NOTE NUMBER 222 P U B L I C P O L I C Y F O R T H E privatesector OCTOBER 2000 Multiservice Infrastructure Lourdes Trujillo and Privatizing Port Services Gustavo Nombela Por ts have become increasingly capital intensive. Economies of scale Lourdes Trujillo is Professor of Economics and Director of have led to larger, more specialized ships. And competition between the Department of Applied por ts has star ted to grow. As a result, governments are reorganizing the T H E W O R L D B A N K G R O U P PRIVATE SECTOR AND INFRASTRUCTURE NETWORK Economics at the University way por ts are run and permitting more private ownership and ser vice of Las Palmas de Gran Canaria. Gustavo Nombela deliver y. Because por ts provide multiple ser vices, if governments are to is Professor of Economics at design an efficient legal and regulator y framework for private par ticipa- the same university and spent 1999 as a visiting fel- tion it is impor tant to study all these activities to evaluate the best low at the World Bank approach. Moreover, because these activities must take place in a small Institute. Both authors have published extensively on space, it is impor tant to study how they are best coordinated. transport restructuring and More competition nections. Therefore, modern ports must be regulation and have advised In recent decades there have been profound extremely competitive to be able to offer optimal governments in Latin America on port reforms. changes in maritime transport. Ports, once labor- combinations of time and price for those firms intensive, have become more capital-intensive, demanding their services. making much port labor redundant. The develop- Somewhat less widely understood is the potential ment of containerized transport has dramatically for intraport competition. Seaports offer many serv- reduced the cost of cargo handling, but it has also ices to ships. The potential for competition in pro- required much investment in equipment (gantry viding these services depends largely on the assets cranes, specialized terminals, improved pavement, required to provide them, the space available in the and so on). The economies of scale obtained by port, and the volume of traffic. A defining physical the transport of large quantities of containers and characteristic of ports is that space is limited. Partly bulk cargoes have led to the building of larger and this is because many of the activities must take place more specialized ships that require substantial around the ship. But it is also because port infra- port investments in new infrastructure and equip- structure is expensive to build, and much of it can ment. Moreover, the development of integrated only be expanded in discrete units. and intermodal transport chains has reduced transport costs so much that it is often preferable Multiservice operations for a shipper to use a distant port instead of a closer For the purposes of analysis, it is useful to divide one, if the distant port has better facilities and con- port activities into infrastructure, services M U L T I S E R V I C E I N F R A S T R U C T U R E PRIVATIZING PORT SERVICES Figure Port activities 1 Maritime access infrastructure • Channels, approximation zones • Sea defense (breakwaters, locks) • Signaling (lights, buoys) Port Port infrastructure Port superstructure area • Berths, docks, basins • Cranes, pipes • Storage areas • Terminals, sheds 2 • Internal connections (roads, other) Berthing Ancillary services Cargo handling Consignees services • Suppliers • Stevedoring • Administrative paperwork • Pilotage • Repairs • Terminals for ships and cargo • Towing • Cleaning and refuse • Storage • Permits (sanitary, • Tying collection • Freezing customs and so forth) • Safety • Service hiring Land access infrastructure • Roads, railways • Inland navigation channels Source: Estache and de Rus 2000. provided using the infrastructure, and coordina- for a ship to enter and exit a port safely. In some tion between the activities at the port. ports pilots are public employees, and in others they are private agents licensed by the port author- Many kinds of infrastructure ity. Towage is the operation of maneuvering a ship A port obviously needs good access by sea (chan- using tugs. Like pilotage, it can be provided by pri- nels, locks, aids to navigation, and so on) and by vate firms or operators hired by the port authority. land (roads, railways, and canals). The port also Cargo handling includes all activities related to has internal infrastructure, such as docks and stor- the movement of cargo to and from ships and across age yards, and internal superstructure. The super- port facilities. The historic distinction between structure can be classified into fixed assets built on stevedoring—moving goods within a ship—and the infrastructure, such as sheds, fuel tanks, and loading—moving goods onto a ship from the office buildings, and fixed and mobile equipment quay—has been eroded by modern cargo handling such as cranes and van carriers. techniques like containerization. Because the tech- In general, the port authority is responsible for nique used depends on the type of cargo, it is effi- the port, and the state or municipal government is cient to use specialized equipment. This has led to responsible for the land access infrastructure. the formation of terminals that specialize in partic- They divide responsibility for the maritime access ular cargoes. Because cargo handling charges infrastructure, with the port authority responsible account for between 70 percent and 90 percent of for breakwaters, lights, and buoys and the govern- the cost of moving goods through a port, regulators ment responsible for the rest. concerned with cost-efficiency of the port must pay cargo handling particular attention. Many kinds of services A further range of services is provided by agents Many services are provided by different operators. who handle the documentation for port users— First, there is a group of services related to the health clearances, import and export require- berthing, which include pilotage, towing and tying. ments, and customs duties. These agents are They can be provided by the port authority or pri- known as consignees, and are hired by shipping vate firms. Pilotage covers the operations required companies to arrange in advance the administra- tion and all matters related to the use of port facil- ▪ Build (or Rehabilitate), Operate, and Transfer. ities by a ship. A modern port must minimize red Private operators build or rehabilitate facilities, tape for port users. Delays cost money. which are eventually transferred to public own- Finally, there are ancillary services, including ership. Also known as a concession. supplies to ships such as fuel and water, cleaning, ▪ Joint ventures. Operators create a new inde- and refuse collection. pendent company. This type of agreement arises when two or more parties with common Coordination interests join forces (for example, one firm sup- With many activities being performed in a limited plies technology and know-how, while another 3 space, there is a need for a coordinator responsible supplies market knowledge). for the proper use of common facilities, for safety, ▪ Leasing. The port authority leases port assets to and for the design of the port. In most ports, this is private operators for a given period. In contrast the role of the port authority. It is generally a pub- with a concession, the private operators do not lic institution, with representation of local interests, usually make investments, and therefore they but in some ports the authority is purely private. only assume commercial risks. The common forms of organization are known ▪ Licensing. Private operators provide services as landlord, tool, and services ports. requiring basic equipment, which they own. ▪ Landlord port. The port authority owns and The port authority owns the port infrastructure manages the port infrastructure. Private firms and superstructure and charges the private provide all other services and own the port operators for their use. Stevedoring companies, superstructure. pilots, tug operators or consignees can work ▪ Tool port. The port authority owns both infra- under this type of agreement. structure and superstructure. Private firms pro- ▪ Management contract. The port authority vide services by renting port assets, through remains the owner of the port, but the port is concessions or licenses. run by a private firm which can provide a more ▪ Services port. The port authority is responsible commercial approach to operations. Both for the port as a whole, owning the infrastruc- investment and commercial risks are faced by ture and superstructure and hiring employees the public sector, since managers do not invest to provide services. their own capital in the port. In landlord and tool ports, the port authority is usually public and the port operators are private Shared or exclusive use firms. Services ports are more likely to be privately A basic consideration in choosing the best form of owned, with one private firm operating the port as privatization is whether the service to be privatized a single unit. The role of port authorities should requires the exclusive use of the port’s fixed assets. be confined to the provision of infrastructure and Activities in which the fixed assets can be shared the coordination of port services. However, in include services such as pilotage, towing, consignee many countries where there is no regulatory insti- services and ancillary services to ships and crew. tution for seaports, port authorities perform many Under a system of licenses, several operators can be other tasks, such as investment planning and authorized to provide these services. The prices financing, or regulation of the tariffs that private they charge and the quality of their services can be operators charge to port users. regulated. In cases where competition is possible, for example between consignees or pilots, strict reg- Privatization options ulation of prices would not be necessary unless col- The options for privatizing port services depend lusive practices were detected. In ports where space on the size of the port and the services involved, limits the number of operators, prices and condi- and include: tions of service need to be regulated to prevent mar- ▪ Full privatization. All assets and liabilities are ket domination by a few firms who may try to exploit transferred to the private sector. their position to extract rents from port users. ▪ Build, Operate, and Own. Parts of the port are Because space is so scarce in ports, exclusivity in sold to private operators to be developed. the use of some fixed assets may be necessary. Such M U L T I S E R V I C E I N F R A S T R U C T U R E PRIVATIZING PORT SERVICES Types of competition at different berths and can manage them better. The terminals Box volumes of container traffic compete with each other. When a company serves 1 Type of competition Level of traffic (TEUs) Intra-terminal Inter-terminal Above 30,000 per year Above 100,000 per year all ships using a given berth, the port authority can make it responsible for collecting port tariffs— charges for the use of the port—as well as the oper- ator’s own charges. At this volume of traffic, it is viewpoint Inter-port Above 300,000 per year Note: TEU is a Twenty Foot Equivalent Unit. This is a unit of measurement equivalent also possible to provide incentives for private oper- to one 20-foot shipping container. Source: Kent and Hochstein (1998). ators to finance projects for infrastructure is an open forum to enhancement or construction. encourage dissemination of Finally, in a region where container traffic is public policy innovations for assets and associated services include terminals for above 300,000 TEUs a year, the market size allows private-sector led and cargo handling, storage areas, repairing docks and for the existence of several ports that can compete market-based solutions for fuel suppliers. It is more complicated to introduce for traffic. Such inter-port competition again development. The views private participation in these services, since opera- reduces the need for control over private opera- published are those of the tors need to use assets that are considered to be tors’ prices. However, even in this optimal case, authors and should not be optimally owned by the port authority. Therefore, attention is still needed for the proper drafting of attributed to the World concession contracts need to be written carefully in concession contracts, since private operators must Bank or any other affiliated order to reconcile private operators’ interests with be compelled to fulfill their obligations not only organizations. Nor do any of port authorities’ objectives. At the same time, con- on service conditions and charges, but also on the conclusions represent tracts must include incentives for private operators equipment maintenance, safety, quality of serv- official policy of the World to maintain or enhance assets as required. ices, and all other matters which are costly for the Bank or of its Executive The number of operators for these services is by concessionaire, and could be underprovided. Directors or the countries definition extremely limited, although it depends they represent. on port size. Similarly, the need for regulation of charges and quality depends on the type of port To order additional copies and how many alternative ports are nearby. In a References contact Suzanne Smith, port in a highly competitive environment, the reg- Drewry Shipping Consultants. 1998. World Container managing editor, Room I9-216, ulator need not be too concerned about over- Terminals: Global Growth and Private Profit. London. The World Bank, charging, because operators that overcharge risk Estache, Antonio and Ginés de Rus, eds. 2000. 1818 H Street, NW, losing customers. Privatization and Regulation of Transport Infrastructure: Washington, D.C. 20433. Guidelines for Policymakers and Regulators. World Bank Rule of thumb for competition Institute, Washington, D.C. Telephone: The privatization strategy should maximize the Kent and Hochstein. 1998. “Port Reform and 001 202 458 7281 potential for competition. There is no universal rule Privatization in Conditions of Limited Competition: The Fax: for the degree of competition and regulation desir- Experience of Colombia, Costa Rica and Nicaragua.” 001 202 522 3181 able in a port with a particular volume of traffic, but Journal of Maritime Policy Management 25(4): 313–33. Email: for container ports there is acceptance of some ssmith7@worldbank.org thresholds (box 1). A port handling fewer than This Note is based on a chapter in Estache and de Rus 2000. 30,000 TEUs a year is too small to have several ter- minals and operators. The best solution is to have a Lourdes Trujillo, (email: lourdes@empresariales.ulpgc.es) and Printed on recycled paper single operator and to regulate its charges. Gustavo Nombela (email: gnombela@empresariales.ulpgc.es) In a port handling between 30,000 and 100,000 Universidad de Las Palmas de Gran Canaria, Spain. TEUs a year, it is feasible to have several operators, possibly sharing a single terminal. There would be intra-terminal competition, with stevedoring com- panies competing to provide cargo handling serv- ices. A port handling more than 100,000 TEUs a year is big enough to have a number of terminals oper- ated by several companies that can use separate This Note is available online: www.worldbank.org/html/fpd/notes/