Sixth Symposium(Presentation of Cebu: Cebu Port Commission)

Port Privatization Or Private Sector Participation In Port Operations
-Profit As Incentive For Better Public Service

I Introduction
Ladies and Gentlemen, good morning! Welcome to Cebu!

Privatization has as many definitions as there are points of view. But for our purpose today, let us agree “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”. There can be no port privatization without the notion of private ownership or the private funding of port assets or services.

The Philippines already has, in fact, a National Privatization Policy. It has enacted several laws, which authorize the financing, construction, operation, and maintenance of infrastructure projects by the private sector…”

The Medium Term Philippine Development Plan (1994-2004) enumerated as policies and strategies for water transportation the following:

a) Transfer regulatory functions to an independent regulator (or regulators), which shall have jurisdiction over all ports

b) Encourage maximum private sector participation and investment in the sector

c) Formulate effective policies and implementation of projects to enhance safety practices and strengthen enforcement

II Background
As important gateways to trade, seaports and their facilities play a critical role in determining a country’s competitiveness and economic health. They help to facilitate and promote a country’s external trade and, moreover, represent significant accumulated capital investments. Ports are extremely valuable assets for the national economy.

Government-owned and operated ports face many problems. Lacking exposure to full commercial competitive pressures, publicly owned and operated ports may have reduced incentive to operate efficiently and are often subject to political interference. Public ports absorb scarce funds from local governments and drag down local economies. On the other hand, efficiently operated public ports are often targeted by cities that want to siphon off surplus funds.

The global trend in transferring government port operations and assets to the private sector suggests that public ports can benefit from greater private-sector participation.

During this trend is the growing realization that in general, government control of port operations and port assets is not consistent with efficient, market-responsive port management.

Moreover, while governments the world over face growing demands to develop transportation infrastructure as a means of promoting trade and enhancing economic development, they lack the necessary resources to maintain and modernize these capital-intensive facilities.

Increasingly, international competitive pressures encourage shippers and ship operators to direct cargo traffic to ports, which have the most cost-effective industrial bulk-handling techniques and better intermodal coordination. These tend to be ports where private managers have greater autonomy and incentive to quickly adopt technological changes and efficient labor practices.

By improving incentives to perform, greater reliance on private management and capital will increase autonomy, efficiency and competitiveness of public ports.

Privatization invariably generates efficiency improvements because it enables an enterprise to take advantage of the stronger incentives associated with private ownership, reduces the potential for political interference and exposes the enterprise to the full range of capital market disciplines and financing alternatives.

III Objectives of Privatization
A. Primary
i. Improvement of the service capability of the port entity
ii. Reduction of the financial demands on the public sector
iii. Enhancement of the service quality offered to users
B. Secondary
i. Attracting new or additional trade and business for the country and the port
ii. Sharing commercial, economic, technological or management risk between the public and the private sector
iii. Stimulating private entrepreneurs and investment in the economy
iv. Transferring technology in the form of advanced equipment deployment of the introduction of state-of-the-art management systems

IV Beneficiaries of Privatization
The main beneficiaries of privatization schemes are the Port Authority, the terminal operator and the port customers. The benefits are generally grouped into macroeconomic benefits (in general those generated at the level of the world economy, the national economy or the national Government) and microeconomic ones (typically the advantages accruing to the 3 main beneficiaries referred to earlier).

Beneficiary: Port Authority
Perceived Advantages:
1. Possibility to more readily define its priority corporate objectives, thanks to greater (or complete) freedom from government controls
2. Possibility to more readily define its priority corporate objectives, thanks to greater (or complete) freedom from government controls
3. Greater freedom from public sector constrains, particularly with respect to personnel management, pricing, budget review and its sanction by higher authority, administrative impediments and procurement of equipment and services
4. Increased ability to define precise financial targets
5. Increased accountability in line with set targets
6. Greater transparency of costs, greater likelihood of tariffs being cost-related, reduced risk of cross-subsidization
7. A better distribution of port charges and dues particularly in the case of service ports, as these tends to undercharge the ship and overcharge the cargo
8. Increased responsibility for the private investor with regard to the level of infrastructure investment necessary to carry on with his business


Beneficiary: Terminal operator
Perceived Advantages:
1. Opportunity to bring into the country foreign management and technical expertise as required
2. Greater potential for the diversification of activities
3. Freedom to subcontract to third parties any activity the company does not want to pursue itself (or does less well)
4. Full accountability with respect to achieving the set operational and financial targets
5. Cost transparency allowing for cost-related tariffs and a curb on the practice of cross-subsidization

Beneficiary: Port customers
Perceived Advantages:
1. Availability of customer-tailored quality services
2. Quicker, more effective response to users’ service requirements
3. Reduction in prices for port services, as competing units will make efforts to reduce costs and prices to attract traffic away from competing ports

Beneficiary: The world and the national economy
Perceived Advantages:
1. Increased responsiveness to changes in market structures and demand
2. Faster adaptation to changes in maritime transport technology and intermodal transport

Beneficiary: National government
Perceived Advantages:
1. Reduction of the financial and administrative burden on the government
2. Creation of additional tax revenues for the Government as private operators pay their taxes (contrary to statutory port authorities, which often try to escape them) and the increase in business levels


Conclusion
Clearly, privatization schemes have not only potential advantages but also some potentially serious deficiencies and threats, the most notable of which are:

1) There is the increased risk that the statutory public service functions, with which a public port administration is generally entrusted, may be neglected, since private operators/investors will favor profit maximization and cost-cutting.

2) Thus, they may be inclined to abandon facilities and services which although economically, socially or environmentally of essential value are less or not rewarding for the private operator or generate additional expenditures without providing significant revenue (which leads to the privatization of profits and the socialization of losses);

3) Where no or limited competition exists, it is probable that a “public monopoly” will be turned into a “private” one, most ports having a certain degree of monopoly power because of a lack of “contestability”. Moreover, economies of scale resulting from the operation of modern port facilities are such that only large ports can have more than one of these (e.g. container terminal, a mineral ores terminal, a grain terminal), and this further reinforces the natural monopoly power of ports and terminals;

4) A division of responsibilities between the public and the private sector may hamper the necessary coordination of investments in complementary parts of the transport chain (e.g. highway and railway access to a private port terminal can be out of phase if both the public and the private sector have investment responsibilities in different sections of the transport chain;

5) Logically, private operators will favor the business interests of their owner or holding company and this may lead to the discriminatory treatment of outsiders (whether actual or potential customers) and to the exclusive use of the port facilities where initially a common-user arrangement was intended.

The potential disadvantages of privatization schemes can be tempered by a judicious choice of the mode of privatization, the instrument used and its modalities of application.

Specifically, where governments and public administration have special duties to the public, the public interest necessitates that the privatization schemes are built on solid legal foundations. There should be a balance of the interests of the public and the private operators, without reaching a level of regulation that would hamper effectiveness or efficiency.