PORT REFORM IN DEVELOPING COUNTRIES

There are several problems encountered during implementation of port reform

By HARIS KHAN, MILT
June 21 - 27, 2004

Developing countries constitute the majority of countries in the world and are extensively engaged in international trade. By providing a cheap source of commodities and services to the global economy, developing countries have become integral parts of the global supply chain network. Globalization has undermined the once stable supply relationships for individual commodities. This situation has increased competitive pressures amongst trading countries. The commercial success of the export industry greatly depends on transportation and so sea borne trade has gained even greater prominence. Ports are the interface between land and sea transport in the transport chain of import and export commodities. Some developing countries are not situated in strategic geographical areas and have to find ways to increase their competitiveness by other means, including transformation of their ports into world-class facilities with the latest efficient technologies and international best practice. There is an added urgency in view of the implementation of the WTO regime.

It is customary for most ports in developing countries to be used to absorb labour and protect local industries from external competition. Governments often manipulate trade, administration and regulations to achieve political aims. Consequently, governments run these ports as public monopolies. Financial principles and controls applied by governments over ports to mitigate deficits resulting from poor performance and high costs have led to lower efficiency and productivity. Private operators are therefore not attracted to invest in such ports and cannot even compete fairly with government run terminals as they receive state subsidies and are thus protected from bankruptcy. As modern ports become more capital and land intensive due to the high cost of equipment and land, the lack of sufficient investment became more apparent and this increased the demand on governments to invest.

In many cases governments tend to wait for ports to reach a "crisis point" of under investment. Indeed, today in developing countries, ports are facing the problems of the extended "investment holiday" and are now forced to follow international trends of seeking capital from the market, not for the purpose of gaining a competitive advantage over other ports, but more to address specific problems relating to operational capacity. The resulting costs to all parties involved in the export and import market, like domestic industries, transport and logistics service providers, are ultimately borne by the consumer. With globalization, the importance of ports in international trade and commerce have prompted governments to consider urgent reforms to existing institutions, regulations, management and operations. Non-responsiveness to markets, incompetent management drawn from the civil services, barriers to private participation, labour militancy and low productivity and inefficiency need to be permanently removed.

Port authorities have to turn their attention to effectively enforcing regulations, improving hinterland connectivity, allowing the market to determine pricing for port services, allowing expert terminal operators to implement turn around strategies and not interfere with their decision making. If organizational and management efficiency does not improve, institutional reform to achieve operational efficiency should be undertaken without delay.

Port privatization is part of the national strategy for economic growth in many developing countries. The main objectives identified in these economies are increased exports, new investments and job creation. This, it is hoped, can be achieved by removing bottlenecks to exports and their attendant costs. Labour, environmentalists, and communities are concerned that the introduction of private operators in ports can lead to the neglect of public interests in pursuit of profit maximization and the promotion of shareholder interests. Therefore, private sector involvement must be accompanied by clear requirements for public accountability and responsibility. It is pedestrian that Port Authority must adopt a more commercial approach and create a competitive environment for private operators to increase efficiency and service levels while lowering costs. Restructuring solutions must therefore be implemented systematically. Strategic preparations pertaining to the decision about which institutional model is appropriate in a specific situation, in particular defining the new role of the port authority and private operators.

There are several problems encountered during implementation of port reform. For example, the effects of port reform on the existing labour, an assessment of the financial returns of the transaction and the valuation of terminal assets, including equipment and superstructures, which must be handled carefully. During the due diligence investigation preceding the granting of concessions, a clear definition of the port area must be established, as a basis for establishing respective duties and rights between the concessionaire and the Port Authority. The concession tendering and award process must be standardized, with a clearly defined negotiation structure.

Since in many developing countries new and more suitable institutions need to be established it is imperative that the new Port Authority is equipped with a new and competent top management. When inefficiencies are not immediately addressed, resultant problems relating to the productivity of the port may pressure the government to accept less beneficial terms and contractually exclude itself from future productivity and efficiency gains. The policy framework should also allow for flexibility in respect of the roles of the private and public sector, particularly to allow schemes involving equity participation by both parties e.g. joint ventures, which could further benefit the ports.

Whatever Port reform strategy is adopted by a developing country it is very important that it is best suited to the needs of that particular port. There is no blanket strategy or solution, which may be applied to all ports. Just because one model succeeds in one case does not necessarily make it applicable to the other. Once a strategy has been chosen after careful analysis it is important for a government to ensure that it is followed through no matter what the difficulties. Perhaps, only then could the benefits of the strategy be achieved transforming the port into a world-class facility having a high stake in International Trade contributing to the national economy.

(The writer holds a MSc. in Transport & Maritime Management from The University of Antwerp, Belgium and is a Transport & Trade Consultant. He is also on the panel of experts of Aim Consultancy Services & The World Trade Review)

E-mail: Haris@mail2aim.com