22
Dec
13

Port Privatization Affects Port Performance in Asia and America

by Muhamad Rizal Avif Khan, Liverpool John Moores University

It is widely recognized that port is the heart of international freight trade and transportation. Alderton (2008, p.2) considered it as one of the most substantial aspect of a national transport infrastructure. As the gate of freights and commodities penetrating to a specific area, it plays major role in logistic trades, both in regional and international. Economic growth is also influenced by port performance. Lim (2005) stated that the port really affects for the regional economy in every facet. It is a major economic multiplier for the nation’s wealth (Alderton 2008, p.2). Hence, a port should be well managed to improve its performance and give positive impact to economy and trade acceleration.

Every port management has various objectives. But, they generally might not be far away from minimizing cost and maximizing benefit. Alderton (2008, p.84) implied that port management objectives come up with a variation of minimizing payments, transport costs, and port costs as well as maximizing benefit of port and region. There are some constraining influences that predispose decision making in port management. Alderton (2008, p.101) discovered nine influences on port management. They are national government, local authorities, customers (shippers), pressure groups (environmentalists), trade associations, competitor, customers (ship owners), regional trade arrangements, and international regulations. Influences of national government, local authorities, and regional trade arrangements depend on establishment of ownership which is implemented by port management.

There are some classifications of port ownership. Alderton (2008, p.74) cited a traditional classification of port ownership which is consisted of state ownership ports, autonomous ports, municipal ownership ports, and private ownership ports. Nowadays, proper categorization of modern port is the mixture of classifications stated before. World Bank (2007, p.81) classified port regarding its ownership into four main categories as widely known as Port Administration Models. They are the public service port, the tool port, the landlord port, and private service port or the fully privatized port. While World Bank (2007, p.81) classified port ownership driven by combination of which infrastructure, superstructure, port labor, and other functions belongs to, Baird (2000, cited in Brooks, 2005) introduced port ownership classifications based on combination of which regulator, landlord, and utility belongs to. They are PUBLIC, PUBLIC/private, PRIVATE/public, and PRIVATE model. Public service port and PUBLIC model, which is absolutely owned, centrally managed, and fully operated by government/ public institution, was a plentiful port administration models used until 1980s

Levy (1996, p.8) implied that in 1980s and 1990s the taking part of private concerns in public infrastructure operation and maintenance starts growing fast in Europe, South Africa, and The United States. Coltof (2000, p.27) implied that privatization has become the most emerging issue of former communist countries like Russia and other countries. And concomitantly, port reform begins to become the most common subject as privatization comes under its main elements.

United Nations Conference on Trade and Development, as known as UNCTAD, (1995, p.5) stated the interface between government and ports was too heavy in developing countries such as Africa. The ports were unable to be managed commercially because of prolonged bureaucratic procedures and pointless government intervention. The problem and theory above lead to reasoning that port reform should be done.

Beside problematic internal phenomena argued by UNCTAD, there are also external factors stated by World Bank which trigger a port reform. World Bank (2007, p.5-7) stated that the three wide compulsions generating passion for port reform in developing and industrialized countries are as the following:

  • Rapidly emerging of external players in shipping industry which use better management and technology forces port to be ready dealing with strong competitors;
  • There is a global acknowledgement that private sector involvement in infrastructure management and development leads to financial benefits and excellent services;
  • And many companies which offer specialized service capabilities for port development service are rising and growing.

UNCTAD (1995, p.5) also stated that global trades and strong international market competition force developing countries government to take an action related to poor performance of their ports, since their trade development and national economy depend on it. Relied on the principal–agent theory, private ownership should be more efficient than the public one (Tangzon and Heng, 2006). That theory combined with those problems lead to emerge of port reforms in term of privatization at developing countries.

Port privatization projects in developing countries were growing progressively start from 1980s. Alderton (2008, p.76) quoted a Harris Survey that said around 80% of ports designated that private sector involvement was increasing in their country’s port sector. World Bank (2007, p.5) recorded there are nine port projects with private involvement in developing countries that reached financial closure in 1992. The accumulative total number amazingly increased to 156 until 1999 and became 220 until 2004. The investments value was escalating as well. World Bank (2007, p.6) recorded the investment value of port projects with private contribution in developing countries that reached financial closure is USD 248 million in 1992. The accumulative total number surprisingly increased to USD 1,306 million until 1999 and became USD 21,402 million until 2004. Possibly privatization becomes one of the most obvious phenomena in port industry (Tongzon and Hang, 2005).

The term port reform has become ambiguous with privatization. Privatization is more precisely defined as one of port reform aspects. Government and port managers can choose from a number of strategies related to port reform. Coltof (2000, p.28-29) quoted three strategies in port reform; they are commercialization, liberalization or deregulation port services, and privatization. World Bank (2007, p.100) stated two more strategies to improve operational and organizational performance in case of port reform; they are corporatization and modernization of port administration and management.

World Bank (2007, p.100) defined modernization of port administration as the uses of more appropriate systems, procedures, or equipment and tools among existing system without making changes in law or national regulations. UNCTAD (1995, p.10) defined deregulation as eliminating some government regulations in order to restore port position to be competitive in a market. Coltof (2000, p.28-29) implied that commercialization means decentralizing operational functions so that the functions turn into businesslike environment and market oriented. Corporatization was defined by World Bank (2007, p.100) as transferring all asset to private company as well as land lease rights, even though government still keeps hold of ownership. UNCTAD (1998, p.1) stated “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, equipments, and systems”. Thus, the five strategies above imply the same track; that is port reform means a process of transforming a port from government involvement and bureaucratic orientation to private participation and market orientation in various degrees.

A port reform is implemented in a particular set of objectives. UNCTAD (1995, p.6) stated that the general objective of port reform is to make port management proactively oriented to market trends and customers expectation, under the concern of meeting its financial objectives. More specific objectives vary widely. It depends on current internal and external conditions within a port.  UNCTAD (1995, p.7) gave some example of specific objectives for port reform, such as to encourage efficiency of port services, to branch out service and promote competition, to minimize cost of port services, to streamline process and organization, to reduce the government’s financial and administrative burden, and minimize bureaucratic/political influence. It is believed that privatization in term of port reform, even without change in the competition, will be related to improved efficiency (Tongzon and Heng, 2005). In last three decades, many ports had been reformed through privatization and it delivered some various positive impacts.

Some American ports succeeded in reforming their management and administration through privatization. Port of Cartagena made a great performance enhancement after being reformed in 1994. World Bank (2007, p.2) recorded the differences of performance when the port was managed by COLPUERTOS, a national public port entity, in 1993 and by SPRC, regional port entity, in 2003. Waiting time for container ship decreased from 10 days to less than two hours. Dwelling time for cargo reduced from more than 30 days to two days. Bulk cargo productivity increased almost ten times. Likely, astonishing improvement had been recorded by Port of Buenos Aires after privatizations. World Bank (2007, p.3) data shows the growing of performance between 1993 and 1996. Containers throughput increased from 300,000 TEUs to 540,000 TEUs. Productivity boosted from 800 tons per worker per year to 3,000 tons per worker per year. Llacer (2006) recorded magnificent improvement made by Port of Panama after being reformed. In 1984, there were 731 ships and 824,945 TEUs. By 2004, these figures had risen to 3,054 ships and 6.4 million TEUs. Average capacity increased from 1128 TEUs in 1984 to 8000 TEUs in 2004.

Alderton (2007, p.78) noted some success stories of port privatization in Asia. Privatization started involving Malaysia’s Port Klang (changed to Port Swettenham in 1972) in 1986. Its repair, maintenance, and administrations costs have been decreased around 50%. Container tonnage increased 75% and wages increased 86%. In China, privatization entered Shanghai Container Terminal since 1994. Three years later, terminal’s throughput and wages doubled, cost decreased around 10%, productivity increased around 30%, and average ship time reduced 70%.

Data captured by many authors above implies that involvement of private parties in port management and ownership generated improvement and positive impact to the port. But, it does not mean that higher degree of privatization brings higher degree of improvement. Tongzon and Heng (2005) stated that relationship between privatization and efficiency is not a linear one. Result of their empirical study using a stochastic frontier model about port privatization implied that the best level of private involvement in container terminals/ports is between the PRIVATE/public and the PRIVATE form mode. That specific level of privatization allows port authorities to limit the private parties within the “landowner and operator” roles and take over the regulatory role.

In conclusion, port reform is a trending phenomenon since end of 1980s in case of port administration and management improvement as a result of strong international market competition. The most common way to reform a port is through transferring some port function from public to private sector in a particular degree. It does not mean the best way of privatization is fully transfer all functions to private sector. The best level of private participation is a level between PRIVATE/public and PRIVATE form. Many port managements in the Asia and America succeeded doing improvement by privatization in 1980s and 1990s. The ports productivity and utilization increased after private sector started involving. From now, a port must be consistent and stable during reform process because, in earlier port reform, significant positive impact might be seen three to twenty years after a reform started.

Reference

Alderton, Patrick. (2008) Port Management and Operations 3rd ed. London: Informa.

Brooks, Mary R. (2004) The Governance Structure of Ports. Review of Networks Economics, pp.168-183.

Coltof, H. (ed.) (2000) Port Organisastion and Management in Developing Countries International Ed. Delft: Eburon Delft.

Delmon, Jeffrey (2009) Private Sector Investment in Infrastructure Alphen aan den Rijn: Kluwer Law International
Available at: http://books.google.co.uk/books?id=vHdhB6jyjBIC&source=gbs_navlinks_s
[Accessed 20th October 2013]

Levy, Sidney M. (1996) Build Operate Transfer: Paving The Way for Tomorrow’s Infrastructure John Wiley & Sons, Inc.
Available at: http://books.google.co.uk/books?id=93d3pgdB3mMC&dq=bot+build+own+operate&source=gbs_navlinks_s
[Accessed 20th October 2013]

Lim, Jung Duk. (2005) Impact of Busan Port and Port Related Industries on Regional Economy
Available at: https://www.univ-lehavre.fr/actu/itlcsge/lim.pdf
[Accessed 23rd October 2013]

Llacer, Fransisco J. Montero (2006) Port Privatization in Panama. Transportation Research Part A 39, pp.483-495.

Tongzon, Jose and Heng, Wu. (2005) Port Privatization, efficiency and competitiveness: Some empirical evidence from container ports (terminals). Marine Policy 30, pp.405-424.

World Bank (2007) Port Reform Toolkit 2nd ed. World Bank
Available at: http://www.ppiaf.org/sites/ppiaf.org/files/documents/toolkits/Portoolkit/Toolkit/pdf/modules/03_TOOLKIT_Module3.pdf
[Accessed 22nd October 2013]


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