionglobale, which is the equivalent to a masterconcession for small ports of local interest.

Other port assets cannot be easily concessionedas individual items. The most important of


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these are assets such as breakwaters, piers, con-necting channels, intraport roads, and othercommon areas. These assets, however, can bepart of a master concession agreement or acomprehensive privatization scheme.

A carefully crafted concession is central to theimplementation of a BOT scheme. The conces-sion contract gives the concessionaire the rightto run the facility (with limited and clearlydefined government oversight) and earn a com-mercial return on investment. The concession orBOT agreement, with the required businessplan, will set out estimates of the likelyrevenues, costs, debt repayment, and profit forthe SPC. This information is necessary to assessthe project’s financial viability and its debtrepayment capacity. Many planned BOTprojects fail because their terms are negotiatedwithout taking into account whether or not theproject is bankable. Governments often try to

negotiate a BOT arrangement at an early stagein the project preparation cycle, before the fullscope of the project is known and before aregulatory oversight regime has been decided.While this might generate significant revenuesfor the government in the short run, it maysaddle the concessionaire with an impossible-to-complete project. There are many variants ofBOT-like schemes, including:

• Build-own-operate (BOO): Full privatiza-tion of the terminal because the port landand the facilities built on it are not returnedto the government or port authority.

• Equip-operate-transfer (EOT): Port infra-structure already exists, but superstruc-ture is supplied by the SPC.

• Build-transfer-operate (BTO): New portfacilities are directly transferred to thecompetent authority (government or port


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In recent years, governments have recog-nized the benefits of developing their portseither through privatization or, more recently,

through joint ventures or build-operate-transfer(BOT) schemes. In this article, we consider theapplication of BOT schemes to port develop-ment and some particular issues that arise.

Prime examples of the use of BOT schemesare the development of new greenfield termi-nals in Gujarat province (India), the new con-tainer terminal at Nhava Sheva (India), and theproposed terminals at Chittagong(Bangladesh), Colombo (Sri Lanka), andTangiers (Morocco). This follows the growingtrend as international port operators such asP&O Ports, Hutchison, PSA, and InternationalContainer Terminal Services, Inc. seek todevelop global networks of terminals leverag-ing off their experience.

The benefit for the sponsors of a BOTscheme is that because this is a well-recog-nized project finance structure, they can limittheir exposure to a relatively small equity injec-tion and management involvement, with thebulk of the financing coming from limitedrecourse bank lending. The benefit for thegovernment is that they will be able to obtainan expensive infrastructure development that,

given the risks involved, a developer would beunlikely to risk on a full recourse basis.

If the concession agreement is between theSPC (special purpose company set up by thesponsors to undertake the project) and a portauthority (rather than the government), then inorder for the project to be bankable, there mayneed to be an agreement (an implementationagreement) under which the government guar-antees the port authority’s obligations andcertain undertakings are provided by the gov-ernment to the SPC or directly to the sponsorsthat cannot be given by a port authority (suchas the provision of a favorable tax treatment).The commitments from the government arelikely to cover issues such as compulsoryacquisition of land, free access for staff andmachinery, and sometimes protection for thestaff in the host country. It may also be neces-sary, particularly in less developed countries,to look to financing for the project and relatedinfrastructure from the International FinanceCorporation, the Asian Development Bank,or other multilateral agencies in order for theproject to be bankable.

Source: Williams, Mark Lloyd, Bill Jamieson, and NortonRose. 1999. “BOT Schemes and Port Development.” WorldPorts Development, p. 20.

Box 22: BOT Schemes and Port Development

authority) immediately after construction.Under BTO schemes, the ownership ofthe assets being financed has been anissue for lenders who require asset-basedcollateral to secure bank loans. WithBTO schemes, the only collateral is theconcession contract itself, which may beinsufficient. BTO schemes are necessaryin countries where legal strictures do notpermit private ownership of main portinfrastructure (for example Croatia, Italy,Costa Rica, and the Republic of Korea).

• Build-own-operate-transfer (BOOT):Ownership of land and facilities conveysto the concessionaire, but is transferredback at an agreed-on price at the end ofthe concession period.

A special case is the wraparound BOT (WBOT);this scheme is used in the case of expansion of a

government-owned port facility by the privatesector, which would hold title to the expansiononly. Under such a scheme, the SPC would:

• Operate the entire port facility under aproject development agreement.

• Manage the government-owned sectionunder a management contract.

• Expand the facility under a BOT con-tract.

In many cases, the government effectivelybecomes a partner in a BOT arrangement byinvesting in certain portions of the infrastruc-ture. Private parties appear to be reluctant toinvest in basic port infrastructure, not onlybecause it makes it more difficult to price useof infrastructure in a manner that permits theconcessionaire to realize a reasonable return onthe investment, but also because these assets


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To export its products, particularly grainsand cereals, Argentina depends largelyon its waterways. Before 1995, the main

Argentine waterway, the River Plate to SantaFe (some 589 kilometers), was a hazard tonavigation. The water was not deep enoughand the river was poorly maintained. The depthof the waterway had silted up from 32 feet to24 feet, and navigation at night becameimpossible.

To improve the waterway, the Argentinegovernment issued a concession contract todeepen and maintain a 700 km plus stretch ofthe river and to provide aids to navigationaccording to IALA (International Association ofMarine Aids to Navigation LighthouseAuthorities) standards. After a lengthy tender-ing process, Hidrovia SA (a joint venturebetween the Belgian dredging contractor Jande Nul and Empema SA, an Argentineanindustrial group) signed a concession contractto upgrade the waterway. The 10-year contractrepresents a total value of around $650 million,of which a significant part will be realized fromtolls on vessels using the safer and deeperfairway.

The first phase of the work included deep-ening the River Plate from Punto Indio to theParana River and up the Parana Inferior to

Puerto San Martin to a depth of 28 feet. A sec-ond part of this phase consisted of deepeningof the Parana Medio up to Santa Fe to a depthof 22 feet. Finally, this phase included reinstal-lation and conversion of some 500 buoys andbeacons to enable panamax-sized ships tonavigate safely through some particularly diffi-cult stretches of the river.

The second phase included deepening theriver channel from 28 to 32 feet.

An important feature of the project was thetoll, which could be applied to the entire water-way once phase 1 was completed. The toll iscalculated on a vessel’s net registered tonnageand maximum draft, taking into account theservices actually offered by the concessionaire.The toll is levied on all ships with a draft greaterthan 15 feet and is set at $1 per net registerton. Ships with a draft less than 15 feet arecharged every three to six months at a reducedrate. The waterway is divided into sections andsubsections, and a ship is charged only for thesections and subsections actually transited.The concessionaire is responsible for collectingthe tolls, while the Prefectura Naval has theauthority to deny port clearances to any vesselfailing to make payment.

Source: Author.

Box 23: San Martin-Rosario Waterway Concession

are largely immobile and have no comparablealternative use. Political instability, change ofcontrol, antiprivatization backlashes (national-ization), unexpected new tax regulations, andother governmental actions could makecomprehensive BOT schemes much lessattractive.

6.3. Comprehensive Privatization Comprehensive port privatization has, untilnow, been developed only in the U.K. and inNew Zealand. Outright sale of port land com-bined with a transfer of traditional public porttasks, such as safety and environmental over-sight (for example, harbormaster’s tasks),remains an exception. Other countries haveintroduced significant privatization schemes,but mostly with respect to port and terminaloperations.

Comprehensive port privatization often requiresthe enactment of new laws, both to regulate thetransfer of ownership and functions from thepublic to the private sector and to define theborderline between redrawn public and privateresponsibilities and tasks. Such legislationshould establish:

• Authority for the port authority to estab-lish a new successor company or compa-nies to take over all or part of the author-ity’s business.

• The right of the successor company toissue shares, either to the authority or toa third party.

• The time and manner for selling or other-wise distributing the shares to third par-ties, as well as for a payment to the suc-cessor company from the proceeds of thesale.

• The basic authority and mechanismsneeded for the government to shape anddirect the privatization.

• A levy on the proceeds of the disposal ofshares of the successor company (in theU.K. this levy was set at 50 percent of thenet proceeds of the sale).

• A levy on profits accruing to the succes-sor company as a result of the disposal ofport land transferred under the privatiza-tion scheme (in the U.K. this levy was setat 25 percent of the profit during the firstfive years, 20 percent during the next twoyears, and 10 percent during the lastthree years of the levy period).

• Provisions for the transfer of port author-ity personnel to the successor company(for example, the number and categoriesof personnel, salaries, benefits, and pen-sion rights) or their dismissal (for exam-ple, separation package, retrainingallowance, rehiring preferences).

• Terms for the transfer of public tasks,such as aids to navigation, pilotage, han-dling of dangerous goods, and protectionof the environment to the successor com-pany or other entity.

• The tax regime applicable to the succes-sor companies.

• Authority for the government to dissolvethe port authority once it is satisfied thatthe objectives of the enabling legislationhave been met and to transfer all remain-ing property, rights, and liabilities to thesuccessor company.

Privatization legislation may include additionalelements, depending on the local situation, thestructure of the former port authority and thespecific legal, institutional, and socioeconomicsituation in the country concerned.

In the U.K., the benefits of comprehensive portprivatization most often cited are:

• The generation of revenue for the treasury.

• The ability of privatized companies todiversify their businesses.

• Greater access to capital markets.

• The removal of restrictions on investmentand borrowing.

• The introduction of new industrialrelations practices.


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• A more commercial and entrepreneurialapproach to management of the business.

• Greater competition.

These features, it was argued, would result inimprovements to the port system’s financial andoperational performance. Note, however, thatnot all of the above-mentioned benefits are dueexclusively to comprehensive privatization; otherport reforms may generate similar benefits.

A vast majority of maritime nations considerscomprehensive privatization to be incompatiblewith national and regional interests. Specificreasons why governments and port authoritieshave refrained from pursuing full privatizationare diverse, but often include one or more ofthe following:

• A public monopoly can easily become apermanent private monopoly.

• The macroeconomic benefits of large portcomplexes to the regional and nationaleconomy are perceived to be threatenedby comprehensive privatization.

• The danger of discriminatory treatmentof customers.

• The risk that, in practice, privatizationmay undermine competition.

• Fear of overinvestment in and duplicationof dedicated terminals for major clients,which could unbalance demand for addi-tional public transport infrastructure.

• Neglect of the port’s public service func-tion.

• Reluctance of labor unions to abandongovernment protection and their fear oflosing jobs.

• Reluctance of public authorities to losepolitical control, including patronage.

• Reluctance of public authorities to loseincome generated by the port business.

Background on the U.K.’s port privatization isprovided in Box 24. After more than 10 yearsof experience, some conclusions can be drawn

concerning the U.K.’s implementation of com-prehensive privatization. Generally, the U.K.model of port privatization is highly determinedby local factors and ideological considerationsthat are unique to the British experience.However, it appears that:

• The valuation of port assets sold to pri-vate parties was judgmental because therewas no established market during thetime of privatization. Subsequent tradingof port shares suggests that the originalprices were only 25 percent of their truemarket value.

• Ports were sold at significantly discount-ed prices. Discounted sales (in addition tothe ruling that 50 percent of the sale pro-ceeds from disposal of Trust Ports shouldbe returned to the buyer) significantlyreduced the original debt of the new portcompany. Certain privatized Trust Ports,therefore, realized very high profits (ashigh as 20–30 percent of turnover) at theexpense of port users and taxpayers.Although difficult to prove, privatizationvia a concession, rather than outrightsale, would probably have raised consid-erably larger revenues for the publictreasury.

• Transfer of port regulatory functions tothe private sector has raised seriousissues. The new privatized ports areessentially self-regulating and have littleincentive to safeguard and enhance inter-port competition. The driving forcebehind the new port owners is corporateinterest rather than public interest. Thequestion, then, is who protects the publicinterest?

• In terms of investments and profits, pri-vatized U.K. ports have done better thanthe still-existing public ports.Privatization led to an injection of cash,but only for purchasing existing assets.Former Trust Ports claimed that invest-ments were hampered by financial institu-tions looking only for short-term returns.


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The United Kingdom (U.K.) is the onlyexample of a country with lengthy experi-ence in comprehensive port privatization.

A number of ports in the U.K., however, stilloperate in the public domain. It is instructive toanalyze the U.K. experience to discern the cir-cumstances leading the U.K. to adopt a com-prehensive privatization approach.

The U.K., an island where no significant cityis more than 100 miles from at least two ports,has strong competition among its ports. Thus,there appears no need for antimonopoly con-trols specifically for the ports industry, otherthan those provided generally by the Monopolyand Mergers Commission for Industry.

Over the last 50 years, British port structureshave evolved in response to three principalneeds:

• To modernize institutions and installations,many of which dated back to the early yearsof the industrial revolution, to make themmore responsive to the needs of users.

• To achieve financial stability and improvefinancial performance, with an increasingproportion of financing coming from privatesources.

• To achieve labor stability and a degree ofrationalization followed by a greater degreeof labor participation in the port enterprises.

In the U.K., chronic labor unrest and outdat-ed work rules constituted major reasons forport reform. In fact, the Ports Act 1991, whichstarted the full privatization process, was intro-duced and could be successful only after theabolition of the National Dock Labour Schemeof 1989. This scheme gave port workers a vir-tual guarantee of lifetime employment, con-tributing heavily to inefficiency and subsequentpoor financial performance in the port sector.

One of the main structural problems of theport system in the U.K.—especially amongTrust Ports—was the composition of theirboards, which were defined in statutes. Theseboards tended to be strongly representative ofport users, who were by nature reluctant toauthorize tariff increases sufficient to generatethe revenues needed to allow for depreciationand subsequent reinvestment in port facilities.Those tariff increases that were authorizedtended to be offset by increasing labor costs,which increased steadily as a result of pres-sure from organized labor, supported by the

National Dock Labour Scheme. The ports,therefore, operated with inadequate surplusesand with depreciation allowances based onhistorical costs. Without substantial surpluses,the ports had to raise the money they neededfor their modernization from fixed interestloans and bonds. The net result of these fac-tors was that the port operated with netdeficits, leading to decapitalization over thepostwar period, up to around 1970.

The main instrument for port privatization inthe U.K. is the Ports Act 1991. This law pro-vides for the formation of harbor authorities oflimited companies under the Companies Act,and for the subsequent sale of their shares. Allproperty, rights, liabilities, and statutory func-tions are transferred to the new port compa-nies. Ministerial approval is required for thesale of shares and for the subsequent dissolu-tion of the harbor authority. The company hasto pay the government 50 percent of the pro-ceeds of the sale of shares, less any amountset aside for assistance to maximize employeeparticipation. If the company later sells portland, a 25 percent levy is charged on the pro-ceeds of sales during the first 5 years, 20 per-cent for the next 2 years, and 10 percent forthe years 8 through 10.

Under the Ports Act, after July 1993 theTransport Secretary could, in the case of har-bor authorities with annual revenues of morethan £5 million, initiate privatization of anunwilling harbor authority, unless that authorityarticulated compelling arguments against it.

Privatization began before the Ports Act1991. The Thatcher administration privatizedthe British Transport Docks Board (BTDB)under the Transport Act 1981. Subsequently,the Associated British Ports was established,floating 49 percent of its shares in 1983. TheBTDB’s management formed the first manage-ment of the new company. The privatization ofBTDM was notable for its vigorous develop-ment of national resources.

Another form of privatization was applied toanother group of nationalized ports, theSealink Harbours (British Railway Board).These ports were sold to Sea Containers Ltd.by negotiated tender.

These experiences encouraged discussionsamong the management of a group of HarbourAuthority ports in favor of privatization bymeans of a management buy-out (MBO) or

Box 24: Impetus behind Full Privatization in the United Kingdom

• The abolition of the National Dock LaborScheme had a more profound effect onlabor stability than the selling of port land.

• Where terminals were already privatelyoperated (landlord ports), selling theunderlying port land made little differ-ence. For example, port land at Dover(a former Trust Port) or Portsmouth(a municipal port) did not affect portoutput because port operations in bothports were already in private hands.

• Some nationalized and Trust Ports were soldunder a M(E)BO scheme to former publicofficials. These managers reaped windfallprofits by selling their shares at a later date.

• There are limited possibilities for portcities to redevelop obsolete port land. Onthe other hand, land speculation by priva-tized ports has become a reality becauseolder port facilities are often situated nearthe valuable real estate of city centers.

The U.K. experience, therefore, has yielded verymixed results and provides few arguments sup-porting comprehensive privatization (the sale ofport land and transfer of all public functions tothe private sector) when other, less radicalreforms can achieve the same objectives.

6.4. Ports as Transport ChainFacilitators Increasingly, major terminal operators are try-ing to secure their strategic position by offering

complementary terminal facilities located eitherin the foreland or hinterland. This practice ismost apparent in connection with containerizedcargoes. In the event that an operator engagesin operating other facilities such as inland ter-minals, rail facilities, or even entire port com-plexes abroad, its objectives and motivationsare broader than those of a localized operator.

The phenomenon of supply chain managementcan for instance be well observed in the Port ofRotterdam, where very large crude carriers(VLCCs) discharge crude oil from various oil pro-ducing countries. Rotterdam has a virtual monop-oly in this traffic in Northwestern Europe as aresult of its very deep access channel to the NorthSea (78 feet). Pipeline systems have been con-structed to connect the port with various refineriesin the hinterland, such as in Belgium andGermany. Thus, the inland transport chain iseffectively controlled by one port, creating a stableenvironment for the transport of crude oil as wellas an attractive location for balancing refineries.The Rotterdam Municipal Port Management wasinstrumental in developing the pipeline systems.

Some port authorities also seek to attract cus-tomers to their port facilities by facilitating orcofinancing terminal facilities outside their portarea. This more expansive view of a portauthority’s role has the potential to influencetraditional port management structures, particu-larly in ports structured on the landlord model.

A port authority’s involvement in terminal oper-ations beyond its homeport may not be focusedsolely on improving logistics chains. The mainobjective might be to maximize the port author-ity’s revenue by making more widespread use ofits operational expertise and management, espe-cially in the case where the port authority actsas terminal operator as well.

Port authorities seeking to become transportchain facilitators should be aware of possibleconflicts of interest and the potential loss oftheir neutral position. Managing a port area,including attendant public functions, is differentfrom optimizing a logistics chain, which can beconsidered a supporting function for the ports


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Box 24: Impetus behind Full Privatization inthe United Kingdom (Continued )management/employee buy-out (MEBO). Thelegislative mechanisms needed to implementsuch reform are complicated, requiring thepromotion of a private bill. This is costly andtime consuming and may—in the event ofopposition by interested parties—result inunwelcome modifications to the original bill.As a result of the perceived uncertaintiesassociated with this process, only a few portsopted to pursue this course.

Source: Author.

industry, and for that reason essential from acompetitive point of view.

The PSA Corporation is a prime example ofglobalization of terminal operations. Since itsestablishment, it has become a leading player inthe global terminal operating business andtoday owns, manages, and operates a chain ofcontainer terminals and logistics hubs through-out the world. Before taking on this expandedrole, PSA had to change thoroughly its legalstructure. Box 25 describes this transformation.

7. MARINE SERVICES ANDPORT REFORM This section discusses a variety of marine servicesand how they are affected by port reform.

Special emphasis is placed on how these servicesmight be outsourced, concessioned, or privatized.

Marine services are port-related activities con-ducted to ensure the safe and expeditious flow ofvessel traffic in port approaches and harbors anda safe stay at berth when moored or at anchor.“Safe” means that port conditions ensure thatvessels using the port, the port environment, andthe marine environment are protected from dan-ger. “Expeditious” means that vessels are notunduly delayed and that the vessels’ port transittimes, as a part of the total turnaround time inthe port, are kept to a minimum.

Although ports may define marine services dif-ferently, and may have different methods ofproviding them, in this section the term is used


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The Port of Singapore is a very successfulcontainer port and, since 1986, thebusiest port in the world in terms of ship-

ping tonnage, most of it containerized trans-shipment cargo. Singapore was a service port,combining land ownership, statutory functions,and cargo operations within one organization,and one of the few successful public serviceports in the world. In 1996, however, the gov-ernment of Singapore decided to fundamentallychange the management structure of the port.

The government changed the port’s struc-ture by creating a corporatized entity (PSACorporation) whose structure would be suffi-ciently flexible to permit it to operate andinvest in the region, especially in container ter-minals located on major shipping lanes.Corporatization of part of the port authority’sbusiness meant increased financial autonomyand generated greater cash flows. It alsoenhanced Singapore’s position as a hub portand was expected to contribute to the eco-nomic development of Singapore and the sur-rounding region. The PSA Corporation will belisted on the stock exchange of Singapore.

Since the PSA Corporation has a monopolyposition in Singapore, it is regulated. TheMaritime and Port Authority of Singapore wasestablished by an act of Parliament (The Maritimeand Port Authority of Singapore Act 1996) to pro-vide that oversight. The main tasks of the newauthority (MPA) are to promote the use, improve-

ment, and development of the port; to controlvessel movements and ensure navigational safe-ty; to license and regulate marine services andfacilities including conventional cargo terminals;and to regulate the port industry’s economicbehavior. The act states that no person shall pro-vide marine or port facilities without a publiclicense or exemption from MPA. The authoritymay control and fix the tariffs charged bylicensees for handling and storage of origin-des-tination cargo (that is, nontransshipment cargo).Transshipment cargo is not regulated because itis an international and highly competitive busi-ness. The original service port structure has thusbeen changed into one of a landlord port.

The newly formed PSA Corporation acts as aregulated terminal operator under corporate law.It is free to operate as a global terminal opera-tor. The question remains whether MPA willallow other private operators to carry out con-tainer operations in the Port of Singapore. Thelegal possibility exists, but the introduction ofintraport competition has not yet materialized.

Through this process, Singapore has sepa-rated public oversight and land managementfunctions (creating a public authority) fromcargo operations (creating a corporatized ter-minal operating company under corporatelaw). Once the government divests its sharesin this corporation, Singapore will have com-pleted its transition to a landlord port.

Source: Author.

Box 25: Singapore Creates PSA Corporation

to refer generally to services having a nauticalbearing, be it maritime safety, vessel traffic effi-ciency, or marine environment protection.

Other services (for example, fire fighting, immi-gration and customs services, security, and portstate control) may also affect port efficiency andsafety. While important to the overall operationof a port, these other services are not dealt within this section.

The specific marine services rendered by a portauthority depend largely on the scope of theport’s marine responsibilities and jurisdiction.The scope of the ports’ marine jurisdictionsdoes not follow a general rule, and there existsno international legislation or standard practicethat defines the responsibilities of port authori-ties. Usually, marine services rendered by a portauthority are geographically delimited by thearea directly under control of the authority,which may encompass only the waterfront ofriparian berths (the port’s domain). However,there are countries where the port authority isalso responsible for managing lighthouse servic-es outside its immediate area of control. Thisextended area may cover harbor waters andapproaches as far as the open sea.

7.1. Harbormaster’s Function Generally, the harbormaster (or port captain)manages port activities relating to maritimesafety and the protection of the marine environ-ment. The legal basis of the harbormaster’sfunction is usually embedded in a port bylawor, in the case of a state-owned port, in a specif-ic law or ministerial decree. The harbormasteroften has specific legal powers to act in emer-gency situations. Typically, the harbormaster ispart of the port authority organization andheads the marine department. In some coun-tries, the harbormaster may work for an inde-pendent public entity such as the coast guard.

The harbormaster is responsible for ensuringthe efficient flow of traffic through port andcoastal waters (including allocation of vessels topublic berths) and—on behalf of the govern-ment or port authority—for coordinating all

marine services. The harbormaster operates outof a port coordination center (or Captain’sRoom), which is often part of an elaborate ves-sel traffic management system.

Frequently, harbormasters have police powersand act as head of the port police. The mainfunctions of such police are enforcement of theport bylaws, especially with respect to trafficregulations, protection of the environment, andaccident prevention. When part of a portauthority, the harbormaster also usually servesas head of the pilotage service. In the event thatthe pilotage service is not part of the portauthority, the harbormaster is responsible forcoordination between this service and portusers. Finally, the harbormaster is sometimesresponsible for regulatory oversight of the car-riage and storage of dangerous goods in theport area as well as for ensuring the proper useof port reception facilities.

In view of the public character of the harbor-master’s responsibilities, this function is rarelyprivatized. To do so would raise a conflict ofinterest between the public interest (safety, envi-ronment, and equal treatment under the law)and private interests from the port industry. Forexample, since port time of ships is an impor-tant cost and operational factor, the harbormas-ter will always be under pressure to grant pref-erential treatment to shipping lines. Impartialand consistent application of operational safetymeasures for ships carrying dangerous or envi-ronmentally sensitive goods such as gas carriers,chemical parcel tankers, and VLCCs is essentialto the safe functioning of any port. The harbor-master, therefore, should not function within apurely commercial environment, but must havefreedom of action to carry out public tasks inan unimpeded and unbiased manner.

Although the harbormasters might be part of aport authority’s management team, they shouldbe free to operate in their jurisdiction as inde-pendently as possible from the commercialmanagement of the port. In carrying out emer-gency measures in the event of accidents andindustrial disasters, the harbormaster should


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have full freedom of action and possess the ulti-mate authority and responsibility for directingall necessary activities. In a fully privatized port,the harbormaster should not be part of the portmanagement, but should be employed by anational or regional maritime administration.

7.2. Pilotage In a port reform process, pilots often are thefirst ones to demand privatization. Pilots usual-ly constitute a closed group of professionals(often master mariners), who are keenly awareof their unique position in the port environ-ment. Successful vessel management relies heav-ily on the efficient functioning of the pilotorganization, a fact that pilots may use to maxi-mum advantage during port reform.

In many countries, pilots (or pilot organiza-tions) have been more or less successfully priva-tized. This type of privatization, however, car-ries the risk of creating a private sector monop-oly in pilotage services, especially when pilotsare privatized on a national or regional scale.Pilotage is an essential part of traffic manage-ment, and safe passage of vessels through a portarea requires expert teamwork of a vessel trafficmanagement organization (Captain’s Room),tugs, mooring gangs, and pilots. A private sec-tor pilot monopoly that has the ability to bringport operations to a complete and rapid stoprepresents a significant risk for ports, carriers,and shippers alike. As a consequence, retainingpilots as part of a port authority’s marinedepartment may be desirable even when otheraspects of port management and operations areprivatized (see Box 26).

There are two ways of privatizing of thepilotage function. Pilots can be self-employedand work under the oversight of a maritimeauthority that serves as the regulator and licen-sor of the individual pilots, or pilots can organ-ize themselves into a private company.

The pilotage company should have its owninfrastructure and facilities, such as pilot boats,communication equipment, and pilot stations.Sometimes a pilot organization (especially in

smaller ports) might also operate a vessel trafficmanagement system (radar). The port authorityor maritime administration should regulate theprivatized pilot organization regarding:

• Training requirements and pilotqualifications.

• Standards for obtaining a certificate orlicense, and its revocation.

• Roles and responsibilities of the organiza-tion for operation of a vessel traffic man-agement system.

• Communication equipment and channels.

• Investigation of incidents and follow-upactions.

• Pilotage tariffs and financial record keeping.

• Medical fitness and continued proficiency.

• Reporting requirements to the relevantport authority.

7.3. Tugboat Operations Tugboat operations are typically carried out byprivate firms. If the volume of vessel traffic is notsufficient to support a tugboat service on a com-mercial basis, a port authority may be obliged toprovide such service itself. Sometimes neighboringports can share tugboat services to reach volumessufficient to sustain a commercial operator.

In many instances, traffic density allows foronly one private tugboat company to operate inthe port area. In such cases, the port authorityshould regulate the service regarding:

• Minimum crew size.

• Minimum bollard pull.


• Roles and responsibilities relating to thevessel traffic management system.

• Tariffs.

The optimum situation would be a number oftugboat firms competing vigorously in the port.In that event, the port authority should nothave to regulate tariffs. Regulation of other


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aspects of tug operations such as manning canbe at the discretion of the port authority andwill depend on the local situation.

7.4. Mooring Services Mooring services in smaller ports can be pro-vided by the local stevedore. In larger ports, amooring service is usually performed by a spe-cialized private firm. Especially in a complicatednautical situation (for example, single pointmooring buoys, specialized piers for chemicalsor gases, or ports with large tidal differences),mooring activities require expert skills andequipment. A port authority may choose to reg-ulate this activity when only one specializedfirm exists. Regulations should include:

• Minimum manning requirements.


• Number of mooring boats and theircharacteristics.

• Tariffs.

7.5. Vessel Traffic Services and Aidsto NavigationVessel traffic services (VTS) are usually part ofa port or a maritime authority. Such services areprovided in port areas and in densely used mar-itime straits (such as the Dover Channel) oralong a national coastline (for example, thecoast of the Netherlands). In principle, it ispossible to privatize VTS under a concession


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In 1988, the Netherlands Pilotage Servicebecame an independent organization, withthe pilots acting as private entrepreneurs.

The objectives of the government in the priva-tization of the pilot services were to reducethe governing executive burden and toimprove efficiency and adequacy of the pilotservices.

A public entity, the Nederlandse LoodsenCorporatie (the Netherlands Pilot Corporation,NLC) was created to manage the register oflicensed pilots and be responsible for the edu-cation and training of licensed pilots. Alllicensed pilots constitute the NLC.

In every region, the licensed pilots haveset up a legal entity, the Regionale LoodsenCorporatie (Regional Pilot Corporation, RLC).The licensed pilots are all shareholders of theLoodswezen Nederland BV (Pilotage Serviceof the Netherlands Ltd.), which is responsiblefor the exploitation of the independent pri-vate enterprise. All supporting staff isemployed by this company. The companycollects the pilotage fees and makes pay-ments to the pilots in accordance with thefinancial statute.

The ownership of the capital goods used bythe pilots is incorporated in the LoodswezenMaterieel BV (Pilotage Services Material Ltd.).Individual pilots, united in regional partner-ships, the “Pilot Associations,” render thepilotage services. Supporting services are

provided by the Loodswezen Nederland BV.Five foundations are responsible for education,social allowances, management of pensionfunds, and allowances for special situations.

Privatization in the Netherlands did notbring an end to the debate about pilot servic-es. The government Audit Office directedharsh criticism at the privatization processand asserted that the efficiency improve-ments did not benefit the shipping lines or thegovernment, but solely the pilots.Notwithstanding the Audit Office’s criticism,the Netherlands’ privatization of pilots is notconsidered a successful one.

To a certain extent, the government’s objec-tives have been attained. The increase in theamount of pilot activity and the reduced num-ber of licensed pilots have led to higher effi-ciency. However, pilotage became a virtualmonopoly and the efficiency improvementshave led primarily to a very substantial rise inthe pilots’ incomes.

The cost structure of the pilotage organiza-tion is not transparent. The fees are nonnego-tiable, contrary to the fees for other marineservices and pilot fees in other ports. Themagnitude and rigidity of pilot fees createstrong pressures to reduce other cost ele-ments in the highly competitive maritime trans-port sector. Overall, the present situation hasproven unsatisfactory to port users.

Source: Christiaan van Krimpen.

Box 26: The Creation of a National Pilotage Monopoly in the Netherlands

agreement. VTS that should be regulated by thecompetent authority should include:

• System functions, such as vessel manage-ment and control, emergency functions,and information and communicationfunctions.

• Types and specifications of radars andtracking software.

• Manning levels and qualifications.

• Reporting duties.

• Tariffs.

Responsibility for aids to navigation usuallyrests with a national maritime authority inport approaches and in coastal areas, andwith a port authority in port areas. Often,provision and maintenance of buoys andbeacons are contracted out. Because aids tonavigation are generally part of an integratedmaritime infrastructure, the costs of providingthese services are included in the general portdues. Therefore, it is difficult to privatizethem.

7.6. Other Marine Services The control of dangerous goods for maritimecargoes is usually performed by a specializedbranch of the port authority. The same goes forthe handling of dangerous goods in port termi-nals. Oversight and regulation of land transportof dangerous goods is normally a responsibilityof the central government. The highly sensitiveand technical nature of this work makes it inad-visable for privatization.

Waste management services in ports often areprivatized under strict control of a portauthority or another competent body.Privatization carries risks, however, especiallywith respect to the disposal of dangerouschemicals. Proper waste management can beexpensive for shipping lines. With high costs,ship captains might be tempted to dump wasteinto the sea or into port waters. Control ofsuch dumping practices is extremely difficult,especially for chemical cargoes. To spreadwaste management costs, ports can include all

or part of the waste management costs in thegeneral port dues. Transport of waste from theship to a reception facility also poses achallenge, especially in larger port areas. Portauthorities should directly provide or organizethe provision of transport barges or trucks forthis purpose.

The entire waste management system, includingpersonnel and facilities, should be closelycontrolled by the competent authority. Whenprivate firms are engaged in waste handling, theauthority should employ experts from itsorganization to ensure compliance with allrelevant laws, rules, and regulations.

Generally, emergency response services arecarried out by a variety of public organizationssuch as the port authority (harbormaster), firebrigade, health services, and police. Some portshave sophisticated tools available to aid in crisismanagement, such as prediction models for gasclouds. Such tools are often integrated in a traf-fic center of the local vessel traffic managementsystem (VTMS). Private firms (for example, tug-boat companies) may play a subsidiary role incrisis management in the event that they areequipped with fire-fighting equipment. Largerports use patrol vessels and vehicles for a vari-ety of public control functions. In some ports,such patrol vessels also have fire-fighting equip-ment on board. When a port does not havepatrol vessels available, a contract with a tugboatcompany should be arranged to guarantee avail-ability of floating fire-fighting capability. Portpatrol services are part of the harbormaster’sresources and, therefore, should not beprivatized.

Control of dredging operations by a portauthority is of utmost importance. Often, theport authority or the competent maritimeadministration does not have enough expertiseto exercise sufficient control over both mainte-nance and capital dredging. Port authoritieswith large water areas under their controlshould employ sufficient competent personnelto prepare dredging contracts and overseedredging operations. Sounding is an activity


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Box

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that should preferably be carried out (orcontracted out) by the port authority itself.Dredging is usually carried out by private firms.It might be cost effective for some ports to usetheir own dredges, especially when continuousand important maintenance dredging isrequired.

Box 27 summarizes the prevailing approachesfor handling the most important port functions.

REFERENCESBaird, Dr. Alfred J. 1999. “Port Privatisation,

Objectives, Extent, Process, and the UnitedKingdom Experience.” Napier University,Edinburgh, 4th World Port PrivatisationConference, London, 22–24 September 1999.

Drewry Shipping Consultants Ltd. 2005. AnnualReview of Global Container Terminal Operators –2005. Drewry House: London.

Heinrich, Michael. 1999. “Port Efficiency—ThePublic-Private Partnership.” (Port of Hamburg)World Ports Development, p.16.

Holocher, Dr. Klaus Harald. 1990. Port ManagementTextbook, Volume 1. Bremen.

McDonagh, Stephen. 1999. Port DevelopmentInternational.

Shaw, William, and Thompson. 1996. “Concessionsin Transport.” TWU Papers, Discussion Paper,World Bank, Washington, DC.

Williams, Mark Lloyd, Bill Jamieson, and NortonRose. 1999. “BOT Schemes and PortDevelopment.” World Ports Development, p. 20.

World Bank. 1992. Port Development Strategies forAsia, Phase 1. National Ports and WaterwaysInstitute, Louisiana State University.

Saundry, Richard and Peter Turnbull. 1997. Privateprofit, public loss: The Financial and economic per-formance of U.K. ports. Maritime PolicyManagement 24(4): 319.

UNCTAD (United Nations Conference on Trade andDevelopment). 1984. Handbook for Port Plannersin Developing Countries. UNCTAD.

UNCTAD. 1998. Guidelines for Port Authorities andGovernments on the Privatization of Port Facilities.UNCTAD/SDTE/TIB/1.

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