Port privatisation

Chapter 3

International Experience

Port privatisation, all over the world, has gained momentum for the last few years. More than 40 countries in the world now have some form of private investment in their ports. On one side, Hong Kong is fully in private hands and countries like Myanmar (Burma) are on privatisation route.

World’s largest private port operator, Hutchison Port Holding (HPH) is developing the port of Thilawa, near Rangoon. In North Korea, HPH is carrying out study on port development in Rajin-Sonbong free trade zone. But then, what are the basic risks and legal issues in port privatisation, and what are the future prospects?

3.1 Political Considerations

A privatization motive is based on diverse concerns like need to raise revenue and avoid future capital expenditure, to improve efficiency and management based on market forces, philosophy or, more cynically, to limit trade union power.

Ports have an important position in the national psyche. The economic significance of country’s ports are self-evident, as will be the national security implications. The political difficulties for the public sector and the political risk for the private sector, which may accompany privatization, cannot be under-estimated. This is evident from the process both in UK and more recently in South Africa. The labour party in UK had desired to halt the privation of the port of New Castle. In South Africa, port privatisation has been a contentious issue due to sensitive labour relations in the industry and it is progressing at a snail’s pace.

Though there are reasons for encouraging privatisation of ports, there is a need for a balanced approach, especially privatizing existing ports. In UK privatisation for existing ports was done under the Ports Act 1991. Due to lack of knowledge, many ports were sold at below market value thereby causing loss to the government. The Port of Medway was privatised for 29 million Pounds and was resold by the owner after 2 years for 108 million Pounds.

The political implications of reduction in number of employees after privatization may cause problems for the government. On the other hand, a potential buyer and the lender would like to retain as much freedom as possible to run the port in the manner that it wishes and to fulfil its commercial objectives. Furthermore, any lender will want to have sufficient security over the ports assets and the necessary mechanism for enforcement, should it become necessary. Thus, after privatisation, the degree of involvement and control by the government can be a delicate balancing act.

Many political issues centre around control of the port and its operations. From the government’s point of view, the privatization must ensure the continuing discharge of the port’s core functions, such as harbour maintenance and vessel regulation, whereas the buyer and the lender would view things purely from a commercial angle. Since, these obligations are likely to be imposed upon the buyer by law, the buyer is likely to accept such responsibilities.

3.2 Legal and risk issues

For privatization, there is a need for passing of a new law or amendment to existing one to enable the port or an interest in the port to be sold to private sector. This will be followed by offer for sale to invited bidders and negotiation of a concession contract or equivalent rights between the State entity and the successful bidder.

The nature and extent of the new law to privatise the port will depend upon the level of private sector involvement being sought by the government. For example, the State may sell (fully privatise) the port or the State may wish to retain the ownership, but delegating the management of all or some of the current functions. In additions, the buyer would like to ensure that competing facilities both in the public and private sector are restricted by way of license and permits to operate the port. The buyer would also like to be compensated by the government for and changes in the law that adversely affects the costs and revenues, or its ability to construct, operate or maintain the port. This will give rise to detailed agreements and contracts.

The question of land ownership is also very important. The buyer and the lender would want to be certain as to the rights it has over the site of the port, whether it is bought or leased. A necessary change in the property law of the country has to be made. In Panama, the State retains a small share holding in the privatised ports of Balboa and Cristobal, and is receiving an annual royalty based on the volume of cargo handled.

The buyer and the lender will seek to set the charges at the levels required to repay loans within the shortest time as per lender’s requirements. The State on the other hand, will be looking at long – term considerations and will be less inclined to set charges at such a high level.

Auxiliary infrastructure, such as roads, rail links, communication and fuel requirements must be secured, especially for new ports. Buyers in certain cases, will have to enter into agreements with third parties and lender will require that such agreements have been entered into within the appropriate parties and that the agreements are sufficiently strong, effective and enforceable.

3.3 Prospects for the future

The main global players in private port operations are, HPH, P&O Australia, Stevedoring Services of America and International Container Terminal Services Inc. (ICTS). Privatisation of port infrastructure also allows the infusion of new capital into old State – run ports. For example, in Shanghai, HPH has 40% ownership. These major players add their brand name to the port privatised, leading to a manifold increase in traffic and increasing returns for the investors.

There are many large projects in progress around the world and especially in China and South – East Asia. As per John Meredith, the Group Managing Director of HPH, “There is a five – to – ten year window of opportunity in the port developing business.” The port operators, their consultants, advisors and contractors can look forward to continued expansion in the contractors can look forward to continued expansion in the privatised port sector well into the next century.