Today, the term port reform connotes the changing institutional structure of the port business and the much greater involvement of the private sector in the exploitation and financing of port facilities, terminals, and services. Port reform, therefore, results in changing relationships between the public and private sectors.
The sharp increase in world trade over the last 60 years focused the attention of national governments on the economic importance of ports. This was especially the case in major ports developing large industrial sites within their domain. In the 1950s and 1960s, many nations introduced institutional changes with the aim of coordinating port development at national and regional levels and preventing overinvestment in expensive port infrastructure. For example, the United Kingdom established its National Ports Council for this purpose.
In the former Soviet Union, Eastern Europe, and in many socialist-oriented developing countries the situation was entirely different. Ports were considered part of the national state structure (for example, as an element of the ministry of merchant marine or ministry of transport) and were often controlled by national shipping companies. Every matter involving maritime policy was decided centrally, with port authorities carrying out the various day-to-day nautical and operating functions.
At the beginning of the 1980s, the belief in the management and operating capacities of national governments faded in most market economy countries. Central structures came under fire and often lost some of their powers. The privatization wave launched in the late 1970s and early 1980s by Margaret Thatcher in the U.K. also affected the port sector and resulted in a reassessment of the role of the government and private enterprise.
The demise of the communist system in the beginning of the 1990s resulted in the virtual collapse of centrally controlled port systems in the former socialist countries. They too embarked on port reform and adapted the institutional and financial structure of their port sectors to market conditions.
Despite the social and economic reforms of the past 35 years, the public sector has retained a strong role in port development. Generally, in a market-oriented economy a government continues to be responsible for the development of public goods, goods that have a social utility, but that cannot be provided by the private sector because of low profitability. Moreover, another reason for continuing government involvement in the port sector is the strong ties to government responsibilities in the areas of land use planning, environmental protection, job creation, and the economic stimulation of underdeveloped areas. Box 16 is a compilation of a considerable number of surveys seeking to summarize the most frequently cited reasons for change in the management or ownership of ports.
Many port managers and government officials believe that the only way to improve the performance of public port organizations is through the process of privatization. They hold this view because they believe that certain characteristics of the private sector are indispensable to achieve commercial success. The term privatization has therefore become synonymous (and confusingly so) with port reform. Privatization, however, more accurately refers to one aspect of port reform—the introduction of the private sector into areas previously reserved to the public sector, finally resulting in the transfer of port land into full private ownership.
Governments and port managers can select from among a variety of strategies for improving organizational and operational performance, including:
Each of these options may be equally valid and successful forms of port reform, depending on the setting of the port in question. Each of these options is defined below.
Modernization of port administration assumes that performance can be improved by introducing more suitable systems, working practices, or equipment and tools within the existing system of bureaucratic constraints. The advantage of this strategy is that certain changes in the organization can be made without the requirement to change laws or national policy.
Liberalization and deregulation are the reform or partial elimination of governmental rules and regulations that enable private companies to operate in an area where previously only the public sector was allowed to operate.
In the case of commercialization, although the public port is not transformed into a private company, it is given more autonomy and made accountable for its decisions and overall performance. A commercialized port authority applies the same management and accounting principles as private firms and can adopt private sector characteristics and practices to become more customer oriented as well as more efficient and profitable.
In the case of corporatization, a public port enterprise is given the legal status of a private company, although the public sector or government still retains ownership. All assets are transferred to this private company, including land lease rights. Land ownership usually remains with the port authority.
The most complex form of reform is privatization. A useful definition of this term can be found in the UNCTAD publication of 1998 Guidelines for Port Authorities and Governments on the Privatization of Port Facilities: “Privatization is the transfer of ownership of assets from the public to the private sector or the application of private capital to fund investments in port facilities, equipment, and systems.”
More specifically related to the port sector are two more variations of privatization:
Hence, privatization expands the role of the private sector in the ownership or operations of existing port facilities and services, as well as in the development of new port facilities. In the following sections, the various port reform options are described in greater detail.
The strategies of liberalization, commercialization, corporatization, and privatization all attempt to improve the efficiency of the port administration and the operations through the introduction of a business-like environment. Although these strategies can be effective, some governments are reluctant to implement them because they fear that such institutional modifications may lead to a disruption of services or loss of government authority, prerogatives, and power. As a result, governments sometimes prefer other less sweeping methods to improve organizational performance, such as the modernization of the port’s administration. Such a strategy assumes that the performance can be improved even in the prevailing environment of bureaucratic constraints. The advantage of this strategy is that certain changes in the organization can be made without the necessity to make legal or policy changes.
Examples of improvements that can be introduced without legal or policy changes are:
Many ports have refrained from introducing corporate planning (strategic management or strategic planning) because port managers fear that its positive effects may be undermined by bureaucratic or cultural considerations.
Effective corporate planning is dependent on strategy formulation involving group interaction. While group-based strategic decisions often can offer the best available alternatives, a strict hierarchical organizational structure places the majority of important decisions in the hands of a single executive. In such cases, the success or failure of port development and policy is dependent on one person only, which is a risky situation. But this is precisely the most frequently observed form of management in traditional ports.
Career planning and management development are important elements in a port modernization strategy. Many ports have failed to introduce career planning and career development in the organization, or omitted to link the two activities. As a result, such organizations are characterized by low employee motivation levels, high absenteeism, and high turnover rates at management level positions. Efforts to improve the administrative environment and performance should include the rational use of computer applications and the application of modern communication technologies. Such developments are perhaps the most significant technological efforts undertaken by ports. Many have developed advanced computerized management information systems. EDI and information and communications technology are excellent tools to improve port administration and communication.
In the final analysis, the modernization option generally has not led to fundamental changes in the port sector, which is what the reform process sets out to do. It should, therefore, be considered as a stepping stone toward a more comprehensive reform program.
Liberalization sets the stage for a private organization to carry out certain port activities previously reserved exclusively for the public sector (public monopoly). With this reform, the private sector is authorized to provide selected port services to users in a competitive environment with the intent of increasing efficiency and improving port-client responsiveness. The essential feature of the liberalization option is implementing legislation that permits the private sector to provide facilities and services and to compete with the existing public port organization. The most important advantage of this system compared to other port reform systems is that the public port operator, even if inefficient, will continue to exist as a form of insurance against disruptions in service, while unsuccessful private port operators can be replaced.
Since liberalization may temporarily introduce competition between public and private port operators, the two must be able to compete effectively and fairly. This might require the introduction of an independent port sector regulator. Actually, the logic of liberalization should lead the public port authority to fully withdraw from commercial activities and concentrate on any necessary regulatory functions.
Liberalization is often opposed because of the existence of internal as well as external crosssubsidies. This, for instance, occurs when ports with a statutory monopoly cross-subsidize unprofitable services in competitive markets with profits earned in monopoly markets. For example, in many ports the most profitable activity is the container terminal operation, the revenues of which frequently support bulk or general cargo facilities and services. Other forms of cross-subsidy occur when a public port organization realizes substantial revenues from nonmaritime-related activities, such as real estate development, and uses these revenues to underwrite port-related costs. With this type of support to draw on, the public organization has a competitive advantage over its private counterpart.
On the other hand, the price advantage that the public port body may have had diminishes as competition erodes its monopoly power and prices are set in a more competitive environment. Its price levels cannot match those of the private sector if it has to rely on inflated prices to subsidize other port services. The former monopoly may, as a consequence, be forced to scale back or cease the unprofitable activities (which, although unprofitable, may be vital to the nation) to compete effectively with the private sector.
On many occasions, the public sector continues to rely on public subsidies, thereby undermining fair competition between the public and the private sectors. This strongly argues for the clear separation of the regulatory and commercial roles in a port, with the port authority taking on the former and the private operator the latter.
Another potential problem associated with the liberalization option is the possibility that the public port organization will use other unfair practices to compete against private operators. The port authority, for example, may take actions that are beneficial to the public terminals, but are disadvantageous to the private terminals. One example is the dredging of certain Asian ports; often, the government ministry or the public port authority provides exclusive dredging services. This public entity can refuse to offer this service to the private operators, thereby putting those operators at a competitive disadvantage. Another possibility is that the service would be provided to the private sector at a higher price than the one charged to the public sector. To avoid such potential conflicts of interest, the government may also decide to liberalize or privatize these essential complementary services to create a level playing field. Because of these situations, the logical conclusion for the liberalization option is for all commercial activities of the port to be ultimately transferred to the private sector.
Commercialization is the introduction of commercial principles and practices into the management and operation of a port authority or part thereof, requiring it to operate under market disciplines. The process can be achieved through negotiated performance contracts between the government, acting as the owner of the port, and the port management. The agreement specifies the port’s objectives in terms of performance goals, service quality, and social obligations. Commercialization is characterized by the following:
Essentially, commercialization aims to create an environment in which the port authority runs on a commercial basis. This involves a variety of business-type decisions. The chief executive typically has a certain freedom of action and refers only specific matters relating to overall policy or strategy to the controlling body (the relevant ministry or city council). Commercialization is designed to allow port management to conduct, to a large extent, its own affairs and at the same time imposes on it responsibility and accountability for its decisions and performance. In practice, however, a common problem has been that governments continue to interfere in port decisions, undermining the authority of port management.
Commercialization seeks to provide port managers with decision-making authority and responsibility similar to that existing in private sector organizations. However, since the port enterprise may still have substantial monopoly power, managers may not be confronted directly with the hardships and necessary discipline imposed by market competition. Therefore, a commercialized government organization often will not be as efficient as a comparable private firm, unless it is subject to competition.
Since the essence of commercialization is to require and empower port management to perform as well as the private sector, changes in the institutional and legal structures of the port organization are required to remove bureaucratic obstructions. A common first step in the process of commercialization and the elimination of bureaucratic inefficiencies is to transform the port organization into a truly autonomous port authority. Box 17 notes that the governments of China and Mexico followed this course.
Commercialization should result in the creation of a port authority board to oversee the organization’s activities, removing that responsibility from the central government ministry or city. At the same time, however, the government may still need to exercise some form of oversight to safeguard the public interest. Commercialized port authorities should:
In many countries, the process of commercialization is only partially implemented because procurement and contracting practices remain subject to national government regulations.
A weakness of the commercialization process is that during its introduction, the acting public sector manager becomes the chief executive responsible for pushing through the changes in the organization. The manager’s performance and commitment to the commercialization of the port authority greatly influence the management team and the shape and pace of reform.
In other words, managers accustomed to civil service procedures and practices have to drastically change their management styles. This has proven to be a difficult transition and is the reason why, in many such processes, managers with private sector experience soon replace the former civil service senior management. A wellthought- out training program may be an effective tool to change attitudes and prepare management and staff for the different style and culture commercialization brings.
The next gradation on the path to full privatization is corporatization. Corporatization goes further than commercialization in that it involves the transformation of the public port authority or part thereof into a corporation. This means that the port authority or one or more of its constituent parts, such as a port authority–operated container or general cargo terminal, is converted into a legally and financially independent legal entity with its own board of directors. The government or public port authority retains ownership in all shares of the venture. By applying market principles, the corporatized port authority is expected to function more efficiently. A corporatized port authority may also accommodate both national and local interests, as in the case in Poland. In the case of a publicly managed terminal, corporatization is usually the first step onto the road to privatization. Thus, a corporatized port authority, especially when based on a specific law, can be considered a permanent organizational structure while a corporatized terminal usually is a transitory organization
Corporatization, then, is the process in which a public sector undertaking, or part thereof, is transformed into a company under private corporate law. This is achieved by selling shares in a new company that conducts the port’s business and holds its assets, although the shares are issued and may be owned entirely by the government (or port authority). The main objective is to decrease direct government control over the company and to make it more responsive to market forces. Similar to privatization, corporatization can include financial restructuring and be a catalyst for the introduction of commercial principles. Corporatization is, in effect, privatization without divestment.
For political or legal reasons (often both), comprehensive or partial privatization may be neither appropriate nor possible. In such cases corporatization may offer an effective alternative for achieving more efficiency and greater market orientation. Corporatization usually features most of the following characteristics:
Corporatization can be implemented either through incorporation under a commercial code as a limited liability company or as a statutory authority under its own articles of incorporation. The statutory option is the most common approach for corporatizing port authorities. In view of the public interest involved, it is also the most appropriate one.
During the initial phase of the corporatization process, the following principal actions are required:
The key difference from the other reform options discussed is that the goal of corporatization is to constitute the corporatized firm as a single, self-contained entity. The corporatized company’s management should be free from direct government interference or control (bureaucratic constraints) to allow them to operate the company on commercial terms. At the same time, management should also be held accountable for its actions.
The new corporation can be organized with clearer lines of communication and responsibility. Distinct targets can be set and adhered to. Stricter internal financial controls can be introduced and, where necessary, information and accounting systems established. This all seeks to make the business more aware of market and client requirements.
One of the corporatized terminal’s greatest strengths is its financial autonomy. This means that tariffs should no longer require approval from the government or ministry (unless it is a monopoly environment and the government wishes to exercise strict control) and that the company should be allowed to establish its own procurement, contracting, and hiring and firing practices. In addition, such companies do not rely on government support for investments and have the authority to negotiate loans directly with commercial banks. The government, however, typically will continue to exert some measure of political control. Usually this is achieved through the appointment of board members.
Among the reasons for pursuing corporatization over other alternatives are:
Having completed the corporatization of port operational activities, subsequently one can consider the corporatization of the port authority as a regulatory body (for example, the case of the port enterprise of Antwerp). Negative aspects of corporatization include:
However, the most problematic issue affecting corporatized port authorities is the mix of public and private objectives. The rationale behind this type of reform is the expectation that corporatized ports operate as viable and effective businesses. However, while part of the ports’ enabling legislation may state that they should pursue commercial objectives and operate as effective businesses, the public shareholders (ministers, commissionaires, aldermen, or council members) have responsibilities other than strictly commercial ones, such as the delivery of public goods.
There are two types of corporatization models. The first model’s goal is to transform former statutory authorities into government-owned enterprises. This means that a corporatized port authority would have a constitution consisting of a memorandum and articles of association that define the nature of the company and the manner in which the affairs of the company are to be conducted based on the “companies act” or “corporations act” in force. A regulatory body in existence should oversee performance of the newly formed port authority and ensure that conditions of the company’s constitution and of the applicable companies act are met. This model has been applied to Rotterdam Municipal Port Management.
The second model involves the creation of a statutory government-owned enterprise (corporation) by specific legislation. This would mean that there is the potential for some degree of public (national, regional, or municipal) input and scrutiny. It also means the introduction of tailor made provisions, such as those relating to accountability and public control.
The distinction between the models focuses on the issue of whether the organization is subject to corporate law or to the conditions of the statue and specific legislation. The difference between a company incorporated under corporate law or by or pursuant to a statute is that the company’s constitution spells out the nature of the company as well as regulations for the internal government of the company. This requires a rigid operating framework and a regulatory regime that ensures that the conditions of the company’s constitution are neither breached nor abused to suit political or other gains.
Corporative port authorities established by law as government-owned enterprises, on the other hand, are quasi–private sector companies. They are expected to operate like their private sector counterparts, but are not subject to corporation’s law, instead they are subject to the provisions of the statute under which they were enacted. Under this model, the public sector holds a pivotal role in the structure and operation of the organization.
Ultimately, the choice of one of the alternative models when corporatizing a public port authority is a political issue. In some countries, (larger) ports are considered part of the public domain, representing vital public interest. Other countries view ports mainly as commercial entities. The quality of governance also plays a role. Stable and democratic countries will be less inclined to corporatize their port authorities, unless for very specific reasons, which often have little bearing on efficiency. In Poland, the ports were corporatized to combine state and municipal ownership of port land. In Australia, the policy for port reform was an endeavor to improve efficiency in the port environment, notably by distancing government from day-to-day operations. Box 18 describes the process of corporatization for the Aqaba Container Terminal in Jordan.
Privatization can be either comprehensive or partial. The latter takes the form of a publicprivate partnership and is usually combined with the introduction of a landlord port authority. Comprehensive privatization remains an exception and is not a preferred option for major ports.
The reasons that might prompt governments or a port authority to enter into the privatization process are discussed below.
Removal of trade barriers. Outdated work practices, obsolete facilities, inadequate institutional structures, and excessive charges in ports cause inefficiencies that can create obstacles to foreign trade. Indirectly, the entire population of a country pays for port inefficiencies, which are reflected in the prices of both import and export commodities.
Harnessing the efficiency and expertise of the private sector. Increasing specialization in the shipping and port industry requires highly trained personnel, advanced systems and equipment, and capital-intensive cargo handling techniques to meet the fast changing demands of port users worldwide. Government-owned firms, with their cumbersome administrative procedures, poor cash flow generation, inflexible payment schemes, and lack of market orientation usually cannot cope with these requirements.
Elimination of political interference. Although there are countries with well-balanced political systems and minimal political interference in the functioning of the state- or municipal-owned port enterprises, the appointment of political nominees with inadequate experience to high level positions in government-owned ports is a well-known phenomenon. In contrast, privatization of port operations often results in the selection of professional port managers with an undiluted focus on the market and its changing needs.
Reduced demand on the public sector budget. Partial privatization does not necessarily mean a total withdrawal of the government from port investments. However, a large (often major) part of port investments can be undertaken by the private sector without compromising wider social and economic benefits. Development of a modern port still requires a balanced public-private financial package with balanced risk sharing.
Reduced expenditure on port labor. Government-owned enterprises traditionally have been a large source of direct employment; in the port sector, the greatest employment is in cargo handling services. A privatization scheme that maintains restrictive working practices cannot be effective. In the long run, creating an internationally competitive port system, with all its direct and indirect economic spin-off effects, is more valuable than the short-term objective of maximizing local dock labor.
Other objectives. Governments sometimes pursue privatization for other reasons, such as raising revenues for the state treasury, disposing of assets, and encouraging competition and broader citizen participation in share ownership.
In its many variations, privatization usually includes the following core features:
In theory, privatization provides the same flexibility to management as commercialization. Unlike under commercialization (where in the worst case scenario the government is likely to subsidize the company if it fails to perform adequately), a privatized terminal operation can be permitted to fail, provided other facilities can handle its traffic. Or, existing facilities may be taken over by a new operator who continues the operations. The management determines its own fate, free from significant government influence, as long as it complies with regulatory requirements.
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