Port Reforms: Labour Deregulation, Private Investment and Financial Autonomy - Term Paper Example

Port Reforms: A Report on Labour Deregulation, Private Investment and Financial Autonomy Market -oriented management of ports is the core objective of port reforms. It is through this general objective that governments try to make these entities profit earning. The general objective encompasses a number of specific objectives such as enhancing competitiveness, efficiency, productivity, invite private capital etc. It is difficult to observe exclusive impact of any one element on port reforms without considering others. For example improved efficiency also increases competitive ability and productivity which makes ports lucrative for private investment. Nevertheless, the current report attempts to analyse independent effects of financial autonomy, deregulation of labour and private investment on port reforms. The report favours a part public and part private model since all public model has led to economic losses and burden on state budget while all private model may create social risks as massive layoffs. TABLE OF CONTENTS Page no. I. BACKGROUND 3-4 II. SPECIFIC OBJECTIVES OF PORT REFORMS 4 A. Deregulation of labour market 4-6 B. Attracting private capital 6-8 B.1. Which model to adopt for effective port reform 8-10 C. Financial Autonomy 10-12 III. CONCLUSION 12-13 REFERENCES I. BACKGROUND AND AIMS Ports, being public sector units in most of the nations, are target for institutional reforms. The similar port activities when compared in terms of performance differ between ports and even within same region. For e.g. in 1991, Western European ports handled containers ranging from 14 to 30 moves per hour per crane. An Asian port handles 458 containers in three and a half hour while another port in the same region took 2-3 days for same amount of work. The labour productivity also differs between ports. In 1993, a port in Far East employed 7200 workers to handle 200 million tons of cargo while another port in same region needed 52000 strong labour force to handle 150 million tons of cargo. It is evident nations realised that poor productivity and high costs are proving a deterrent to development of trade and national economy (UNCTAD, 1995). Sommer (1999) also noticed that unprecedented increase in world trade led captive port users (having cargo vertically integrated into production) to put political pressures on authorities to improve handling facilities and reduce cost of port services. Sommer also points out another important reason for reforms that developing superstructures with modern strategic location and improved efficiency was beyond the funding capacity of public port authorities. Particularly the developing countries are not getting advantages of low cost of production in their land due to the high costs of port services. As an example, loading of a cargo of soybean on board of a ship cost $65 in South American ports compared to only $20 per ton at North American ports (UNCTAD, 1995). Sometimes the port infrastructure does not have major defects yet the cost of port services is too high. In the UNCTAD survey on the ports of Cted'Ivoire, Ethiopia, Kenya and Senegal, the port facilities were reasonably good but the boundary between port and government was rather too heavy. As a result managers were restricted in utilising ports commercially. The unnecessary intervention by the state and lengthy processing prevented management from responding quickly to market needs by reshuffling operations as the need may arise. Moreover, the decision makers catered to demands of government rather than to the market requirements. If at all the changes were made, these were either too late or too small to be cost effective for the client. Many countries have labour regulations. Excessive Labour and strong trade unions are not market friendly. If market tries to punish a port for not fulfilling its demands, ports are not threatened because government support comes as financial subsidy. As a result beneficial relation between port and market could not develop making institutional reforms as mandatory. The general objective of reforms is to comply with market demands and satisfy the client. The deregulations of labour, attracting private capital and financial autonomy have been chosen as specific objectives to assess as to how reforms affect these. The assessment is discussed with examples of ports that have undergone reforms or are in the process. II. SPECIFIC OBJECTIVES OF PORT REFORM A. Deregulation of labour market: In many countries, especially in some European and Latin American countries, dockers have a special status and are customarily protected by law. In France and Italy, the deregulation of labour has been a difficult process including tough negotiations with labour unions. In Chile, the United Kingdom and New Zealand, successful deregulation of port workers has been crucial for port reforms. In the United Kingdom, the National Dock Labour Scheme (NDLS) was scrapped off to achieve rather strict reductions in labour which brought positive changes in employees' attitudes and increased traffic. These ports also enjoyed better financial viability (UNCTAD, 1995). Turnbull (2009), on the other hand , emphasised that It was the major port authorities, rather than port users, producers, consumers or the state, who were the driving force behind port reform in the UK. After removal of NDLS in 1989, there was huge layoffs of registered port workers and derecognition of the Transport & General Workers' Union (T&GWU) Ports and port companies acquired huge managerial control. NDLS had imposed heavy costs on ports and also transformed port structure from 'tool' to 'service' Some South American countries have found that the port labour market is too difficult to deregulate. Government support is one of the key conditions to employment deregulation. Moreover layoffs should be timed appropriately e.g. When unemployment rate is low (Asian, South American nations) or a social support system to compensate removed labour is available (as in New Zealand and France). Without such compensating conditions the massive layoffs may pose a social risk. Training of layoffs may be used to reorient these to other port activities (UNCTAD ). After the port reforms in UK, the cost reduction was achieved by three main strategies: decentralisation whereby the operations were divided into smaller strategic units. For e. g. Mersey Docks and Harbour Company (MDHC) sub-divided its operations into general cargo, timber, grain, roll-on/roll-off and container operations, each with a new identity but still under the parent company. Detachment or transferring some of its operations from core activities to a third party. Associated British Ports (ABP), for example, retained a direct interest in the container handling operations at Southampton (in a joint venture with P&O), but issued new stevedoring licenses to Southampton Cargo Handling for general cargo operations and Berkeley Handling for the un/loading of cars. Finally, disintegration or substitution of commercial contracts for employment contracts through sub-contracting. The profits of Associated British Ports (ABP) increased by 48m between 1989-91. ABP employed 1,700 registered dockers in 1989, but three years later employed just ten. Thus the revenue came from port activities but cost incurred on employment to registered Dockers was reduced greatly. In the wake of this plight of dock workers multiemployer collective bargaining and regulation of casual workers would be appropriate besides the training and reorientation of registered workers (Turnbull, 2009). B. Attracting private capital: Privatisation of ports requires strong government commitment since it is not only an economic process but an equally important political one also. Government plays a decisive role as it had in UK, New Zealand or Malaysia. It is the government's assurance that attracts private capital. Privatization refers to transferring rights and responsibility to private players. In private hands the ports receive private market dynamism, management expertise and investment. Along with government's will, successful privatisation requires presence of a strong private sector. A small private sector and nonexistent stock exchange makes it difficult for developing nations to fulfill requirements of port reforms. In such cases it is not desirable to sell or lease ports to private companies since the market oriented management skills and investment capacities are lacking. It is not possible to wait for private sector to become strong either, in this time of globalisation rather small reform measures are taken by leasing some operations to foreign private sectors. This measure, in fact, would be useful in encouraging domestic sector to be strong. China, Viet Nam, Malaysia, Pakistan, Panama, Poland have chosen foreign companies for this reason (UNCTAD, 1995). Baird (1999) clarified that reforms or privatisation of ports may be understood through following four models. Table I: Key Port Elements: Privatization Options (from Baird, p.4) Port Models Port Regulator Port Landowner Regulator PUBLIC public public public PRI VATE/I public public private PRI VATE/II public private private PRIVATE/III private private private In the first model, PUBLIC, all three elements - regulator, landowner, and operator - are the responsibility of the state. Examples of such ports may be found in Singapore, Israel, India, and in certain African states. PRIVATE/I type of arrangement is also known to as a 'landlord' or 'tool' port. In this model port land is still in public ownership and regulatory activities are also the responsibility of the public sector. North American and European ports, in which terminals are generally leased to the private sector, exemplify this model. PRIVATE/II model gives control of two elements, operations and property rights, to the private sector. Certain large multi-user ports in the UK appear to conform to this model. For example, Tilbury, Felixstowe and Harwich are owned and operated by the private sector. The final possibility, referred here as the PRIVATE/III model, is where all three elements - regulatory, land and operations - become the responsibility of the private sector. With this model the state has practically no involvement. Ports in the UK would appear to be virtually the only examples anywhere of this wholly privatised model (Table 2) Table 2. Extent of privatisation within the top 100 container ports (from Baird, p.5) Port Models PUBLIC PRIVATE/I PRIVATE/II PRIVATE/III Number of ports 7 88 2 3 B.1. Which model to adopt for effective port reform Over the years, the respective governments have realised that trade is hampered by ports due to high costs and low efficiency. Thus introducing private sectors' management expertise to make these efficient is necessary. There have been other reasons as well such as huge state funding to ports puts heavy demands on public sector budget. Though the state may support basic infrastructures of ports but the super structures viz. cranes, terminal building may be provided by private sector. Port operation is one element transferred first to private sector. This is in a bid to reduce expenses on port labours since the duty of state is to generate employment and to achieve this aim mostly the operations suffer. Of the models outlined above, the PRIVATE/I model has many advantages as: increasing private sector investment by bringing in new facilities or upgrading old ones. Unlike in UK, reforms should not aim at merely acquiring the ownership of ports as these are existing so rather than giving overall charge of port to private sector it is more beneficial to allow this sector to manage some selected operations say, operation of a single terminal and developing facilities such as HIT in Panama. The private sector builds facilities which revert to state after contract period. The public sector also receives regular payment from HIT under BOT agreement. The ports in China apply an alternative approach by running ports as joint venture between public and private sectors whereby both the sectors split cost and risks. The PRIVATE /I model has underlying principle of increasing port efficiency by up gradation and thus improving trade, reducing burden of state budget while at the same time the state keeps control on ports and has property rights. No wonder that landlord model suits developing states also as evident from private funding of ports in these (Table 3) Table 3. Port projects with private participation in developing countries by region, 1990-98 ( source PPI project database as in Sommer, 1999, p. 5) Region Number of projects Total Investment (1998 US$ Million) East Asia and Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Total 38 8 48 5 9 4 112 5410.5 23.4 2497.7 376.5 942.6 32.0 9282.7 The PRIVATE II/III models applied in many UK ports, on the other hand, provide regulatory control and property rights to private owners. As a result sale of port land becomes right of private owner which has fundamental weakness. The efficiency which has been observed in UK ports is basically due to abolition of NDLS in 1989 rather than some innovative efforts by the private players (Baird, 1996).. C. Financial Autonomy: Port prices constitute an important element of port competitiveness which prompts ports to reduce their own wages as well as those of the services provided by private companies in the region on their behalf. It is also emphasised here that prices charged are utilised for maintenance and improvement of services so these cannot be reduced greatly. To arrive at minimal cost four components are to be considered: costs of infrastructures, transport, port services and external cost, according to Meersman et al (2003). Niekerk (2002) agrees with Meersman et al as port authorities are expected to bring profit or at least break even, the delay in infrastructure investment may hamper development. The port development objectives have to be clearly defined at the time of port establishment or restructuring. Meersman et al provided possible interests of port players (Table4) Table 4. Port players and their possible objectives Port Player Possible Objectives Government Efficient management of assets Economists Minimising the welfare losses Port authorities Maximising throughput Maximising value added Maximising employment Users Transparency of charges Based on Suykens and Van de Voorde, 1998 and Pettersen-Strandenes and Marlow, 2000 (as in Meersman et al, p. 376) The findings of ATENCO project of European commission, carried out by Haralambides et al. in 2001 (cited in Meersman et al, p.376), revealed wide differences between funding and pricing practices across the ports in Europe. In the survey port authorities supported full cost recovery within the port sector while majority of these wanted 'user pays' systems. Though the port authorities agreed that even the full cost recovery would have little impact on pricing levels. The port authorities did not expect dry and bulk cargos to be affected by user pays system though the general cargo, containers and Ro-Ro cargos market may be influenced by such pricing. Most of the ports supported a general pricing system with some flexibility. Port users were also of the view that public support system has little impact on prices charged from them for port services. The first case analysed by the ATENCO project was of two British and one Irish ports case. These ports use full cost recovery system yet the pricing was at managerial discretion and wide variety of modified pricing principles were used which did not obey any standard best practice method. Niekerk highlighted views on economy of yet to be reformed ports of South Africa. Prior to the overtaking by Transnet Ltd, the predecessors of South African ports , South African Railways and Harbours Administration (SAR&H) and the South African Transport Services (SATS) were acting in monopolistic manner to earn just sufficient to provide for services. The capital port projects were state funded and the loans provided for the purpose at an interest. The loans were often rolled over and the interest kept on building up. The revenue was generated mainly by raising tariffs. Conversion of SATS to a public company, in 1989, to achieve autonomy was a hushed up decision without giving due consideration to gauge new company's ability to meet its financial commitment and without an effective legislation. Transnet was burdened with developing basic infrastructure in South African ports though it was not adequately resourced for the purpose. It is not possible to forge a relationship between port usage and expenditure incurred from usage since it does not result in identifiable marginal costs. Wharfage as the tax on cargo imported or exported was major source of income to Portnet, the comprehensive owner, operator and regulator of South Africa's ports, which fall under Transnet (a transport conglomerate). As a result the yield on other charges such as cargo handling, pilotage and tug resistance were not encouraged which in turn showed little profit It was uneven distribution of profits since wharfage was interest of the port authorities, the landlord (Niekerk, 2002). The author has noted that port authorities in South Africa play a regulatory role. However since they derive their revenue from ports, they are unlikely to be biased in their decisions particularly where risk may involve. It is suggested that port authorities too should be regulated by an unbiased regulator who should focus on expert driven research and evaluation. Port authorities should remain confined to everyday management and control. III. CONCLUSION An alternative is suggested by Niekerk (2002) that expert driven control and regulation of supply chain should be monitored by regulator who is independent of port authorities. While the port authorities should look into the general management and control. It seems a feasible alternative for public ports till South Africa gets ready to handover its ports to private owners. The most successful model of reforms seems to be one where operation, which are loss causing, are given to private players while regulatory power and land remain public. The UK experience shows that all private model (PRIVATE/III) has caused social risks as massive layoff post reforms. Besides giving ownership of land to private players has fundamental difficulties as well. Port authorities in general supported full cost recovery 'user pays' system. However the ports fully owned by private owners, as some British and Irish ports, showed pricing to be at managerial discretion and not following any best practice rule. A system based on marginal cost of infrastructure development, transport facilities, port services and external cost may provide ideal basis for pricing. References: Baird, Alfred. "Privatization Defined; Is it the Universal Panacea" 1999; available from http://siteresources.worldbank.org/INTPRAL/Resources/338897-1117630103824/baird.pdf ; accessed 18 Aug 2009. Meersman, H, E. Van de Voorde, & T. Vanelslander. "Port Pricing. Considerations on Economic Principles and Marginal Costs". EJTIR, 3, 4 (2003): 371-386. http://www.ejtir.tudelft.nl/issues/2003_04/pdf/2003_04_03.pdf [Accessed 18 Aug 2009] Niekerk, H C-van. "Ports restructuring, policy and regulation: The South African case". Paper presented at IAME 2002 at Panama, 13 - 15 November 2002; available From www.eclac.cl/Transporte/perfil/iame_papers/.../Van_Niekerk.doc; accessed 20 Aug 2009. Sommer, Dirk. "Private Participation in Port Facilities-Recent Trends". 1999; available from http://rru.worldbank.org/Documents/PublicPolicyJournal/193somme.pdf; accessed 20 Aug 2009. Turnbull, Peter. "Restructuring and Strategies of Seaports and Port companies: The United Kingdom"; Available: http://www.maritim.unibremen.de/ports/global/TURNBUL.pdf ; Accessed 18 Aug 2009. United Nations Conference on Trade and Development (UNCTAD), "Comparative analysis of deregulation, commercialization andprivatization of ports". 1995; available from http://www.unctad.org/en/docs/sddport3_en.pdf; accessed 18 Aug 2009. Read More