Private investment in the port sector is as old as ports themselves, starting with the port and land concessions granted to private companies under treaty by colonial powers. Today, the range of typical public-private partnership (PPP) models in this sector is broad, though most countries adopt a landlord port approach. This refers to a port where the public sector owns the port and retains responsibility for common facilities such as the breakwater and entrance channels, utilities, and road and rail access. The public entity then enters into PPP contracts for a number of individual terminals within the port. This may take the form of a concession or Build-Operate-Transfer agreement for a new terminal, or even a management contract for existing assets.
Exceptions to this approach include ports in China and Indonesia, where it is common to have public-private joint ventures for develop-ing ports, and in Turkey and the U.K., where privately run and financed multi-purpose ports are common. It’s not surprising that with so many models, legal and policy considerations in port PPPs span a range of issues.
A port is a busy place with many different activities and competing interests. In a landlord port, where there are likely to be a number of private operators as well as public workers, the private operator must guarantee that its land parcel is clearly defined and that there are clear rules established about responsibility in the case of interference or disruption due to a third party. Each of the operators will likely need specific rights of access over common land or each other’s land.
More broadly, investors and financiers in new port facilities need to ensure they have sufficient title to the land on which the facilities are to be built, to give them ownership—or at least security interests—in the new assets. On the public side, government needs to have title in the land (or acquire it) and be able to grant sufficient land title to the operator prior to commencement of work under the contract.
Access and interface
Overall, port turnaround times are critical for a port to maintain its competitive edge. Times can be subject to a number of other factors outside the operator’s control, like customs processing, efficient pilotage and towage services, and stevedoring efficiency. The operator will always seek assurances from government on the process times, along with the most important issue: access to and from a port.
This access is the key to competitiveness and will have a significant impact on the operator’s return on investment. Ships need to be able to get into the port in a timely manner; for this to happen, dredging of the port and maintenance of the breakwater and channels is key. Cargo must then be transferred inland, so road and rail access needs to be sufficient to avoid congestion at the port. The operator will seek clear guarantees from the port landlord that this infrastructure is in place and is maintained.
Competition and regulation
In countries with healthy competition among ports, there is limited regulation of tariffs because it’s assumed that market forces will take care of this. However, in the case of country or regional port monopolies, government will as a matter of policy wish to regulate tariffs. Potential investors will need to be sure that these tariff restrictions do not cause the port operation to fail to meet revenue forecasts.
Space and turnaround
A number of ports in developing countries have huge space and turnaround problems because the ports function as container storage depots. While some of this is due to access issues, low pricing at the port can also result in customers using the port as a convenient storage facility. Government can manage this risk by ensuring that tariffs are properly balanced, and by looking at storage alternatives such as inland container depots which can divert some of the activities from the port and reduce congestion.
Competition and customs duties
Governments must carefully consider whether to allow new ports that compete with each other. This is a key challenge that requires careful navigation. For example, imagine an operator investing in a new oil and gas terminal on the understanding that all the oil and gas would be channeled through that terminal. If the operator were then to find that a rival terminal was being built a short distance away, this could undermine the commercial viability of the project. Although the operator seeks exclusivity, it may be in the interest of the government to promote competition, so it may decide to grant exclusivity for a defined period and only within a certain area. At a regional level this becomes more difficult for operators to manage, as ships may be willing to travel to a neighboring country to use new or improved port facilities there.
If the port is serving a region or landlocked countries beyond the coastal country, the level of customs duties levied on goods is bound to be another contentious issue. In some countries, the political risk may be so high that operators may seek some form of guarantee from government on this issue.
Labor is a sensitive issue in port PPPs because many existing terminals have unionized workforces and restrictive working practices. Investors may therefore prefer to look to greenfield solutions where there is no existing workforce. Where labor transfer arrangements need to be put in place, the operator will typically look to the government to undertake any restructuring prior to the PPP, have transferred to it only the number of staff required, and have the government retrench any remainder. This allows for flexibility in retention and retrenchment of staff. Another option is to accept limitations on firing staff in exchange for a reduced lease fee.
More information at www.worldbank.org/ppp.