Thesis Acciaro PDF

Erasmus University Rotterdam
MSc in Maritime Economics and Logistics 2003/2004
Private Sector Financing of Container Terminal Infrastructure

by
Michele Acciaro
Copyright MSc Maritime Economics & Logistics
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AI MIEI GENITORI PER L AFFETTO , LA FIDUCIA E IL SUPPORTO. GRAZIE.
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According to the system of natural liberty, the sovereign has only three duties to attend to; [] thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1904 edition)
My views on government spending can be summarized by the following parable: If you spend your own money on yourself, you are very concerned about how much is spent and how it is spent. If you spend your own money on someone else, you are still very much concerned about how much is spent, but somewhat less concerned about how it is spent. If you spend someone else's money on yourself, you are not too concerned about how much is spent, but you are very concerned about how it is spent. However, if you spend someone else's money on someone else, you are not very concerned about how much is spent, or how it is spent. Milton Friedman, at White House ceremony in his honour, May 9, 2002.
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Acknowledgments
Even if a thesis is in the end the sole responsibility of its author, it is always the final result of the efforts of a larger group of people that contributed to it in different ways, providing information and critical review, suggesting alternative approaches and new ideas, sharing their experiences and providing guidance and support. Also in my case this thesis would have not been possible if it was not for the contribution of many people. I would like to thank all the people at ECORYS, with whom I had the pleasure to spend the three months in which I have worked on this thesis. In particular I would like to give a special thank to Hein Gietema for the time he dedicated me in reading, correcting and discussing the contents of this work. I would like also to thank Edward, Jaap, Jordy, Marcel, Maurice, Elvira, Patricia, Herman, Liselot and Olga for some of the nice moments we spent at the office. A special thank goes to Professor H. E. Haralambides for his valuable comments, corrections and suggestions and especially for being a precious guide in the field. I would also like to thank Enzo de Filippi who also provided some valuable thinking and reviewed part of the thesis. I would like to mention also two people who provided important contributions for the discussion, namely Dr Sheila Farrell of Sheila Farrell Associates (SFA) and Otto Rosier, of the Havenraad. In addition I would also like to thank for the time they dedicated me Mr U Bottema and Mr A Jansen of ECT, Mr J van Hoff and Mr G Oosterbaan of the Port of Rotterdam, Ms D Coed of the port of Felixstowe. Furthermore I would like to thank some people who did not actively participated in the work of this thesis but whose support has been essential for developing in my studies, namely J Signorile of PWC, for being my first valuable work contact in the filed of transport of transport and my aunt Daniela, for always reminding me to believe in myself. I would also like to thank the people who have supported me in this first year in the Netherlands. Peter, Marco, Juana Erik, thank you. Finally my greatest thank you goes to my mother, Giovanna, and my father, Giancarlo, without whose support, assistance and love nothing of this, for the little value it may have, would have ever been written.
Abstract
The port sector has been going through a substantial reshaping in the last thirty years. The increased requirements of efficiency, public budget constraints and the necessity to operate port facilities and provide port services on a commercial basis have determined a larger involvement of the private sector in what was regarded before as a purely public sector. The container terminal business represents for sure the set of port activities that have been in the front line in broadening the participation of the private sector in its services provision, so that, nowadays, a large number of terminals all over Europe and in the world are managed entirely by private operators. However, in the majority of cases the public sector still plays a considerable role, since in many countries terminals are operated on the basis of leasehold concessions. This implies that the public sector is the legal owner of the terminal and is generally responsible for designing, building, financing and leasing it. On the one side private sector financing of container terminals superstructure is common and well accepted in Europe and its share in the underlying infrastructure has also significantly increased in the last decades. On the other side public funding is still substantial. A situation of entirely privately financed container terminals, without any public investment, does not seem possible in Continental Europe at least in the short-run. The thesis proposes and evaluates some obstacles in this and explains why they prevent private financing of container terminal infrastructure. It also indicates possible solutions to overcome these obstacles. In doing this it provides the fundamentals of financing of container terminals with a reference to the European and international practice. On the basis of these fundamentals and of the characteristics of terminal investments, it assesses the level of private financing of container terminals achievable in Europe. The thesis, with the support of economic theory and of two case studies, concludes that a situation of fully privatised terminals would have some advantages in the framework of the European Communitarian port competition policy and given the developments that have been taking place in the container terminal business. Nevertheless, some characteristics of the European port systems conflict with this point of view and are at the basis of the difficulties in the implementation of full private financing of container terminals at least in the short run.
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List of Tables
Table 1: Major reasons for port reform Table 2: Port model characteristics Table 3: Port investment responsibilities in port models - basic definition Table 4: Institutional models in European Countries (including Bulgaria, and Rumania) Table 5: Port assets classification Table 6: Factors that influence risk in container terminals Table 7: Port investment responsibilities for port of Rotterdam Table 8: Key elements in the comparison between FSR and MV2 Table 9: Characteristics of the investment approaches in FSR and MV2 PPP initiative encouragement 20 26 32 57 62 63 64 13 16 17
Table 10: Advantages and disadvantages of container sector full privatization and of
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List of Figures
Figure 1: Thesis structure Figure 2: Average total cost curve aways above average revenues Figure 3: Average total cost curve not always above average revenues Figure 4: Port of Felixstowe Figure 5: Felixstowe South reconfiguration Figure 6: Port of Rotterdam (1:50.000) Figure 7: Maasvlakte 2 3 24 24 50 53 55 58
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List of Abbreviations
ADB BBO BOO BOOT BOR BOT BRB BTC BTDB BTO BWB DBFMO DBFO DCT DWT EBRD EC ECT EIB EMSA ERDF EU FMC GRT HPH IMO ISPA ISPS JVA LDO MOU Asian Development Bank Buy Build Operate Build Own Operate Build Own Operate Transfer Build Operate Renewal Build Operate Transfer British Railways Board British Transport Commission British Transport Docks Board Build Transfer Operate British Waterways Board Design Build Finance Maintain Operate Design Build Finance Operate Dedicated Container Terminal Deadweight Ton European Bank for Reconstruction and Development European Commission European Container Terminal European Investment Bank European Maritime Safety Agency European Regional Development Fund European Union Federal Maritime Commission Gross Registered Tonnage Hutchinson Port Holdings International Maritime Organization Instrument for Structural Policies for Pre-Accession International Ship and Port Facility Security Joint Venture Agreement Lease Develop Operate Memorandum of Understanding
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MTO OPEC OSRA PA PFI PFL PPP RMPM ROO RO-RO ROT RPM SOLAS SPC SPV TEN TEU UK USA WB WBOT
Multimodal Transport Operator Organization of Petroleum Exporting Countries Ocean Shipping Reform Act Port Authority Private Finance Initiative Port of Felixstowe Public-Private Partnership Rotterdam Municipal Port Management Rehabilitate Own Operate Roll On Roll Off Rehabilitate Operate Transfer Rotterdam Port Management Convention on the Safety of Life at Sea Special Purpose Company Special Purpose Vehicle Trans European Network Twenty-foot equivalent unit United Kingdom United States of America The World Bank Wraparound BOT
Table of contents
Acknowledgments Abstract List of Tables List of Figures List of Abbreviations Table of contents 1 Introduction 1.1 Background and objective 1.2 Research methodology 1.3 Thesis structure 1.4 Relevance of the topic 1.5 Difficulties, possible improvements and further research 2 Transformations in the port business 2.1 Changes in technologies 2.2 Trade Liberalisation 2.3 Shifting bargaining power 2.4 Development of Hub and Spoke distribution pattern 2.5 Environment, safety and security issues 2.6 The transfer of port operations to the private sector 3 Port models and investment responsibilities in Europe 3.1 Public and private drivers 3.1.1 Public and private roles 3.1.2 Port reform 3.1.3 Strategies to increase private sector involvement 3.1.4 The core responsibilities of the public sector 3.1.5 Port Investment 3.2 Port models 3.2.1 Service ports 3.2.2 Tool ports 3.2.3 Landlord Ports 3.3 Port models and investment responsibilities in Europe 3.3.1 Overview of port models adopted in Europe 3.3.2 Port investment responsibilities 4 Terminal Investment 4.1 Terminal Investment v vi vii viii ix xi 1 1 2 3 4 5 6 6 7 8 8 9 10 12 12 12 12 13 14 15 15 17 17 18 19 19 20 22 22
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4.1.1 Investment in infrastructure in general 4.1.2 Terminal assets 4.1.3 Is a container terminal a public good? 4.1.4 Container terminals characteristics and private financing 4.2 Risk and terminal infrastructure 4.2.1 General issues 4.2.2 Risk in container terminals 4.2.3 Major types of risk 4.2.4 Due diligence issues and risk mitigation 4.2.5 Optimal allocation of risk between the public and the private sector 5 Obstacles in full private sector financing of container terminal infrastructure 5.1 Obstacles in full private sector financing of container terminal Infrastructure 5.1.1 Financial viability 5.1.2 Public financial support interferes in the competition 5.1.3 Role of the public sector 5.1.4 Cultural and historical reasons 5.2 Solutions to overcome full private financing obstacles 5.2.1 State subsidisation reduction 5.2.2 European Competition policy 5.2.3 Adoption of specific pricing rules 5.2.4 Evolution of the container business 5.3 Limits to full private financing of terminal infrastructure 5.3.1 How feasible are these solutions to increase private financing? 5.3.2 Will it be possible in the future to achieve fully private financing of container terminal infrastructure in Continental Europe? 6 Case study comparison 6.1 Investment in container terminals in the port of Felixstowe 6.1.1 Policy framework in the UK 6.1.2 The port of Felixstowe 6.1.3 The Felixstowe South Container terminal 6.2 Rotterdam The Maasvlakte 2 project 6.2.1 Policy framework in the Netherlands 6.2.2 The port of Rotterdam 6.2.3 The Maasvlakte 2 project 6.3 Comparison results 6.3.1 Summary of the characteristics of the two projects 6.3.2 Advantages and disadvantages of the two approaches 6.3.3 Can a fully privatised approach be applied in Rotterdam? 7 Conclusion 7.1 Major thesis conclusions
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37 37 37 39 40 42 42 42 43 43 43 44 44 45 46 46 46 49 52 53 53 55 57 60 60 62 63 66 66
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7.2 Recommendations Bibliography Annex 1 European Country Profiles Belgium 76 Bulgaria 77 Cyprus 77 Denmark Estonia 79 Finland 79 France 81 Germany Greece 82 Ireland 83 Italy 84 Latvia 84 Lithuania Malta 85 Netherlands Poland 86 Portugal 87 Rumania Slovenia Spain88 Sweden 88 United Kingdom Annex 2 Types of Public-Private Financing schemes Agreements that entail temporary release of ownership Agreements that entail indefinite release of ownership Joint Ventures Annex 3 EU Legislative References
67 69 76
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85 86
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89 90 90 92 93 94
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1 1.1
Introduction Background and objective
The aim of the thesis is to evaluate the level of private sector financing of container terminal infrastructure achievable in Continental Europe. The port sector has been traditionally viewed as a public sector. In the last thirty years though the changes taking place in the industry have led to the progressive involvement of the private sector in a large number of port activities in many countries. Many ports have gone through institutional, managerial and operational reforms that have reshaped them with different intensity and have generated different outcomes, so that in the European scene we have a variety of port systems and the private sector has a different role in every country. Even in the same country substantial differences in the involvement of the private sector can be found. It can certainly be said that the private sector involvement in the port sector is multifaceted and complex. In Europe, ports structures range from fully privately owned, managed and operated ports, as in the United Kingdom to ports where port operations are still largely under the responsibility of the public sector, as in France. Among the many specific aspects of the port business in which the private sector has been engaged, the thesis will focus on the financing of container terminal operational infrastructure such as quays, warehouses, land reclamation works, etc. Container terminals have been chosen with respect to other types of terminals, for the specific characteristics of the container industry and the trends taking place in it. In general competition among container terminals is rather developed, within and among ports. In this context then is particularly interesting that container terminals fully privately financed in the UK for example have to compete with terminals largely financed/subsidized by the public operators. The focus has been limited only on infrastructure investment and financing and not on service provision and commercial activities, because in the majority of ports in Europe these activities are already in the hands of the private sector, and there is wide consensus of the fact that in general the private sector performs better than the public sector with this respect (World Bank, 2001). In addition, the thesis will focus only on operational infrastructure and not on superstructure and equipment because private sector financing of container terminal superstructure and equipment is common and well accepted in Europe (World Bank, 2001). The case of container terminal infrastructure is interesting because public funding is still substantial, despite the fact that in Europe there are examples of fully privatised terminals. The existence of fully privatised container terminals suggests that they can virtually be financed entirely on the basis of the revenues they generate and that public funding is thus not required. In the majority of the UK terminals, where the responsibility for raising finance and for infrastructure cost recovery falls entirely within the private sector, operators still manage to be successful and to obtain reasonable profits. This inevitably raises the
question on why it should not be possible also in continental Europe to withdrawn the public sector completely from the financing of container terminal infrastructure. In spite of the fact that a situation of entirely privately financed container terminals would be probably feasible and desirable, it does not seem possible in Continental Europe at least in the short run. It is interesting to discuss some of the reasons that prevent container terminals to be entirely privately financed in Continental Europe. Once these reason have been found, possible solutions to increase the level of private sector financing of container terminal infrastructure should be discussed.
1.2
Research methodology
The methodologies used to fulfil the objective of the research are the following: Desk research. The purpose of the desk research is to set the framework for the problem discussion, examining the theory aspects of the private financing of port infrastructure Interviews with experts in the field of port finance, port authorities, terminal operators, etc. The interviews aim at acquiring a better understanding of the reasons and obstacles in private terminal infrastructure financing as well as the different industry points of view. Case study comparison between two large infrastructure projects in the port of Felixstowe and in the port of Rotterdam. The idea behind the case study comparison is to identify the main differences in the financing of terminal infrastructure in the fully privatised port of Felixstowe and in the port of Rotterdam, in order to verify empirically the findings of the desk research and of the interviews. The terminal industry offers the interesting case of global operators that manage terminals in the UK and in the Netherlands. In principle these terminals are operated with the same managerial logics in the two different institutional frameworks: one that requires the operator to recover infrastructure costs and the other that provides infrastructure on a leasehold base.
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Thesis structure
The thesis is structured as follows.

1. Introduction: Problem definition and Framework setting
Characteristics of port infrastructure finance in Europe 2. Transformations in the port business 3. Port models and Investment responsibilities in Europe
4. Terminal investment
5. Obstacles to full private sector financing of container terminal infrastructure Competition Financial Viability Role of the public sector Cultural and historical reasons
6. Case study comparison Felixstowe Rotterdam
7. Conclusions
Figure 1: Thesis structure
Source:
Elaboration of the author.
1. Introduction In this chapter the research problem, the objectives and the methodology of the thesis are considered. 2. Transformations in the port business This chapter describes the framework of the problem in terms of the main trends taking place in the port industry 3. Port Models and Investment Responsibilities in Europe The chapter analyses the theoretical models of balancing the presence of private and the public sector in ports. The chapter is essential to set the problem of financing of infrastructure in the current organizational structure of European ports. The models are defined in terms of ownership, operations, planning, investment, financing, service provision, regulation and supervision. 4. Terminal Investments and Risk The fourth chapter aims at clarifying what are the features of container terminal investments. The definition and the various assets that need to be financed in container terminals will be given explaining the peculiarities and differences with respect to general infrastructure. An essential aspect of every investment is risk. The risk profile of container terminals will be discussed in this chapter.
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5. Obstacles in full private sector financing of container terminal infrastructure The chapter examines the obstacles for which terminal infrastructure cannot be entirely financed by the private sector. On the basis of the discussions of the previous chapters these obstacles will be commented and possible solutions to overcome them will be addressed. 6. Case study comparison The chapter presents the two case studies used in the thesis. It is structured in three sections. The first two sections analyse respectively the Felixstowe South container terminal reconfiguration in the port of Felixstowe and the Maasvlakte 2 expansion in Rotterdam. They describe the policy framework of the Netherlands and the United Kingdom, the development of the two ports in analysis, and the financing characteristics of the container terminals in the two ports. The third section compares the results and draws the conclusions on the case studies. 7. Conclusions Summarises the major findings of the study, stating the study weaknesses and suggesting possible ways to extend the research.
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Relevance of the topic
The role and effects of financing strategies in container terminal infrastructure is relevant for the following reasons: 1. The public opinion, business associations and the media pay remarkable attention to container terminal projects. The reason for this is that in the past, high involvement of public authorities in the port sector has generated inefficiencies and has been the cause of the waste of public resources. The discussion on the possible ways t o increase private sector participation in container terminals would be useful for the public debate. 2. The European Commission is concerned about the negative effects of public subsidies on competition and free access to port services. This has stimulated a debate on the issue, bringing to attention the need of additional research in the field. The evaluation of private sector financing of container terminal infrastructure can be helpful in this respect. 3. The private sector has realized that various business opportunities are present in the port sector. The attention is then on possible ways to exploit these opportunities and participate in the port sector activities and port infrastructure financing with adequate returns. The aspects dealt with in the thesis may be interesting then also for private sector operators. 4. The emergence of global container operators is a widely recognised phenomenon. Their role and impact in the port system has been substantial. It is interested in this respect to analyse how these terminal operators have managed to expand and what have been their financial strategies. 5. My presence in Rotterdam has been a substantial incentive in the thesis, in order to get a better understanding of the role of the public and the private sector in terminal financing in the Netherlands.
1.5
Difficulties, possible improvements and further research
Given the relatively limited amount of time available for the research a relevant part of the thesis has been based on existent publications and data. This consideration slightly weakens the analysis as rarely the information available is sufficiently updated and the results obtained original. All possible has been done to update and integrate the material contacting the sources directly, making interviews and making use of web resources. Port infrastructure projects often draw the attention the public opinion. In particular their financing and their necessity are often publicly questioned and debated. For this reason the financing of port projects is often considered a highly political matter by port operators, port authorities and governments. This fact may cause part of the material obtained during the interviews, the studies and other sources used in the thesis to be somehow biased. The case studies both deals with large terminal projects. It is likely that other results would be obtained if also other, eventually smaller terminals, with different managing strategies were taken into consideration. It is believed though that the interesting point of the case study analysis lies in the fact that the same terminal operator is present in both ports. This element allows confronting the terminal operator perspectives on investment on a ceteris paribus basis as much as possible. It would be interesting for further analysis to extend the investigations to a large number of terminals, trying to survey their investment strategies and responsibilities and their financing and risk mitigation methods. Further research is also required in the analysis of the impacts of cost recovery practices in ports and in the establishment of the relations between economic development and port infrastructure financing. It would be interesting to further analyse the issue of provision of infrastructure under exclusive private financing, in order to assess if exclusive private financing fails to provide the optimal level of infrastructure, i.e. the necessary level of operational excess capacity. Additional research could be done in the field of the impacts of port models on competition among ports. It would be interesting to evaluate if the landlord port model distorts competition with respect to the private model, because the variability among ports in the concessions fees charged to operators is higher than the original costs of capital in infrastructure investment.
Transformations in the port business
The last thirty years the port business and in the port organization have changed dramatically. At the basis of the port change there are the joined effect of technical innovations, economic forces, and social drivers. Based on the World Bank (2001: Mod. 2, 17-50), the following change drivers can be identified: Changes in technologies, Globalisation, Bargaining power shift, Development of the Hub and Spoke distribution patterns Environment, safety and security issues, and The transfer of port operations to the private sector. The aim of this chapter is to set the framework on the port sector for the specific discussion on container terminals. Every paragraph will address the issues listed above trying to indicate their impact on port investment. The main questions this chapter is trying to answer is: What are the major drivers that are affecting the port sector? How do they impact the pert investments?
2.1
Changes in technologies
As far as the impact of changing technologies is concerned, the most notable are the diffusion and consolidation of the use of containers in cargo transportation and the extensive application of information technologies and electronic data interchange. The container revolution has transformed the container in an essential component of traffics of large ports, altering the relations of port authorities with the global carriers and the terminal operators (Slack, 1993). The diffusion and the increasing importance of the container business have required large investments and a change in the terminal management philosophy. In addition the diffusion of containers has favoured integrated logistics and intermodality increasing the challenges on port authorities and port management (Notteboom and Winkelmans, 2001a). Furthermore the penetration of containers is associated with the upsizing of vessels. The increase of container vessels size is likely to affect deeply the port. According to Cullinane and Khanna (1999: 193) The latest generation of container ships make considerable demands on terminals and ports in the form of additional infrastructure, cranes, depth in ports, productivity, etc. The first level at which the upsizing of vessels will concern port authorities is the physical level of equipment and infrastructure. Port authorities are required to invest consistently to upgrade and extend their infrastructure and equipment in order to berth the new bigger ships.
The second level of effects on ports will concern the competitive position of the ports and the consequences the level of infrastructure will have on the attractiveness of the port for shipping lines and the port capacity to withhold them. Because ports will require sufficient infrastructure in terms of berths, depth of water and craneage, fewer ports will be in a position to compete for these larger and larger ships. As a result, additional casualties will be added to the existing list of redundant liner ports (Cullinane and Khanna, 1999: 194). As a result, if ports want to play the role of large transhipment hubs they will have to provide adequate infrastructures and equipment to berth large container ships and handle effectively the consequent large numbers of container boxes. As a matter of fact, the development of container transport activities requires and is motivated by an increase in the efficiency of ports and terminal operators. The requirement of more efficiency in terminal and port operations is leading to more capital-intensive handling techniques and increasing specialization of port labour. The consolidation of the container transport has had dramatic effects on the port labour. Between 1960 and 1994 the number of dockworker man-hour was reduced by 42% thanks to container handling systems although the volume of cargo handled increased almost 7 times (Burkhalter, 1995: 63). The change in the labour force profile following the introduction and the consolidation of container transport has required large labour reforms. Well-known examples of the social unrest resulting from port reforms are the UK, Spain and Italy (Turnbull and Weston, 2001; Longobardi, 1997), where the economic impacts of port labour reforms have been widely discussed. A further aspect that should be considered is that the development of container transport and the increased role of ports in the logistic chain make them more dependent on access infrastructure. The development of access infrastructure is a fundamental element in determining the extension of the port hinterland, and land connections may determine the failure or the success of a container terminal (see for example the Ceres Terminal in Amsterdam). In order to expand their hinterland, a large number of port authorities are directly investing in access infrastructure or are seeking the commitment of the relevant authorities (Haralambides, 2002).
2.2
Trade Liberalisation
Trade liberalisation has reshaped the port sector in various ways. Firstly, production processes have been progressively delocalised all over the globe increasing the need for transporting raw materials, and especially semi-final and final goods, thus boosting the container transport sector in particular and the port sector in general. Secondly, the ports are increasingly becoming value adders in the production process. A large number of production activities can now take place in the proximity of ports, as they have become value adders in the logistics (World Bank, 1999: module 1, 20). After having been at first merely an interface location for cargo and between land and sea transport, next a transport, industrial, and commercial service
centre, the modern port is a dynamic node production/distribution network (Juhel. 1998: 46).
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the
international
Thirdly the competitiveness of a port is strictly interrelated with the location decisions of industrial processes. Finally, trade liberalisation is considered at the basis of the emergence and expansion of global carriers and terminal operators (Juhel, 1998: 42-43). Trade liberalisation indirectly affects the investment needs of the port. Port planners are increasingly considering inside the port areas adequate spaces for the developments of distriparks and other logistics platforms with the aim of boosting adding value activities.
2.3
Shifting bargaining power
The bargaining power of the different parties involved in the port decision process is the force with which each party is involved in the transactions. Stronger parties will have more bargaining power thus obtaining greater advantages. The recent tendencies in the port have lead to the emergence of consolidated groups of ocean carriers and global terminal operators. Competition among ports, deriving from the overlapping of their contestable hinterlands, and the relatively easiness for shipping lines to transfer their operations from one port to another have weakened the bargaining power of public authorities. Port authorities are seen more as pawns in the game, as they are less and less in control over their destinies (Slack, 1993: 580). No longer can ports expect to attract shipping lines because they are natural gateways to rich hinterlands. [] Shipping lines have now become the major actors in the world trade in non-bulk commodities, and because they operate on a global scale they possess a more varied choice of ports of call than ever before (Slack, 1993: 581). Examples of the effects of the shipping lines bargaining power are numerous. It is interesting to see how shipping lines may induce port authorities to commit to large infrastructure investment in order to attract or withhold shipping lines. An interesting example is the Mearsk-Sealand threat of leaving the port of New York/New Jersey that resulted in the investment of the port of 600 million USD from the Port Authority in order to withhold the shipping company traffics in the port (World Bank, 2001; Mod. 2, box 20, pg 38). The shift of bargaining power affects port investment at least in two ways. On the one side there is the emergence of new investors, i.e. global carriers and shipping companies, that have the ability and the financial means to invest directly in ports, on the other side the changes in the balance of powers resulting in the subordinated position of many Port Authorities that are induced to make investments on the basis of the threat of seeing their container traffics reduced.
2.4
Development of Hub and Spoke distribution pattern
The use of regional hubs for the transhipment of containers has increased progressively. The Hub and Spoke system in liner shipping is at the basis of this
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tendency and entails the development of a complex network for liner companies. The major effects of the Hub and spoke system are: The reduction of the number of mega transhipment hubs: The Hub and Spoke system is intended to maximize utilization of large containerships while providing market coverage to a large number of ports. The technical requirements of large ships will tend to reduce the number of calls the large ships will be able to do in a voyage (Haralambides, 2002). The concentration of the transhipment hubs in the hands of a (limited) number of Global Terminal Operators and the emergence of dedicated container terminals: Global carriers require from their terminals high degrees of service and short turnaround times. In order to provide these high service requirements, only specialised terminals can survive in the long run (Haralambides, 2002). The development of extensive feeder networks: the development of infrastructure in ports will probably make more attractive for the shipping companies that do not operate at a global level to call at more ports, with ships of more limited dimension. This effect, jointly with the increase of cargo will motivate higher levels of feeder traffics (Haralambides et al. 2000). The effect of the development of the Hub and Spoke system on the investment strategies of Port Authorities, results in increasing the pressure in maintaining high levels of infrastructure and services. Port Authorities are induced to compete to obtain the role of large hub, especially in those markets where it is still possible to become dominant players because of the high growth container traffic rates and the expansion of the markets. A typical example is the Mediterranean where 21 million TEU per annum of additional capacity is expected following the container terminals expansion projects in the area (Drewry, 2002: 221) and the majority is referable to ports that are aiming at assuming the role of regional hubs.
2.5
Environment, safety and security issues
Ports are often perceived by public opinion and governmental officers as potential threaten to the environment, the security of their country/region, the safety of its workers and the nearby community. This is mainly due to the presence in the port of large industrial activities and their increasingly dominant character of international gateway to a country. Whether the increasing attention on the pollution, safety and security threatens is always justified or not, nowadays ports have to deal with issues that in the past were not considered to be in their scope. At least in developed countries, ports have to maintain international environmental, security and safety standards. The non-adherence of the port to them may hinder dramatically its operations, defile its public image and in final analysis compromise the success of the port development strategies and damage the industrial activities taking place in the port (Heazendonck, 2001). In addition ports that fail to create, maintain and promote their image of environmentally friendly, safe and secure ports, will encounter opposition from public opinion and authorities to enlargements and funding, without considering that, at least in developed countries, port decision making in general is a painstaking process that requires a certain degree of public support (for example House of Commons, Transportation Committee, 2003).
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For this reasons, ports strategies have to be planned in terms of sustainable development. The concept of sustainability in the case of ports entails the respect of environmental and social standards (Goulielmos, 2000). The attractiveness of port activities and new investment projects in the port area needs to be assessed not simply in terms of the economic potential but also in terms of sustainability (European Commission, 1997). It is widely recognized that ports have both positive and negative environmental effects (Goulielmos, 2000). On the positive side they are central to an integrated transport policy that can reduce traffic congestion on roads and the consequent pollution. It has been shown (European Commission, 2001c , for example) that marine transport can play an important role in the reduction of pollution. The intermodality strategy, aiming at shifting cargo traffic from land modalities to marine modalities, requires inevitably a determinant role for ports. On the negative side, ports play a substantial role as industrial conglomerate attractors (Musso, 1996). Many of the activities that take place in the port may be the cause of significant water, soil or air pollution. In addition many port activities produce large quantities of light and noise, which compromise the habitats of numerous animal species (Button, 1993; Goulielmos, 2000). As far as the issue of safety is concerned, an extensive regulation exists in western countries to reduce the risks connected with labour activities and handling of dangerous substances in the port. The tutelage of port safety measures in ports is for sure of increasing importance in developed countries, and an aspect that cannot be neglected in port operations and policy. The issue of security has acquired increasing importance since 2001. The maritime and port facility security regime agreed in the International Maritime Organization (IMO) in December 2002, in the form of amendments to the Convention on the Safety of Life at Sea 1974 (SOLAS) and a new International Ship and Port Facility Security (ISPS) Code apply to passenger ships and to cargo ships of 500 gross tonnes and above engaged on international voyages, and to the port facilities serving them. Security, by the imposition of ISPS code and other similar measures is affecting port operations and policy. The main way environment, safety and security issues are affecting port investment is by drawing more public opinion attention on new port projects. New port developments need to take also these aspects into consideration because opposition from environmentalist groups or claims on the grounds of safety and security may generate costly delays and may cause the project to become unfeasible.
2.6
The transfer of port operations to the private sector
The increase of private participation is made clear in the widespread corporatisation, commercialisation and privatisation efforts that have taken place and are taking place in the port sector of many countries. Until the Eighties ports were perceived to be fully in the scope of the public sector. Since then, the increase of the market oriented activities, the reduction of public budgets and the search for improvement and increased productivity have brought about large port reforms all aiming at an
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increased involvement of the private sector in port service provision (World Bank, 2001). It is important to point out that in the developments affecting the port sector, there is a tendency in differentiating those services that can be provided by the private sector and those that can be provided by the public sector. The awareness of the possibility of involve the private sector directly in the port service provision and management has come along a tendency towards commercialisation, that has resulted as one of the major drivers in the developments of the port business in the recent years. The effects of the increased participation of the private sector in the provision of port services are relevant for port investment because the private service providers, in order to perform efficiently need to have full control at least on the equipment and superstructure they make use of, including investment decisions. On this basis in the long term it is possible to envisage that private operators will require extending control also over to the underlying operational infrastructure (Farrell, 2004).
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Port models and investment responsibilities in Europe
In order to discuss the possibilities to extend the role of the private sector in terminal infrastructure, it is important to understand the role the private sector is playing in European ports now. The degree of involvement and the subdivision of responsibilities between the private and the public sector in the port can be schematised into port models. Port models are defined by the structure of ownership, management and service provision responsibilities in the port, and it is the framework in which investment decisions take place. What is particularly interesting in the filed of private sector financing of container terminal infrastructure is the subdivision of financing responsibilities in European ports. The chapter will address the issue of public and private roles in the port and will identify what are the drivers towards an increased involvement of the private sector. It will review the four port institutional models that have emerged in literature over time and finally will provide an overview of the models adopted in Europe with particular attention on the parties financially responsible for terminal investment. The main questions the chapter is trying to answer are: What are the most common port models in Europe and what are their characteristics? What is the balance between public and private responsibilities in port investment in Europe?
3.1
3.1.1
Public and pr ivate drivers

Public and private roles
In the majority of ports, the public and the private sectors are present with different roles. The balance between public and private sector roles is constantly changing in the port environment as a consequence of the transformations of the port business. These transformations are the main reason for which many of the competences that once were of the public sector are not falling into its scope anymore. The requirements of adapting the managerial, economic and legal framework of the port to the changing nature of the business have made governments and policy makers increasingly aware of the need of reform. As a consequence the presence of the private sector has increased substantially in the last thirty years. 3.1.2 Port reform
Ports institutional frameworks can be grouped into models on the basis of characteristics such as asset ownership, service provision and management. Port reform entails the transition from a port model to another with an increase in the role for the private sector. Within these four institutional port models, there is a wide spectrum of decisions to be taken and evaluated. These decisions range from the methods of involving the private sector, the funding of port assets, the labour framework, the legal framework, ways to guarantee public interests oversight, etc. Even if fully public ports still exist in Europe, the majority of Countries have engaged in some forms of reforms aiming at increasing the private role in the port. Well know examples of port sector reforms are the waves of privatisation that took place in the
12
UK in the 80s and early 90s (Baird, 2000), the highly debated reform of the Puertos del Estado, strongly opposed by the local unions in Spain (Turnbull and Weston, 2001), and the attempts aiming at an increased liberalisation of the port sector that set off in Italy in 1994 (Longobardi, 1997). Even if port reforms have taken the form mostly of the increase of the private sector presence in the port, as stated in the World Bank toolkit (2001), private sectors involvement in the port should not be an end in itself, but only a mean to achieve specific and well-defined public interest objectives. These objectives obviously vary from port to port and from context to context, but in general larger private involvement in the port sector is motivated (World Bank, 2001) by: The need to increase competitiveness in the port; The desire to stimulate the port based regional economy; The need to reduce public budget expenditure. A more extensive list is provided in the following table.
Table 1: Major reasons for port reform
General Reasons: Improve port efficiency Decrease costs and prices Improve service quality Increase competitive power Change the attitude with respect to port clients (become more client friendly) Financial Reasons: Reduce Public expenditure Attract foreign investment Reduce commercial risks (investments) for the public sector Increase the private sector participation in the regional and national economy Administrative/managerial Reasons: Diminish the political influence on the public port administration Reduce bureaucracy Introduce performance-based management Avoid governmental monopolies Employment reasons for change: Reduce of the size of the public administrations Restructure and retrain the port labour force Eliminate restrictive labour practices Increase private sector employment.
Source:
World Bank (2001).
In addition to the previous considerations, the increased involvement of the private sector derives also from the need of a better allocation of the risks of the port business. It should be noted that the risk in the provision of port services for example has been steadily increasing as a consequence of factors such as the growing competition among ports, larger capital requirements, the tendencies towards specialization from multipurpose terminals to specialized terminals, vertical integration among port activities that is causing port operators to expand beyond the traditional boundaries, etc (World Bank, 2001). In most cases the private sector is able to manage the risks deriving from this factors more effectively. 3.1.3 Strategies to increase private sector involvement
Nowadays policymakers have a variety of strategies aiming at increasing the role of the private sector in their ports. The decision of what strategy to use depends on the
13
characteristics and the framework in which the port operates. The World Bank (2001) considers the following strategies: Modernisation of port administration and management that can be applied when it is assumed that the performance of the port can be enhanced by the introduction of more efficient working practises and tools, and it is the government is not able or unwilling to alter the bureaucratic and legal framework of the ports. Various attempt of modernising the port administration without altering the its structure have been performed for example in France and at Cyprus. Liberalisation or de-regulation of port services that allows private companies to operate in areas previously reserved to the public sector by the reduction and loosening of the governmental rules and regulation. Italy engaged in the liberalisation of port handling in 1994, even if the reform was partially hindered by the unions. Commercialisation that requires that the port is made more autonomous and accountable for its decisions and performance results. Even if often private sector accounting principles and practices are used, the port remains still a public entity. An interesting case of commercialisation are the reforms in which the Baltic countries have been engaging into after independence, rapidly moving through the steps of port reform. Corporatisation in which the port is given the legal status of a private company, even if the public sector still remains the sole/major owner. All assets are transferred to the private company, including land lease rights, even if the land ownership remains public. A recent case of corporatisation is the port of Rotterdam, whose management, previously a municipal department, has been corporatised in 2004. A further case is the port of Koper, 22 per cent of which is privately owned and the Slovenian Government I willing to reduce further its share. Privatisation that involves the expansion of the role of the private sector also to ownership and/or operations of the port facilities and services, and to the development of new facilities/assets. Even if the UK is the most well-known case in Europe of full privatisation, ports of minor interests and dedicated generally to a single industrial activity have been privatised in the Netherlands, in Denmark and in Greece. 3.1.4 The core responsibilities of the public sector
It can be observed that the tendency in all major ports deriving from port reforms aims at a clear distinction between the public and private roles. The role of the public sector has been gradually limited to five major tasks, namely: Regulation, Supervision, Planning, Promotion, and Coordination of the port activities. On the other side operations and in general all the value-added activities have been entrusted to the private sector (World bank, 2001).
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Even if the involvement of the private sector is believed to continue to increase, especially in activities such as promotion and planning, some form of government intervention is believed to be required (Baird, 2001). 3.1.5 Port Investment
Even if also the private investment in port assets has been increasing in the last thirty years the public involvement is still substantial (European Commission, 2001c). The need for some form of government intervention in the port investment is related to the unique economic characteristics of seaports, some of which tend to make them natural monopolies (Farrell, 1999): The provision of port services entails large fixed costs and low marginal costs. The marginal benefits associated with using port services exceed the marginal costs of providing these services. A relatively large minimum initial capacity of basic infrastructure is required for technical reasons. The infrastructure is frequently indivisible and, as a result, increases in infrastructure capacity can only be realized in large chunks. Both initial construction and port expansion require large amounts of capital. As a result, the need to develop basic port infrastructure (e.g., sea locks, breakwaters, quay walls, and main roads) all at one time creates large capital operating losses and foregone investment opportunities as a result of underutilised capacity during the earlier phases of a projects lifecycle. The life span of port infrastructure projects often exceeds the time horizon acceptable for private investors and commercial banks. Basic port infrastructure is immobile and has few alternative uses. This set of characteristics is the main reason for financial involvement of governments in port construction and expansion projects. The success of many ports will lie on the adequacy of the balance between public and private roles. Given the importance of issues such as ownership and the balance of responsibilities for port and terminal expansions, also for the provision and the financing of port and terminal infrastructure, it is essential to clarify the differences in port models.
3.2
Port models
In order to obtain a clearer understanding of the roles of the public and the private sector in the ports of the world, a categorization of port institutional frameworks in port models has emerged over time. Ports can be classified into four main models: Service Port; Tool Port; Landlord Port; and Fully Privatised Port or Private Service Port.
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Table 2: Port model characteristics

Dominant Public Sector a. Service Port, publicly owned b. Public sector owns land, infrastructure and equipment Public sector provides services
Tool Port Public sector owns land, infrastructure and equipment Equipment and space are rented out on a short-term contract basis to the private sector, which then provides services
c.
Landlord port Public sector owns the land and the infrastructure Services are provided by the private sector on a long-term basis, for example using concession agreements or Build Operate transfer contracts (BOT)
Dominant Private Sector
d.
Service port, privately owned All land, infrastructure and equipment is owned and operated by the private sector.
Source:
van der Veer (2001)
These models differ from one another on the basis of the role the public or private sector play on assets ownership, management and service provision responsibility (generally cargo handling or operations). Firstly is should be noted that a port model characterises the goals on which the port focus. Public service and tool ports tend to emphasise the public interest while private service ports tend to focus on the interests of their private shareholders. Landlord ports have to mediate between the public interest, represented by the port authority and the private interest represented by the port industry (World Bank, 2001). It should be clear though that ports that can be classified in the same port model could still differ substantially if other aspects were to be taken into account, such as: The orientation of the port, that can be local, regional or global; The degree of public/private provision o f the various types of port services (cargo handling, towage, pilotage, waste management, services to passengers, etc.); The ownership of the specific types of infrastructure (port land, infrastructure, superstructure and equipment, and within these categories, cranes, docks, quays, etc.); and The regulation concerning dock labour and management. The types of model that can be referred to a port is relevant in determining the investment responsibilities. A very general definition of the investment responsibilities in the four main port models is given by the World Bank (2001) in the following table.
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Table 3: Port investment responsibilities in port models - basic definition

Infrastructure Public Service port Tool Port Landlord Port Private Service port Public Public Public Private Superstructure and Equipment Public Public Private Private Operations and port labour Public Private Private Private
Source: 3.2.1 Service ports
World Bank (2001)
Service ports are under the complete control, administration and operation either of a private company or of public authorities. Under the service port model, the port authority (that in the case of private service port is a private body) offers all the services required for the functioning of the port. The port owns and operates the completeness of port assets including equipment and the port workers are employed generally by the port authority. In service ports also the operations of cargo-handling activities fall in the scope of the body administering the port sometimes by means of a separated company. Public Service ports are a part of the Ministry of Transport (or Marine etc, according to the definition it assumes in the different countries). The administration of the port is performed according to the standards of public administration, so that the managing director, and all the other personnel are civil servants. The public cargo handling companies usually report to the same Ministry as the Port Authority. The coexistence of al different public companies, sometimes with different objectives but reporting to the same authority, the Ministry in this case, is a serious challenge (World Bank, 2001). Public service ports are not so common anymore. Typical examples were the ports in the former Soviet Union and the port of Singapore until 1996. Cases of public service ports remain in Asia and in the Caribbean (Jamaica, Cuba). Private service ports on the other side are fully privatised ports. In fully privatised ports the State is no longer involved in the port sector. Land, Infrastructure, superstructure and equipment are also privately owned. In addition some governments have simultaneously transferred also their regulatory/promotional functions to private companies (World Bank, 2001). Private service ports are limited in number, and can be found in Europe mainly in the United Kingdom or next to other models. Privatised ports are present in Latin America, New Zeeland and in Asia. 3.2.2 Tool ports
In the tool port model, the Port Authority owns, develops and maintains the port infrastructure as well as the superstructure, including cargo-handling equipment
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such as quay cranes, forklift trucks, etc. Port Authority staff usually operates all Port Authority owned equipment (World Bank, 2001). The cargo handling operations are generally carried out by private cargo-handling firms, hired under contract when required and under licence of the port authority. A typical example are the Ports Autonomes in France, where container terminals are managed and operated as a tool port, even if in certain cases the operator has been made responsible for the investment in equipment. But other examples exist in some Chinese ports, the ports of Seattle and some Canadian ports, even if there is the tendency of moving towards the landlord port model (World Bank, 2001). In general tool ports are considered to be inefficient for the fact that terminal operators are not allowed to adapt their operating equipment to their working needs. The above-mentioned division of tasks within the tool port system clearly identifies the essential problem with this type of port management model: split operational responsibilities. Whereas the Port Authority owns and operates the cargo handling equipment, the private cargo-handling firm usually signs the cargo-handling contract with the ship owner or cargo owner. The cargo-handling firm however, is not able to fully control the cargo handling operations itself. (World Bank, 2001: Mod 3, pg. 18). In the tool ports land, infrastructure, superstructure and equipment are made available by the port authority to cargo-handling companies. Cargo-handling companies in the tool port tend to be small with an almost entirely variable cost structure. The cost of under-utilization of port facilities is absorbed by the port authority, thus reducing the risk for the cargo handling company. In general, the reduced capitalisation of the cargo-handling has impeded them to expand other the borders of the port in which they were operating and has largely compromised their efficiency (World Bank, 2001). 3.2.3 Landlord Ports
In the landlord port private and public interests coexist. The landlord port today is the dominant port model in large- and medium-size ports, and is the most diffused in Europe. Under the landlord port model the majority of port operations and value added services are entrusted to private operators, while the port authority is responsible only as a regulatory body and as the effective owner of the infrastructure and land (World Bank, 2001). Infrastructure and land are leased to private companies responsible for operations and to port industries such as refineries and chemical industries for a fixed period of time, for which on a yearly basis a fixed sum is paid to the port authority. The lease fee is often related to the costs of the assets leased. The port operators on the other hand have to provide and maintain the superstructure and equipment on the terminal grounds (World Bank, 2001). In the case of landlord ports, dockworkers are freely employed by the terminal operators, even if in some ports, such as in the Italian case right after the reform, workers from reserves or pools have priority and certain employment constraints still exist (World Bank, 2001).
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3.3
3.3.1
Port models and investment responsibilities in Europe

Overview of port models adopted in Europe
Europe shows a wide range of port management and institutional frameworks. We can analyse European ports on the basis of five fundamental characteristics: Institutional models, Ownership of assets, Financial resources Port activities and. The ATENCO project of the European Commission (2002a) provides an analysis of the operational and private investment structures of the major European Ports. The ATENCO report, which focused only on the analysis of the 15 EU countries at that time, has been extended and updated with various sources to include also other European countries, i.e. the other new accession countries and some others, and to reflect the changes intervened in the port institutional models 1. From the following table is can be observed that the majority of European countries present various port models. In some cases different port models coexist in the same country in different ports. In addition many countries are in a phase of transition from a port model to another or have recently engaged in port reforms that have not yet been completely implemented. As far as ownership of port infrastructure is concerned it can be observed that in the majority of European ports the infrastructure is publicly owned. The most notable exception is the United Kingdom, where a large number of ports (80 per cent) is privately owned. Cases of privately owned ports also exist in the other European countries, namely the Netherlands, Denmark, Greece.
See Annex 3 for the various European country profiles.
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Table 4: Institutional models in European Countries (including Bulgaria, and Rumania)

Infrastructure Investment responsibility
Public Public Public Public/Private Public Public Public Public Public Public Public Public Public Public Public/Private Public Public Public Public Public Public Public Private
Ownership
Financial Resources
Tool Port
Country
Belgium Cyprus Bulgaria Denmark Estonia Finland France Germany Greece Ireland Italy Latvia Lithuania Malta Netherlands Poland Portugal Rumania Slovenia Spain Sweden Turkey United Kingdom
Landlord Port Private Port
Public Public Public Public/Private Public Public Public Public Public/Private Public Public Public Public Public Public/Private Public Public Public Public Public Public Public Public/Private
Public/Private Public Public/Private Public/Private Public/Private Public/Private Public Public/Private Public Public/Private Public Public Public Public Public/Private Public/Private Public/Private Public Public Public Public/Private Public Private
Private Public Private Private Private Private Private Private Public Private Private Private Private Private Private Private Private Private Public Public Private Private Private
Source:
Elaboration of the author on the basis of various sources
In the majority of European ports, port operations are the responsibility of the private sector. Also the countries in whose ports the responsibility of port operations was of the public sector, i.e. France, Spain, Greece, Cyprus, Slovenia, etc. have implemented reforms aiming at involving the private sector more deeply. 3.3.2 Port investment responsibilities
When analysing the issue of port and terminal finance in Europe, the first consideration to be done is that given the fact that there are no uniform port organisations at European level (European Commission, 2002a), also the degree of public involvement in financing and building of port infrastructures is different all over Europe. The degree of private sector participation in the field of port financing varies depending on the hosting country, the dimension of the port and the type and entity of the investment concerned. There may be significant differences also within the same country or within the same port. As a consequence it is very difficult to assess who finances what in the port sector. Also the attempt of the European Commission
20
Port operations
Institutional Model Public Port
(1997; 2001a; 2001b) to measure the public sector participation in port investment did not produce noticeable advances. As a first step it is important to distinguish between investment responsibilities and the origin of financial resources. As far as the origin o f financial resources is concerned, following the European Commission (2002c ) approach it is possible to differentiate between ports that finance infrastructures through state resources, and ports that finance infrastructures on the basis of their own revenues. Even if they present substantial differences the ports in the former group finance most or all port infrastructure publicly, generally through federal, regional or local budgets, while ports in the latter group are structured as separate and fully commercial entities, and have to finance their entire infrastructure from their revenues (European Commission, 2002a). This second group of ports includes fully privatised ports. By investment responsibility it is meant the individuation of the institution that is in charge for the port investment. These institutions can be governments, port authorities, local authorities (municipalities, lnder, provinces, etc) or private operators. The subdivision of investment responsibility depends on the type of asset concerned and in a large number of ports investments are made as a jointly efforts of various institutions. An additional difficulty is represented also by the ambiguous nature of the port authority, which in some ports is a private company or is responsible for activities that in other ports are performed by private operators (European Commission, 2002). The variegated nature of port investment allows the coexistence of different methods of financing in the same port. This fact, in addition to the reforms taking place in ports and their often complex organizational structures make it more difficult to individuate the entity responsible for financing of port assets. From the analysis of the European port sector two major models in the financing of port assets have emerged (Notteboom and Narayana Murthy, 2001) The public ownership and private operation (POPO) And the private ownership and operation (POO). The POPO model entails the public provision of port infrastructure that are given to the private sector on the base of a leasehold/concession agreement. In general it can be observed that with the exception of the countries that have entirely privatised their port assets, in those European ports that have implemented a landlord model Governments are still deeply involved in the financing of the majority of port assets. The POO model on the other side entails that the private sector is responsible also of the construction/financing of the port infrastructure. These ports necessarily have to apply some sort of cost recovery pricing in order to raise their own finance (European Commission, 2002a). In Europe, the majority of ports make use of POPO models. Cases of POO models can be found in the UK, Denmark, the Netherlands and Greece.
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Terminal Investment
When discussing terminal investment financing strategies and the degree of private sector involvement in terminal infrastructure it is often argued that terminal infrastructure should not be privately financed because it shows public good characteristics. If some port general investments, such as defence and access infrastructure, can be classified as public goods, this is not always the case with terminals. The description of the characteristics of container terminals is important in determining the feasibility of the private sector involvement in the terminal infrastructure financing. In fact public good characteristics in general increase the difficulties for private sector financing. Another aspect that is relevant in the evaluation of the attractiveness of terminal investment is risk. Container terminals present some specific risk aspects that should be taken into consideration when determining the degree of involvement of the private sector achievable in financing terminal infrastructure. The main questions that this chapter will try to answer are: What are the characteristics of terminal investment? Is terminal infrastructure a public good? What are the main elements that generate risk in port and container terminal investments? Is this risk substantial and how can it be reduced?
4.1
4.1.1
Terminal Investment
Investment in infrastructure in general
According to Nijkamp et al. (2000, as cited in Wiegmans et al. 2002), transport infrastructure can be defined as those immovable estate provisions, which increase efficiency in the use of factors of production. Infrastructure is directly used in the provision of services or in the production process, it is a capital good and it has some characteristics of a public good2. Transport infrastructure presents the following characteristics: long economic life and few alternative uses (Banister and Berechman, 2000). In particular when an investment in infrastructure is made it is possible that the infrastructure will last for a long period, even if not profitable or not required anymore. An investment in infrastructure is irreversible because once the construction has started the abandonment of the project would generate large losses. large amount of capital. Infrastructure investment generally requires large amount of capital. These charac teristics jointly with long waiting period prior to starting operations and long construction period make infrastructure investment
2
A public good is defined economically by the two characteristics of non-excludability and non-rivalness. Non-excludability means it is prohibitively expensive to stop someone from using the infrastructure even though they do not pay for it. The fact that infrastructure is non-excludable makes it very difficult for a private provider to charge beneficiaries for it. When a business cannot charge a price, it cannot cover costs, so the good or service will not be supplied by businesses. Non-rivalry means that consumption by one does not diminish the supply available for others. Infrastructure is non-rival up to a point in which congestion is generated (Case and Fair, 2004).
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not appealing for financial institutions such as commercial banks (Wiegmans et al. 2002). The difficulty in balancing supply and demand and lumpy investment. Difficulties in balancing supply and demand are originated because infrastructure investment can be done only by large chunks and generally the expansion of capacity is not readily available when required (Strong, 2004) The demand for infrastructure is a derived demand. In general infrastructure is not required per se but as a facilitator of the transport service. In general transport and logistics decisions are taken irrespectively of the cost of infrastructure, as the unit cost of infrastructure is relatively small with respect to total transport cost. Infrastructure is just expected to be available when required (Strong, 2004). Uniqueness of each infrastructure project. Each infrastructure project is unique as it is characterised by specific technical, geographic, social, environmental etc. conditions (Wiegmans et al. 2002). These conditions make it difficult to adequately determine market demand or construction costs. Low level of operational (variable) costs. In general, even if maintenance and labour costs for operating the infrastructure may be present, they are always relatively low if compared with the capital costs. High capital costs and low variable costs make it difficult to price infrastructure use. In fact if on the one side short-run marginal cost pricing would be optimal, on the other it does not allow a satisfactory return on investment (Wiegmans et al. 2002). Economies of scale. Many types of infrastructure are subjected to economies of scale. Economies of scale entail that once the infrastructure is provided, the marginal cost of using the infrastructure is negligible and thus it is increasingly profitable to intensify the use of the infrastructure up to the level in which congestion is generated (Strong, 2004). Network economies. Many types of infrastructure are of little use if not rightly connected in a network. The existence of a network makes the financing of many projects more difficult, on the one side in fact, it is necessary for the large cost requirements to break infrastructure projects in well defined (smaller) investments, on the other side there is always the risk that the infrastructure network will not be wholly provided (Strong, 2004).
These characteristics raise substantial economic issues when dealing with transport infrastructure. Firstly it is extremely difficult to attract public investors in the financing of infrastructure. The existence of network economies, high capital costs, and in general also the large public interest and a legacy of public provision, make transport infrastructure particularly unattractive for private investors (Strong, 2004). Secondly the fact that below maximum capacity, optimal price setting, i.e. marginal cost equal to marginal revenue, may result in a loss, has been used as a reason for public sector involvement in transport infrastructure investment financing (Nijkamp and Rienstra, 1995, as cited in Wiegmans et al. 2002). The latter point may be explained with the use of a simple graph (see Figure 2 in the next page). At traffic level q, optimal price setting causes the project to generate a loss (p1p2BA), and in general there is no price in which the project is profitable (demand curve is always below average total cost curve) (Wiegmans et al. 2004).
23
Generally this element is used as a raison d'tre for public sector provision or subsidisation of the infrastructure. A public subsidy in fact would lower the average total cost (at the expenses of society) making the provision of infrastructure economically viable (Figure 3).
Price Average total costs
p2 p1
Marginal revenues O q Volume of transport
Figure 2: Average total cost curve aways above average revenues
Source:
Average total costs
Wiegmans et al. (2002).
p1
Price
p2
Marginal revenues O q Volume of transport
Figure 3: Average total cost curve not always above average revenues
Source:
Wiegmans et al. (2002) adapted.
24
An additional element that should be considered when dealing with transport infrastructure is the usually high level of risk3 involved in these types of investments. In general high risk levels are a disincentive for private investors and the public sector may increase the attractiveness for the private parties by sharing-risk agreements, such as guarantees of subsidy if the project turns out not to be profitable or of minimum profit ratio (Wiegmans et al. 2002). The attempts of the European Commission to incentive Public-Private partnerships in this respect are quite illustrative (European Commission, 2004; European Commission, 2001d). Given these considerations, government intervention in transport infrastructure is still substantial and the market for infrastructure is far from being considered as perfectly competitive (Wiegmans et al. 2002). Nevertheless it should be noted that certain types of infrastructure have succeeded more than other in attracting the private sector, among which certainly roads with Design Build Finance and Maintain (DBFM) arrangements and seaports. Some types of port assets show those characteristics that would require in theory public provision. In the case of ports in fact until recent the investment responsibilities have fallen entirely in the public sector scope (Haralambides, 2002). In reality it can be argued that not all investments in a port show these characteristics, and as a matter of fact different ways of involving the private sector have been used. It can be interesting to briefly view these mechanisms in relation to the types of assets that can be found in a port. We can divide port assets in four categories (World bank, 2001): Port Basic Infrastructure: It includes long-term, high cost infrastructure like breakwaters, channels and turning basins. For this types of assets charges for incremental use can only be assigned arbitrarily to individual users, since the marginal benefit derived from using this common infrastructure significantly outweighs the marginal cost of replacing it (Farrell, 1999). Consequently a charge schedule developed by a private developer and based on user benefits could result in monopoly profits and less use than was economically desirable. Operational Port Infrastructure: it includes long-term, high cost assets like quays and terminals, whose incremental use can be meaningfully assigned to users and whose marginal cost and marginal benefit can be balanced through a number of price regulation regimes or intra-port competition (World Bank, 2001). Port Superstructure: it includes port assets such as paving, warehouses and offices whose use is closely associated with specific users and specific service delivery systems. On-dock storage and transhipment facilities can be awarded through competition and assigned to their most productive use through open tender. Port Equipment: port assets also include long-term equipment dedicated to a specific users and specific service delivery systems. Equipment is a mobile asset and can be competitively provided and easily reused.
The issue of risk wil be dealt with in more detail in paragraph 4.2.
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Table 5: Port assets classification

1. Basic Port Infrastructure: maritime access channels port entrance protective works including breakwaters, shore protection sea locks access to the port for inland transport (roads, tunnels, etc.) rail connection between the hinterland and the port inland waterways within the port area. inner port channels, turning and port basins 2. Operational Port Infrastructure: terminals quay walls, jetties and finger piers aids to navigation, buoys and beacons VTMS docks port land (excluding superstructure and paving) access roads to general road infrastructure rail connection to general rail infrastructure, marshalling yards roads, tunnels, bridges, locks in the port area
3. Port superstructure: paving, surfacing terminal lighting parking areas sheds, warehouses and stacking areas tank farms and silos offices repair shops other buildings required for terminal operations.
4. Port equipment: Tugs line handling vessels dredging equipment ship/shore handling equipment cargo handling equipment (apron and terminal).
Source:
World bank (2001)
In principle all the four categories of assets can be provided or maintained by the private sector (Farrell, 1999). However, from the perspective of private investors, the first category involves the greatest risk and has the longest payback. In addition private investors are prepared to make larger investments only when they are awarded a certain degree of independency in setting prices. In the case of basic infrastructure, generally the public sector imposes price constraints and price schedules have to be approved in advance (Farrell, 1999). The assets in the first category are those that present the most remarkable characteristics of public goods and for this reason the funding of long-lived, high cost infrastructure generally remains in the public sector and is eventually charged back to users in various indirect ways (van der Veer, 2001). On the other side port equipment and superstructure can be easily financed by the private sector because they entail relatively smaller investment, are more easily tradable, are connected directly to user and the service for which they are required in final analysis presents the lowest risk (Farrell, 2004). It is clear that the in the second category we have goods that present (semi-) public goods characteristics thus falling somehow in between. The practice for financing of
26
this type of port assets has preferred the public sector provision, at least for historical reasons. Nevertheless in many countries the private sector has been (partially) made responsible for the full financing also of this types of assets (van der Veer, 2001). It should be clear that container terminal assets do not fall in the first category. The aim of this chapter is to argue that in the case of terminals no substantial obstacles exist from the nature of the assets themselves that prevent private financing. In order to sustain this argument though a more detailed analysis of the characteristics of the investment in container terminals is required. 4.1.2 Terminal assets
Terminal assets investment comprise (Drewry, 2002): Terminal Equipment, that includes gantry cranes, straddle carriers, quay cranes, spreaders, work lifts, forklifts, working vehicles, etc. Terminal Superstructure that includes, paving, terminal buildings, railways, gates, fencing, etc. Operational Terminal Infrastructure, that includes: terminal inner channel, roads to the terminal area, quay walls, jetties and finger piers docks, etc.4 In practice, terminal equipment and superstructure, given their dependency on the operational choices of the terminal operator are provided by the terminal operator, that in the landlord model is a private company (World Bank, 2001). Operational terminal infrastructure is still laying somewhere in between. The responsibility (and the ownership) for this portion of assets varies between the public sector and the private sector in different proportions depending on the country, the port, the time in which the investment have been decided and the specificities of the terminal concerned (World Bank, 2001). The provision of terminal assets takes place in the context of different terminal investments that present substantial differences: Greenfield Projects, adaptation/modernisation of existing terminals and lease of an operational terminal. Greenfield projects include those terminal investments that are to be created in undeveloped sites from scratch, adaptation/modernisation of terminals generally entails only the adaptation of the superstructure to the new exigencies of the container terminal operator, while lease only entails the acquisition of the necessary equipment (Horton, 2001). Greenfield projects generally are built entirely by the public sector or by means of Public Private Partnerships as consequence of the relatively higher risk they involve, while the adaptation/modernisation type of investment in Europe is still limited and many port authorities generally prefer to adapt/modernise the terminal themselves and lease it when fully operational. In the case of the lease of an operational terminal, the type of investment required from the private sector is limited at maximum to equipment or marginal superstructure intervention, and generally is far
To this typology some authors also add ICT infrastructure, but for the rest of the thesis it will be considered as equipment.
27
less riskier that Greenfield projects and adaptation/modernization of existing terminal (Horton, 2001). Only container terminal infrastructures financing in Greenfield projects and maintenance or rehabilitation of the infrastructure in the case of adaptation or modernisation of terminals fall in the scope of the thesis, because in Europe in the other cases (superstructure and equipment) in practice the private sector is generally already responsible for the provision of the financing of the investment. 4.1.3 Is a container terminal a public good?
Till now the characteristics of transport infrastructures have been descried and the major reasons for which they are provided by the public sector have been given. The previous chapter has also limited the scope of the analysis to container terminal infrastructure investment. The remaining of the chapter will try to review the main issues concerning terminal infrastructure in order to determine for what reason they are still publicly financed. First of all it should be assessed if container terminals respond to the definition of public goods. According to general economic theory public goods are defined by the characteristics of non-excludability and non-rivalry (Case and Fair, 2004). In the case of terminals non-excludability would mean that it is prohibitively expensive to stop someone from using the terminal even though they do not pay for it. As business practice shows container terminals are well far from being non-excludable good. Non-rivalry entails that consumption by one does not diminish the supply available for others (Case and Fair, 2004). Infrastructure is non-rival up to a point in which congestion is generated (Strong, 2004). This makes terminals a semi-public good (van der Laan et al, 2001). In general in fact a terminal is a non-rival good, as its use by one user does not prevent its use from another user. But this is true when the terminal is operating below full capacity. It has been assessed in general that excess capacity is a common phenomenon in container terminals (Haralambides, 2002). Excess capacity in container terminals is an operational necessity, because it is the only way to guarantee quick turnaround times to ships (Haralambides, 2002). The requirement for excess capacity is made more urgent by some of the tendencies outlined in the second chapter, especially the increasing use of large container ships and the growing competition among container ports (Haralambides, 2002). The presence of excess capacity tends to make then container terminals increasingly a public good. In reality the issue of container terminals being a public good can be used as starting point in analysing some specific characteristics of container terminal. But what do these characteristics entail? 4.1.4 Container terminals characteristics and private financing
The container terminal business presents specific investment characteristics that constitute the main reason for which container terminals are still largely financed by the public sector. The most important aspects of investment in container terminals are related to:
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Container is extremely mobile (foot-loose). It is relatively easy for shipping lines to relocate their traffics in a different container terminal if the conditions of services and price are not met by the operator or the port authority. This element increases competition dramatically among terminal operators. Because common-user container terminals have to face the risk that their major client might move to a more attractive location, they are in a way dependent on the requests of shipping lines (Slack, 1998). In general shipping lines are mostly concerned about quick turnaround times, so that this aspect contributes to the already substantial excess capacity in the sector (Haralmabides, 2002). Relevance of the infrastructure. In the case of terminals, the quality of the infrastructure provided can be determinant in attracting certain customers. Some shipping-lines may have specific requirements in terms of terminal draft, handling times, landside infrastructure. This element has the effect that in order to accommodate the requirements of shipping lines and terminal operators, that can both be powerful lobbyists, and to maintain their market shares, public authorities are under pressure in investing large quantities of public monies in terminal investment. Leasehold concessions are the most used type of agreement. In general in Europe, terminals have been transferred to private sector as leasehold concessions rather than private installations, this has in general limited the scope of the private sector in expanding directly terminal infrastructure (Farrell, 1999). As long as terminals are leased, the private sector is more reluctant to invest its own resource in the terminal infrastructure, as he knows it is anyway provided publicly. It could be argued that terminal operators pay leases for the use of the terminal infrastructure. However, lease fees are set on the basis of market considerations, rarely entail a component related to the cost o f the infrastructure provided, and in general would not be sufficient to recover the high costs of terminal infrastructure. Trends towards bigger ships. As previously mentioned, the development of larger vessels and the consolidation of the hub-and-spoke model, may lead to the concentration of long-haul traffics on specific ports, thus jeopardizing the possibilities of development or the returns on investments on those ports that did not manage to keep up with their infrastructure provision. This tendency in larger ship deployment increases the need of excess capacity in ports. Haralambides (2002) argues that this is due to the limited availability of cargo handling equipment that can operate on a ship at the same time. Other things been equal, the utilisation of larger vessels requires more excess capacity in ports (Haralambides, 2002: 332). Excess capacity is used as a form of limit pricing5. Many ports develop excess capacity in order to make it more difficult for new competitions to enter the market. I n general these policies are sustained by public authorities because they allow the port to maintain its (dominant) market position (Haralambides, 2002). It should be noted that in many cases these ports are the strongest
Limit pricing is a form of strategic behaviour that entails the rising of costs in the industry in order to make new firm entrance unprofitable. (Haralambides, 2002)
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supporters of cost recovery practices (that do not consider existing assets). Full cost recovery in fact raises the average cost curves of the new entrant above marginal revenue making its entrance in the market unprofitable (Haralambides, 2002). These characteristics, especially increasing competition and excess capacity, jointly tend to lower terminal prices at marginal cost, not allowing full cost recovery (Haralambides, 2002) and thus often requiring public support in order to sustain the port traffics. On the other side, the container terminal industry is also subjected to trends of concentration among terminal operators that facilitate terminal investment from the private operator side. Shipping lines responsiveness to quality of services more than to price. Given the decrease in the number of deep-see ports due to the increase in vessel size and the request by shipping lines and shippers for more frequent services and faster transit times (Farrell, 1999), shipping lines have become more vulnerable to inefficiencies and are imposing higher pressure on terminal operators and port authorities. The regularity of services that is required by shipping lines, make them extremely responsive to levels of services more than price (Farrell, 1999). This element reduces the incentive of container t erminals to compete on the basis of price, thus allowing terminals not necessarily to price at the marginal cost level (and eventually make losses). Trends towards concentration. The terminal business is increasingly becoming an internationally concentrated business, where large terminal operators are becoming leaders in the sector. This factor allows terminal operators to sustain larger investment projects and to invest larger sums in maintaining their market shares. The emergence of dedicated container terminals. Many shipping lines are more and more often considering engaging directly in terminal management by the use of dedicated container terminals (DCT) as DCTs offer carriers greater flexibility and reliability, shorter turnaround times, and higher efficiency in terms of supply chain management (Haralambides, et al. 2002). This characteristic tend to reduce competition among ports, as the shipping line that is committed with a dedicated container terminal, will less easily transfer all its traffic to another port. High capital costs make ports support only one operator. Even if the market could be able to support more than one single operator, many ports are unwilling to invest additional capital just to promote another port operator. This may generate collusion in the way the market is shared (Farrell, 1999), thus allowing terminal operators to make profits. Peak problems. The concentration of container traffic in fewer locations, in combination with higher transhipment traffics, has generated peaking problems and increased the amount of investment required in new terminals. Port authorities are then trying to commit shipping lines to their terminals, by means for example of agreements, dedicated terminals concessions and participation in terminal infrastructure investments. This element in general may reduce competition among terminals on the exclusive basis of price and allows new
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private capitals (those of shipping lines) to be invested in container terminals (Farrell, 1999). This brief overview has shown that forecasting the balance of responsibilities between the public and the private sector in container terminal financing is not straightforward. From the discussion two distinctive trends can be individuated, on the one side increasing competition and the need of excess capacity tend to lower revenues below average costs and reduce the profitability of container terminals, on the other side, there is a distinctive tendency towards concentration of terminal operators that may increase the profitability of container terminals.
4.2
4.2.1
Risk and terminal infrastructure

General issues
The term risk is often used to refer to the volatility of returns around an average or expected return. In this sense risk is equivalent to the statistical concept of variance, and a project risk can increase without any change in expected (or mean) return of the project. Investors who are risk neutral would be indifferent to risk in this sense, and risk of this sort can be effectively eliminated by diversification if it is not systematic (Ross et al. 1999). When discussing project finance, risk frequently refers to the ways in which actual results may be worse than planned. Here the benchmark is not the expected return of the project but the (generally higher) return that investors would receive if everything went according to the plan. An increase in risk in this sense, not only increases the volatility of returns, but also reduces the expected return (Finnerty, 1996). Diversification cannot eliminate this risk; it can only spread the loss among many people. In the remaining the term risk will be used in the sense of variance or volatility around a statistically expected outcome. The risk in the latter definition is treated as the volatility generated by the uncertainty over the event of actual results being worse than planned (Irwin et al. 1997). 4.2.2 Risk in container terminals
Container terminal infrastructure possesses some characteristics that are determinant in the assessment of the risk of an investment in container terminal infrastructure. The risk aspects and issues are summarized in the following table. Given the characteristics of terminal infrastructure, in such investments the flow of revenues begins sometimes many years after the initial investment. In addition, the extreme volatility of container business, associated with the rapid changes taking place in the sector, increase uncertainty (and thus risk) compared to alternative investment options (Wiegmans, et al. 2002). Many have argued (Farrell, 1999; Wiegmans et al. 2002), that in the end the balance between the factors enhancing risk and reducing risk is in favour of the investment in container terminal. The problem refers to the question if container terminals present higher risks with respect to other types of investment. Terminals as a matter of facts present still minor risks with respect to other transport infrastructure (Wiegmans et al. 2002). In order to substantiate this statement it is essential to identify, the types of risks involved in container terminals and determine
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adequate measures of risk reductions and sharing. The issue of risk allocation is also relevant as in many cases, governments (or their local agencies) bear types of risks that for their typology and their entity could be easily be born by the private sector, thus automatically granting risk premiums (Irwin et al. 1997). It will be clear, from the end of this paragraph, that the risk in container terminals is mostly limited to market risk and can be effectively reduced by market mechanisms. Before describing the types of risks that an investor has to face when investing in a container terminal, it is interesting to briefly review the factors that are influencing the general risk profile in terminal investments. These factors are summarised in the following table.
Table 6: Factors that influence risk in container terminals
Factors that amplify risk Container industry is foot-loose Large dependency on the PA regulatory framework Increasing competition among ports Increasing vessel size Assets immovability Dependency on the complementary port investments Large capital expenses Local community Interests Environmental aspects Factors that reduce risk Public Subsidy Increase operators in concentration of terminal
Increasing vessel size Mobility of assets Possibility to increase productivity
Local community Interests
Source:
Elaboration of the Author.
Among the issues that are increasing risk in terminals local community interests and environmental aspects should be noted. Many container terminal projects have been delayed because of the opposition of the inhabitants of the surrounding communities. The case of the protest of the inhabitants of the village of Oostvoorne against the Maasvlakte 2 on the basis of landscape conservation arguments is quite illustrative with this respect. Environmental concerns can also influence substantially the feasibility of a project. With this respect the case of the Hessenatie terminal in Antwerp and the protection of the local birds is particularly evocative. Among the factors that reduce risk in terminals some specifications are required. The increasing vessel size may have divergent effects. In fact if on the one side it increases the requirements of excess capacity (Haralambides, 2002) on the other side, it increases the dependency of the shipping lines on efficient terminals, thus reducing their ability to move operations rapidly to other ports. As far as the local community interest are concerned, they also may reduce risk in the sense that local communities (municipalities, etc) may be willing to maintain a container terminal in the port for reasons of employment, prestige, sustain port traffics, etc. This is an additional source of financial support. A large part of
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subsidies to container terminals in fact comes from local authorities more than from central governments (Farrell, 2004). 4.2.3 Major types of risk
Political and regulatory risk This type of risk is related to the possible changes in the government policy while the project is underway. Political and regulatory risk includes (Irwin et al., 1997): Changes in the port labour requirements regulation that may include changes in working permits requirements, requirements to employ workers from specific pools/organization, safety measures; Increases in taxes and royalties; Shift of responsibilities from the public to the private sector that will entail changes in the risk sharing (by means of public participation in management for example) that increase the private share of risk; Changes in the requirements of currency denomination of revenues it has been a common practice in many Asian terminals, exposing the revenues to currency risks; Forced government participation in shareholding that modifies the balance of responsibilities and decision power. Construction risk - This is the risk deriving from the possibility that cost overruns will hinder the project completion, postponing it or making the terminal unfeasible. Container terminal are designed according to well-established international standards, and thus construction risk is generally lower than for other types of infrastructure. A construction risk assessment is in any case advisable as project lenders are generally reluctant to assume construction risk and require guarantees from the sponsors until the terminal is fully operational (Irwin et al., 1997). Market risk This type of risk may vary substantially from project to project. In general transhipment terminals built in advance in the attempt to capture demand expansions or terminal investments intended only to boost industrial development in the regions are exposed to large market risk (Drewry, 1998). Major factors affecting market risks are (Drewry, 1998): The growth rate of container trades in the routes involving the port other things being equal, trade growth rates in excess of 10% per annum are suggested to identify low-risk ports; The policies of the neighbouring ports, in terms of favouring or delaying the development of additional facilities; The percentage of future traffics generated by the proximity of the port (approximately up to 150km); The degree of competition from the neighbouring ports in terms of physical facilities and tariffs. Other types of risk Environmental risk. Environmental risk is generally low in terminal investments. The main sources of risk are issues concerning the preservation of wetland and animal habitats and the dumping of dredging rests, but in general these issues are dealt with in the design phases (Drewry, 1998).
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Exchange rate risk. Exchange rate risk reflects the sensitivity of the projects value to unexpected movements in the exchange rate (Irwin et al., 1997). In the case of terminals part of the equipment is often imported and much of the investment may be funded outside the country, while in principle revenues are collected in local currency. In general though, many terminals denominate their tariffs in US dollars and adapt the local currency tariff to exchange rate fluctuations (Drewry, 1998). Interest rate risk. The interest rate risk refers to the uncertainty over the determination of benchmark interest rates. In general it can be decomposed in inflation rate risk and real interest rate risk. Interest rate risk and exchange rate risk are closely linked because of the possibility for investors to substitute foreign and local assets. Generally the softer is the currency and the higher is the interest rate. Also interest rate risk can be reduced by denominating tariffs in US dollars (Irwin et al., 1997). Over-borrowing. Drewry (1998) identifies over-borrowing risk as the type of risk deriving from the possibility to improve financial ratios by increasing the percentage of debt over equity. In general this procedure increases the return on equity. 4.2.4 Due diligence issues and risk mitigation
Before considering how to allocate container terminal infrastructure risk optimally among the public and the private sector, risk should be well identified and reduced in general. In this respect the phase in which the project is examined and questioned is essential. Drewry (1998: 28) provides a due diligence checklist that can be useful in identifying and minimizing the terminal risk. The issues to be investigated can be grouped in the following categories: Country The evaluation of the country will have to include the government and political stability, the existence of a legal framework, the international currency conversions regulations, the stage of development of economy. Government Port Policy The analysis should investigate issues such as the tariff regime regulation, the investment government policy and the investment requirements. Shareholders It should investigate the possibilities the partners involved in the terminal investments have to mitigate risk and their possibilities for finance. Competition The issue of competition among ports can be investigated by analysing the hinterland extension of the port, its (expected) percentage of transhipment, the characteristics of the operating parties, and the characteristics of the port equipment. Civil works costs The analysis should include the identification of who is bearing the risk of cost overruns, the characteristics of cost estimations and their adherence to international standards as well as the accuracy of the cost and technical specifications. Equipment costs The issues to be analysed will have to include for example the reliability of equipment suppliers and the accuracy of equipment needs previsions. Human resources It is essential to have an understanding of the agreements with the public sector as far as employment is concerned. In many cases in fact
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there might be employment obligations as far as hiring people from specific groups, or the prescription to employ people of different nationalities. Market place The issues to be considered are the structure of the ancillary services required for a successful container terminal, such as freight forwarders, ship owners, shippers, etc. In addition it may be possible to obtain long-term contracts with some of these parties. Trade Market projections on the growth of the trade in container, on the percentages of the containerised cargo, and in general the cargo specifications, the types of ships that berth in the ports (full cellular or multipurpose vessels) are all aspects that should be carefully investigated. Customs The issues under the category customs include the analysis of impact customs operations have on the terminal. Navigation The impact of the navigation service conditions, such as the harbour dues, the availability of tugs, pilots etc., and the security requirements of these services, are important aspects for the terminal. Local accounting requirements Further issues to be investigated are tax regime, the corporate structures and the local accounting requirements. Operating costs It should be analysed if the level of wages is consistent with the country waterfront average remuneration, if there are requirements for travel, housing or shift allowances, if the cost of utilities are consistent with the local one, if there is the risk of increase and if they are subsidized. Exit strategies Entails the assessment of the possibility that the sponsors will abandon the project and the eventual penalties they would have to pay if they sell down all or part of their shares. Optimal allocation of risk between the public and the private sector
4.2.5
Investors in container terminal infrastructure in general have usually not been willing to bear the risks of the projects alone, and have demanded the government to assume some of the risk. Although the size of the risk borne by governments is difficult to be quantified, governments bear various types of risks, including demand risk, payment risks, exchange risks, and political and regulatory risk, sometimes involuntarily (Irwin et al., 1997). At least in continental Europe, if on the one side the involvement of the private sector in the finance of container terminals has increased, the public sector has remained the major risk bearer (Farrell, 2004). The major issue in involving the private sector in terminal infrastructure concerns the sharing of risk. General financial theory states that risk should be allocated to agent who can best control the risky outcome and to agents who can bear the risk at the lowest cost (Irwin et al., 1997: 9). These two alternatives often push into different directions, as sometimes the party that has better control over the risky outcome may not be in the best position to bear the risk. In this case the various costs and benefits must be weighted against each other. The transaction costs of any allocation must also be considered (Irwin et al., 1997). In the case of container terminals in general a universal framework for risk allocation is difficult to be given, as it is fundamentally dependent on the type of investment,
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the country, the market characteristics, regulation etc. But in general we can argue, on the base of Drewry (1998) and Irwin et al.(1997) that: Political risk should in principle be borne by the public sector. As a matter of fact the government may dispose guarantees and commitments to mitigate political risk. In the case of traditional political risk, referring to expropriation, currency inconvertibility and non-transferability, the main issue is how to find a credible way for the government to commit. It should be noted though that in the case of container terminals this issue is marginal (Irwin et al. 1997). Regulatory risk can only be borne by the private sector. The main issue in this case is if it is reasonable for the government to commit itself not to change the rules and regulations of the project. The solution seems to be dependent on case to case and in general countries that have a better reputation of treating investors better can adopt more flexible approaches (Irwin et al. 1997). Completion and in general construction risks should not be borne by the government. This is because in general the private parties have a better control over the construction than the government. Market risk generally imposes a more complex series of questions. In the container terminal business the government can influence some of the factors that affect demand such as port dues, general port infrastructures, custom policies, land transport network. But the government is only one of the influences and government guaranteed demand creates incentives problems. If the demand risk is borne by the government, there is the risk of not screening projects carefully thus incurring in the construction of terminals in the wrong place. A possible solution is terminal concession terms varying with demand. If demand is higher than expected the concession will be shorter, if demand is lower than expected the concession will be longer. This method reduces the variance of the investors profits (Engel et al. 1997). Environmental risk in the case of container terminals is generally covered by the terminal operators liability insurance, and is in any case rather limited. Exchange rate and interest rate risks are difficult to be assigned. On the one side in fact the government should bear these risks because they have more control over exchange rates or the prevailing interest rate. On the other side thought guarantees with this respect are unlikely to have net benefits. Over-borrowing risk should obviously be borne by the private party.
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Obstacles in full private sector financing of container terminal infrastructure
The previous part should have provided the framework in which ports are financed and should have clarified the main methods of terminal and port infrastructure financing in Europe. The previous part and the case study analysis, presented in the next chapter show that full private financing of container terminals is viable and virtually no public intervention is required. Nevertheless, in many countries state resources are widely used. What is more striking is that often public support is given fonds perdus , while in principle container terminal infrastructure could be financed (privately) on the basis of the revenues the terminal produces. When addressing the issue of why container terminals still require public sector financing in Continental Europe, the main arguments raised to justify this assertion are mainly referable to four types of issues: Financial viability of the investment Competition among terminals The role of the public sector Cultural and historical reasons In the remaining of the paragraph these major arguments will be explained and discussed in order to assess how realistic these obstacles are. In the following paragraph solutions to overcome these issues will be proposed and in the final paragraph an assessment of how applicable these solutions are in the European context will be given. The main objective of this chapter is to argument what are the obstacles in full private sector financing of container t erminal Infrastructure in Continental Europe and how and till what extent these obstacles can be overcome. The main questions this chapter is trying to answer are: What are the obstacles in full private financing of container terminal infrastructure? How can these obstacles be overcome? How feasible are the solutions proposed?
5.1
5.1.1
Obstacles in full private sector financing of container terminal Infrastructure

Financial viability
One of the claims that is made when investigating the reasons of the public sector involvement in the financing of container terminals is that its infrastructure is a public good, and its financing is not viable unless the investment is subsidised and part of its risk is borne by the public sector. At the basis of this argument there are some assumptions that is important to make explicit. The first assumption is that container terminal infrastructure is a public good. In the second chapter it has been argued that a public good possess the characteristics of non-rivalry and non-excludability and that container terminals do not fall in this category. If it is true that some of the characteristics of the category of
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the container terminal business may increase its risk, the fact that a business is risky should not be a sufficient reason for the public sector to provide it. In addition even if container terminal infrastructure was to be considered as a public good, there are examples of public goods (roads) that are designed, financed, built, operated and maintained by the private sector. The second point refers to the fact that public participation is required as full private financing of container terminals is not viable in general. This observation can be easily contradicted if we observe the case of all the privately owned (and financed) container terminals in the world. From the case study in the next chapter has emerged that in the UK for example, container terminals not only are entirely privately financed, but they generate revenues that, in combination with port dues and other charges, allow the private operators to invest and maintain in breakwaters and other basic port infrastructures and to remain competitive. A third point of attention is connected with the claim that public support, by reducing the costs the private operator has to bear, makes investment in the terminal business commercially and financially feasible. If on the one side it is true that public support reduces the cost that the private operator has to recover, on the other side by interfering in the competition arena it provides a comparative disadvantage to fully privatised terminals, creating in the end a disincentive for private operators to invest in terminals. In other words if the port has subsidised, without aiming at full cost-recovery, a terminal in the port, it will face the challenge in motivating new terminal operators to invest in the port without public support, as the new terminal operator would face a disadvantage having to recover costs that its competitor does not have to recover. A possibility in this case would be to set concession/lease fees for the existing terminals that allow the public sector to virtually recover the costs of the terminals financed fonds perdus . Remains to be individuated how to determine such a concession/lease fees, given the fact that the current practice is based on market consideration and not on the cost of the infrastructure leased. Finally there is the element of risk. Further analysis should be done in order to determine if container terminals are effectively a relatively more risky business with respect to other activities. Even if there are good reasons to believe it is not, for the rest of the discussion, it can be assumed that the terminal investment in infrastructure is a relatively risky business. In this case there is no need to claim that public sector intervention is required. In this respect it should be reminded that in principle risk should be borne by the party that is better able to control it or that is least affected by it. In the case of terminals the public sector is able to control at the maximum only political/regulatory risk, which in any case is rather irrelevant in Europe, and there are no good reasons to claim that the Public sector would be least affect by terminal investment risk. Adequate traffic projections and feasibility studies should be able to give enough rationale for the construction of a new terminal. They are the only considerations that really matter as far as modern container terminals are concerned at least in the
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European scenario. Terminals that are built irrespectively to market considerations represent (commercially risky) operations and may generate large inefficiencies. 5.1.2 Public financial support interferes in the competition
One of the obstacles in involving the private sector in the financing of container terminal infrastructure lies in the fact that the public sector financial support interferes in the competition among ports. Public support practices by means of the provision of public funding fonds perdus in ports located at relatively small distances from each other might give a comparative disadvantage to fully privatised terminals. This is because the terminals that are financially supported by their hosting governments do not have to recover infrastructure costs in the same way their fully privatised competitors do. In the past the fact that container terminals were mostly financed by the public sector did not have a substantial effect on neighbouring ports. But this is not true anymore as a result of the changes intervening in the business, most notably the increasing competition among terminals and the transformation of port hinterland from captive to contestable. Nowadays, public subsidies alter the competition level and urge ports to compete on the quantity of public support they give to their terminals (an illustrative example can be the case of the ports of Tanjung Pelepas and Singapore). As far as the European situation is concerned, the problem is essentially of competition between neighbouring European countries in giving subsidies. As long as one country subsidises its terminal the others have to follow suit or otherwise loose business. In principle if no country gave subsidies, the private operator would still be there, maybe charging slightly higher handling fees (Farrell, 2004). However, it is true that the landlord model of public infrastructure financing and private operation (POPO) is wide spread all other the world, also in areas where there is much less competition. But in principle the practice of subsidising container terminals even in ports that are substantially distant can have several explanations. Firstly the port sector is moving in general from a situation of publicly owned an operated ports to one of privately owned and operated ports, so that the present situation seems to be a transitory one. Public ownership and investment in infrastructure is in a way a cultural legacy of the past and will eventually loose momentum. It can be observed that there are for sure more BOT projects at present, or projects that are fully financed by the private sector today compared with 10-15 years ago, when the emphasis was more on the privatisation of port operations and services. As a second reason it can be observed that competition exists for ports over much larger distances than is at first apparent. As an example the port of Rotterdam may regard the ports of the Mediterranean basin as competitors to Asian container traffics to/from Southern Germany. We can consider another example; the port of Colombo considers Singapore and Dubai as competitors for Indian transhipment traffics. There are in practice very few ports that do not have any competitors.
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Thirdly a lot of subsidisation comes to port from the municipal/local authorities more than from the governments themselves. This is mostly due to the perception that terminals and ports are able to boost the economy and to create employment. If this argument may have some substantiation in the case of ports, for sure is of more limited validity in the case of terminals. In addition very few governments really understand the basic issues underlying ports policy. There has been a general tendency to apply the financial and organisational structures used in Northern European ports, which carries a lot of prestige. This attitude has been consolidated by institution such as the World Bank, which has focused on getting the private sector into port services with the aim of producing noticeable efficiency improvements. Private sector involvement in infrastructure has been more difficult to sustain, as private finance is usually more expensive than public finance. Finally private operators and shipping limes have encouraged governments to cross-subsidise infrastructure because it keeps their costs down and reduces their exposure to risk. Large private operators and shipping lines are very effective lobbyists, particularly when faced by small or weak governments (such as in developing countries), or local authorities and ports, that in order not to loose their traffics are ready to keep on investing public money. 5.1.3 Role of the public sector
Another difficulty in increasing the level of private financing of container terminal infrastructure is that the public sector is reluctant to fully release control on container terminals. In general this happens because the public sector is afraid that full private terminal financing might interfere with its role of safeguarding competition or planning or with the macroeconomic goals of the port. In principle it is possible that a terminal operator becomes a monopolist, but the issue of container terminal monopolies present various controversial aspects that need to be analysed. First of all it is important to define what is intended by monopoly and by market abuse. In general terminal operators that have 40 per cent or more of market share are considered dominant. They can be prosecuted under the Treaty of Rome if they practice unfair or discriminatory pricing, require the costumers to pay for unwanted services, or fail to share the benefits of their position with customers (Farrell, 1999). But the dominant position of a terminal operator depends substantially on the extension of the market of the terminal itself, i.e. if the market of a single terminal has to be restricted to a single port or competition from other ports can be taken into account. It should be noted though that if on the one side the changes taking place in the port business are obviously increasing competition among ports, on the other side, the control that global operators are gaining on terminals spread around the world is increasing the possibility of the emergence of global monopolies. An additional problem is posed by the possibility that the port authority is already a monopolist. It is not obvious if the definition of market abuse is applicable also to vertically integrated public operators/ports as in the case of Piraeus. In this cases is
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the port authority abusing of its position if refuses to allow private cargo-handling companies to offer competing services? (Farrell, 1999). A further substantial issue is the conflicting position of the port authority deriving from its roles of regulator and promoter. Even if in the not extreme case of vertically integrated ports, the port authority is facing the conflict between its desire to have terminal operators that are financially independent and strong on the market, and its obligation to ensure that economies of scale are passed on to the consumers. In other words the concession of exclusive rights from the port authorities in general makes the terminal business particularly attractive for the private sector; allowing them to strengthen their position (Farrell, 1999). Even in the case of the assessed dominating position, the problem remains on how to dislodge a terminal operator if it fails to perform or if it abuses of its position. The fact that the port authority (or the government) is the owner and lessor of the terminal infrastructure not necessarily prevents private terminal operators to abuse of their position. It is as matter of fact extremely difficult, and not necessarily in the interests of the port authority, to get out a terminal operator that is failing to perform efficiently or to act in the public interest (Farrell, 1999). Moreover the POPO approach typical of the landlord model poses another difficult problem. It may happen that the port authority is forced to refuse the access to new entrants on the grounds that there is no spare capacity and it is unwilling or unable to invest in additional infrastructure. Is this attitude against competition, and can that be interpreted as a way of favouring certain operators at the expenses of others? (Farrell, 1999) An additional element that should be noted refers to the planning role of the port authority. The management of the port of Rotterdam for example is reluctant to sell port land in industrial areas because it needs to be able to redirect guide and boost the development of production clusters within the port. If a strong cluster starts growing in one part of the port, the lease system enables us to boost that development by offering an Odd man out a lot in another area (RMPM, 2003). If the municipality doesnt remain the landowner, it is powerless to extert any influence on the process of buying and selling (Port of Rotterdam, 2003: 32). For this reason the port of Rotterdam prefers long term leases than actual land sale. As far as the macroeconomic goals of the port are concerned container terminals are publicly financed on the basis that they provide an essential service to the country and they are an important industry for the port region in terms of labour and development. The first problem in this type of argument refers to the difficulty in quantifying these effects. If it is already extremely difficult to evaluate the contribution of the entire port sector on the economy, it is even more complex to evaluate the role of container terminals (Villaverde-Castro and Coto-Milln, 1999). If the role a port plays in fostering and sustaining regional growth is generally recognised, the increasing internationalisation of the container business and the tendency towards a more capital-intensive industry seem not to substantiate such a relevant impact for container terminals.
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But in principle, if the government believes that to foster and sustain economic growth falls within its scope, it can be a reasonable to contribute to the financing of port infrastructures and container terminals. The point in this case is that the government should better finance those investments in ports that are not able to generate sufficient revenues and that are more difficulty privately financed, and not for their economic/financial weakness but for their characteristics of public goods and free-rider problem issues. It has been shown, and the UK experience is rather illustrative with this respect, that container terminals are able to generate IRR of more than 20% with rather short payback periods. In this term they do not seem to fall in the category of investment outlined before and in any case the argument can be assimilated to that of private good nature of terminal investment. In any case lighter forms of support such as PPP, should probably be preferred than the deliberate funding of, in certain cases not viable, container terminal infrastructure projects. 5.1.4 Cultural and historical reasons
Container terminals are still perceived to be in the public sector scope, thus requiring public funding, because the role of the public sector has always been substantial in ports. This statement even if it cannot be substantiated on a scientific ground has often been used in trying to defend the role of the public sector in the provision of container terminal infrastructure. There are many cases of policies adopted on the basis of tradition, history or culture. Needless to say that the only way to eradicate this kind of beliefs that can constitute serious hinder is to provide discussion and information on the reform policy that is being adopted. In addition, there is culture within the port sector of providing capacity in advance of need without considering its commercial viability. This culture derives from the traditional view of ports as public services and the widespread availability of state aid. This approach is finally changing, forcing ports to raise their own finance and then be more cautious about financing investments (Farrell, 1999).
5.2
5.2.1
Solutions to overcome full private financing obstacles

State subsidisation reduction
One of the first important aspects that emerge from what has been previously said is the requirement at least at a European level of the harmonization of the ports and terminals financing mechanisms. The establishment of a fair competition is and should remain among the European priorities. Liberalisation is fine but only when certain basic rules are respected. Competition between ports in the EU must take place on a fair basis, with clear rules (de Palacio, 2004). It seems clear that the EU regulation is going towards this direction even if with the difficulties of the case. If the future EU policies will discourage financial involvement of (local) public authorities, in the port sector, new container terminals will have to be constructed without the use of taxpayers money (Wiegmans, et al. 2002).
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5.2.2
European Competition policy
In the case of terminals as far as competition is concerned, the only possible way of avoiding monopolies is to install a strict regulatory regime and provide breaking the monopolies up in the cases in which they occur. But this solution is not free from controversies. As a matter of fact, who should be in charge of regulation and control on private terminals? If traditionally this role has been performed by the public sector by means of the port authority, it conflicts now, given the changes in the port business, with its promotional role and in certain cases with its own financial interests. In order to regulate terminals and avoid the creation of monopolies, the provision of port services have to be embedded in a Community port regulatory framework. As a matter of fact, even if the EU Treaty rules (that include competition rules) apply also to the port sector, the European Commission still has to deal with the problems of the application of them on a case-by-case basis (de Palacio, 2004). This framework should aim at alleviating Port Authorities from their regulatory role, and would provide a more effective framework given the international nature of the terminal business level playing field. 5.2.3 Adoption of specific pricing rules
In conjunction with supranational policies, a coherent framework should be found for the port and terminal pricing rules. As far as terminals and ports are concerned, the setting of suitable cost recovery mechanisms allowing reducing as much as possible government intervention should be lied out. Haralambides (2002), suggests in the case of port infrastructure a pricing strategy based on long run-marginal costs. This pricing policy would certainly allow full cost recovery for container terminal (and port) investments. Substantial difficulties though remain on how to make such a pricing policy acceptable by ports and on the possible ways to implement it (Haralambides, 2002). Further research should be performed in order to assess the impact of port pricing rules on the competitiveness of container terminals and ports, determine the degree that concession and leasehold agreements allow the public sector to recover infrastructure costs, and evaluate in general the actual extent of public intervention in port financing. 5.2.4 Evolution of the container business
A further aspect that needs to be taken into consideration is the evolution of the container business. Container terminals are developing from multi-user facilities that used to fall into the scope of the public sector to highly competitive complex businesses that serve the needs of a limited group of users and require high degrees of expertise and managerial capacity. In this respect it is straightforward to consider them in the private sector scope.
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5.3
5.3.1
Limits to full private financing of terminal infrastructure

How feasible are these solutions to increase private financing?
As far as a European competition policy is concerned, the recent attempts of the European Commission to intervene in this respect have been mostly discouraged by the fierce opposition from the European ports lobby (Farrell, 1999). The EC has preferred to regulate on the less controversial issues of safety and environmental protection than intervening in the area of port financing. The EC has made very limited use of its powers to regulate port competition and has stated that the use of public funds for the developing of port infrastructure is not to be considered as state aid (European Commission, 2001a). In addition doubts remain in the way financial assistance given by the European Union influence the competition. EU aid, mostly going to Ireland and the Mediterranean in the past and to the new accession countries in the future, has provided finance through ERDF, ISPA funds and TEN-T, to the over than 200 ports included in the TEN networks. EU aids account for more than 3% of all Western European port investment (Farrell, 1999: 231). It has been argued that the financial aid provided by the European Commission to ports distorts competition and in general it is analogous to the type of State aid it is trying to prohibit (Farrell, 1999: 232). The adoption of a coherent pricing rule is subordinated to the adoption of a common European policy. If on the one side the socio economic objectives of ports are so divergent that a uniform approach to pricing becomes meaning less and politically unfeasible, on the other hand at least in a EU liberal economic environment it should be ideally guided by the principle of leaving the complete autonomy to the port producers themselves (Haralambides et al. 2001). The pricing decision is obviously intimately connected with the financing of the port infrastructure. The absence of state subsidies would inevitable lead to the need of putting in place some sort of cost recovery measures that would reflect on the port pricing. The adoption of this type of measures, at least in the short run does not seem feasible in a large number of ports. Various reasons have been identified for this (Haralambides et al. 2001, European Commisison, 2002a and European Commission, 2002c ), and they mostly refer to the issues of: Ownership The ownership stake of the public sector in the port infrastructure implies that political biases affect investment, wages and pricing decisions. Objectives The issue arises if the investment main goals are based on profitability and market share considerations or on macroeconomic and societal goals, such as maintaining the domestic industry competitiveness, or development arguments (Haralambides et al. 2001). Autonomy refers to the ability of the port to perform port services independently and consequently to undertake investment decisions without having to respond to external actors. Scope of activities - this refers to the above-mentioned conflict between the port commercial activities and the activities that entail a high regulatory, safety, promotional and control function.
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Public support fonds perdus the perseverance of this type of financing practices obviously make the implementation of recovery measures less urgent.
In spite of the above-mentioned difficulties, the ATENCO report (European Commission, 2002a) has demonstrated that there is a general accord among port authorities and port operators on the importance of policies that allow ports to be self-reliant. As a matter of fact this policies will entail a further privatisation of those typologies of business that are able to support themselves financially on a commercial basis. In this perspective container terminals are quite likely to be among the first types of port activities to be administered on a fully commercial basis. As a matter of fact, the issue of implementing cost recovery practices in ports does not conflict with the private provision of container terminal infrastructure. Moreover, the tendencies towards an increased participation of the private sector in the container business do not seem to be at stake at least in the short-run, i.e. as long as the terminal business will remain an expanding business (Farrell, 2004). In addition it appears that as the scale of the terminal operation increases, the level of required private sector participation also increases (Baird, 2002). This is due to the complexity associated with the terminal business, the privatisation trends taking place in the industry, the requirement from the shippers, and shipping lines of more professional and efficient services and finally the change in perception of the scope and roles of the public sector. 5.3.2 Will it be possible in the future to achieve fully private financing of container terminal infrastructure in Continental Europe?
From the main points outlined in this chapter it should be clear that it would positive for the society and the port and terminal business that terminals are allowed to compete fully on their own merits, without public authorities to interfere in the level playing field. On the other side there are substantial arguments against this point and full private financing of container terminal infrastructure does not appear viable at least in the short-run (Wiegmans et al. 2004).
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Case study comparison
In order to substantiate what has been argued in the previous chapters and to have a better insight on the issue of private financing of container terminals, the thesis has been expanded with the analysis of two case studies. The two container terminal expansion projects of Felixstowe South Reconfiguration (FSR) in Felixstowe and of the Maasvlakte 2 (MV2) in Rotterdam have been chosen. The comparison of the two projects is particularly interesting because while the container terminal expansion of Felixstowe is planned in a port, where a private company is responsible for all the investment within the port area, the MV2 expansion in the port of Rotterdam is going to be largely provided by the public sector not only by means of the revenues of the port but also with public money. Naturally, when preceding in analysis it is essential to take into consideration the fact that even if geographically close, the tow ports present substantial differences in terms of national policy framework, port productive structure, port regulation, port model and responsibilities, etc. Nevertheless from the comparison of these two examples of terminal expansions some interesting observations have emerged. The chapter is structured as follows. In the next two paragraphs the terminal financing responsibilities for Felixstowe South and Massvlakte 2 are discussed respectively. The analysis consists of the description of the port policy in the UK and in the Netherlands, some background information on the two ports and of the two expansion projects and the analysis of the financing responsibilities of the public and the private sector in the two ports. The last paragraph summarises the results of the two case studies and discusses the findings and the limits of the comparison.
6.1
6.1.1
Investment in container terminals in the port of Felixstowe

Policy framework in the UK
One of the distinctive characteristics of the UK port policy is the wide presence of fully privatised ports. Even if the most extensive policy driven privatisation took place in the 80s, the UK ports industry began to develop in its present form in the nineteenth century. Ports have been established mostly by Private Acts of Parliament and even if a general Harbours Act was issued in 1964, the Government never intended to develop a uniform national plan and legal framework. With this respect, new ports or major new port facilities require the intervention of Parliament through the Secretary of State for the Environment, Transport and the Regions. UK Ports can be divided into four main types (European Commission, 2002a): Nationalised Ports, Trust Ports Municipal Ports owned and operated by local authorities. Private Company Ports. Nationalised ports were administered by the British Transport Commission (BTC) until 1962 and s ubsequently by the British Transport Docks Board (BTDB), the British Waterways Board (BWB) and the British Railways Board (BRB). Although some nationalised ports remain, mostly administered by the BWB, the majority of
46
them was transferred to the private sector in privatisation wave that began in 1981. The remaining nationalised ports are of little economic significance. Trust Ports. Are owned and administered by a trust, a self governing statutory entity set up under individual Acts of Parliament in which their duties, responsibilities and powers are laid down. Trusts are not treated as part of the public sector, as they are not owned by either the state or local authorities but in general they fall under the supervision of the Secretary of Sate to which they are required to provide annual account statements. There are around 90 Trust Ports remaining in the UK, as the majority of them was privatised in the 80s. They are generally small to medium size and account for around 15 per cent of the total tonnage handled in the UK ports. Only twenty of them have a turnover in excess of 1 million and only one features in the top ten UK ports. All profits are reinvested for the benefit of port users and local and regional interests. The most important trust ports are the ports of Dover and Milford Haven. Municipal Ports. Municipal Ports are usually run by a harbour sub-committee of the relevant local authority and are subject to the spending constraints imposed by Central Government on the public sector. Local Government Acts provide the context for their operation. Municipal ports currently account for around 15% of tonnage handled at UK ports, the most important being Portsmouth. Private Company Ports. These ports are privately owned and operated. They originated in four ways: Statutory Companies with shareholders that have always operated independently of Government. Railway Company Ports that were nationalised in 1948 but have subsequently been returned to the private sector (such as Felixstowe). Local Authority Ports which have either been sold or leased to private companies: Former Trust Ports that have been privatised by either Acts of Parliament relating to a specific port or under the Ports Act 1991. An example of the former is the Port of Liverpool, privatised in 1971, and of the latter the Port of Tees and Hartlepool. All British ports are managed as commercial companies. They have responsibility for port development, for provision and maintenance of port infrastructure, and for assuring ports services. It is worth noting that the private companies responsible for port administration are still harbour authorities and retain the same statutory responsibilities and powers under legislative provisions as before. In certain cases hybrid situation have been created, as in the case of Harwich, that was privatised but not given statutory responsibility for navigation and conservancy that remained Harwich Haven Authority Trust (Baird, 2000). The majority of ports in the UK are made responsible for all the investment including infrastructure and container terminals. In the absence of a national Government policy in the UK to control port development, ports operate within an assessment of their expected financial viability. In order not to distort completion ports are n ot publicly funded, thus costs for development, land purchase, maintenance of access
47
channels, buoys, radar, and breakwaters have to be derived from revenues obtained from charges on port users. The provision of superstructure within a port is generally the responsibility of either the port or their tenants. The costs of such development are met by either charges made by the port or specific charges made by the tenant company. Services provided in the context of the operation of a port will each have charges raised for their provision. Thus cargo handling, pilotage, towage, dry docks and slipways etc. will each be charged for by the port or company responsible for their provision. Ports are empowered by their statute to impose dues, that are required by law to be published, but ports are free, as commercial enterprises, to charge what they consider to be commercially viable. The main dues and charges levied by Port Authorities in relation to port related activities are (European Commission, 2002a): port dues which are charges on vessels for the provision of navigational buoys and lights, provision and maintenance of access channels and maritime traffic regulation; goods dues which are charged for the provision of port infrastructure; charges for the provision of nautical services such as pilotage and towage; rents charged to private undertakings for the use of port areas and warehousing and for provision and operation of cranes. Before analysing the port of Felixstowe, that has always been operated as a private port, it is important to analyse the reasons and the effects of the privatisation policy that took place in the Country starting in 1981. The decision to move to full privatisation in the UK was made for three main reasons (Farrell, 1999): To modernize institutions and installations, both of which often dated back to the early years of the industrial revolution, making them more responsive to the needs and wishes of the users; To achieve financial stability and financial targets, with an increasing proportion of the financing coming from private sources; and To achieve labour stability and a degree of rationalization followed by a greater degree of labour participation in the new port enterprises. Secondary objectives were raising revenues for the state treasury from outright sale of port land, encourage competition between ports and widening share ownership (Baird, 2000). In reality the decision to sell them as complete entities rather than moving to the Continental landlord port system was almost entirely political (driven by the personal views of Prime Minister Thatcher rather than industry experts) and was a response to their past history of strong trade union activity and labour disputes, which the government feared might continue under a public landlord form of organisation. The main wave of port privatisation came just after the government had broken the power of the trade unions in the 1989 Dock Strike, and was intended to consolidate the weakening of their position by dispersing the industry between a number of separate employers, effectively avoiding the national wage bargaining which had resulted in a high cost, uncompetitive industry in the past (Farrell, 2004)
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The full privatisation process has been heavily criticized, and after almost twenty years its major pitfalls have been individuated. Some key problems of the UK experience can be identified in four main issues: Port disposals It has been argued (Baird, 2000) that ports where valued much less than what they where worth, thus raising relatively little money from their sale. In addition many ports where divested by means of shares to port officials who where already working in them, thus not introducing any innovative private sector element in their administration. Competition no substantial increase of competition has been generated by the privatisation, making Baird (2000) argue that there has been a change from public to private monopoly. In addition the privatisation process in the UK has entailed also the transfer of the ports regulatory function to private sector companies. In the absence of a port regulator in the UK privatised ports are essentially self-regulating. In addition full privatisation neglects the public role of the port, i.e. planning, dealing with externalities, promotion, coordination, control, etc. Port Investment and productivity Baird (2000) argues that privatisation significantly hampered new port investment because of their public goods characteristics. In addition it mostly failed to improve productivity as the privatisation process did not change the management of the port, but just sold it to the private sector. General port policy approach The policy in the UK has turned out to be inconsistent, because the ports enjoy different institutional status. As a matter of fact some ports have control and responsibility for navigation and other do not, some ports were allowed foreign ownership and others not, etc. In addition, local authorities have been largely ignored and the government does not have any noticeable involvement in the sector (Baird, 2000). If the effects of the full port privatisation policy in the UK port industry in general are of dubious success, or at least contentious, it can be argued that the this is not so for the UK container sector that has expanded mostly in the framework of fully privatised ports. If we analyse the evolution of the container traffics and the competitiveness of UK container terminals we can observe that they have been rather successful. UK terminals have operated at considerable lower tariffs than the other European countries average and they have managed to be competitive and efficient, until at least one and a half years ago (Farrell, 2004). The fact that the container terminal sector has developed relatively better than other port activities in a fully privatised context, substantiates the claim of limited scope for the public sector in the container terminal business, at least as far as the UK experience is concerned. 6.1.2 The port of Felixstowe The Port of Felixstowe6 (PFL) is the largest container port in the UK and the fifth container port in Europe. Containers represent three quarters of the throughput of
6
The information contained in this paragraph are derived from Port of Felixstowe, 2004; Hutchinson Whampoa Limited 2003, Hutchinson Port Holdings (2004); European Commission (2002a).
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the port while the remaining is mostly RO-RO traffic. The size of the container traffic is around 3 million TEUs (including Harwich and Thamesport). The legal status of the port is that of a private statutory company, and since 1991, PFL is a member of the Hutchison Port Holdings (HPH) Group, a fully owned subsidiary of the multinational corporation Hutchison Whampoa Limited.
Figure 4: Port of Felixstowe
Source:
Port of Felixstowe.
The Port of Felixstowe is one of the Eastern regions major employers, and provides employment for over 2,500 people directly. The Port contributes some 70 million to the local economy in wages alone, and over 12,500 people in Suffolk derive their livelihoods from the Port and related industries. The history of the port dates back to nineteenth century. It is operated by a private company and has operated as such since 1875 (with a the exception of the war period) under various Acts of Parliament. The initial Act under which the port was incorporated was the Felixstowe Railway and Pier Act. These acts specifically prescribe the powers and responsibilities of the body administering the port and the limits of the port are clearly defined. was since its origin a private port (Railway Company Port). It was created as a rail interchange port and then used as a grain port. It began its container activity in the sixties. In 1987 it was acquired by the P&O Group and in 1988 following the privatisation processes taking place in the UK it was expanded for further 220 acres. The ownership structure of the port has also changed in the course of the years. In August 1991, 75 per cent of the Port was acquired by Hutchison Whampoa Group.
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The Walton Container terminal was acquired and separately operated by OOHL. The Port of Felixstowe was then owned by Hutchison Whampoa Limited for a 75 per cent and by Orient Overseas Holdings Limited for the remaining 25 per cent until 1994, when Hutchison Whampoa purchased the remaining 25 per cent of the Port from OOHL, giving Hutchison 100% ownership of the Port in 1994. Finally in 1998 Hutchison acquired Thamesport on the Isle of Grain and Harwich International Port, formerly known as Parkeston Quay. As far as port management and operations are concerned, the port company is responsible for all the activities taking place within the statutory area of the port, that comprise port land and water until the limit with the Harwich Haven Authority that is responsible for the maintenance dredging of the harbour. PFL is a private vertically integrated port. The port management is in charge of all the typical functions carried out in the port, including notably cargo handling. In addition fall under the scope of the port company also security in the port area through its own statutory police force; maritime safety in the port area; the provision of all stevedoring services within the port area; the construction and maintenance of all infrastructure to support the above services; warehousing within the port area; leasing of land and property within the port area. Charges for each of the above activities are levied by the port company in accordance with their published rates and other commercially negotiated rates. Most of Felixstowes income is derived from the charges it imposes for cargo handling services and less from the port dues on vessels, goods and passengers. Profits made by the company are distributed as directed by the shareholders, losses would need to be funded from reserves. The capital expenditure of the port is set through an internal budget procedure for a period of five years, with reviews undertaken annually. Additional expenditure beyond that budgeted for would require the approval of shareholders. All capital works on infrastructure and superstructure are financed by the port. The estimated average life span of each project will vary and thus depreciation of those assets will occur over periods of between 20 and 100 years for infrastructure and between 2 and 20 years for superstructure. The port has gone through large expansions of its container terminal capacity. In the eighties the largest intervention where the completion of the Dooley and Walton terminals in 1981 and the Trinity Container terminal, built in the area acquired after privatisation of Harwich port at the end of the decade. In 1990 the trinity terminal was doubled in size, a third expansion project would have been opened in 1996. It is remarkable that the port of Felixstowe is also responsible for dredging works, for example in 1993 the port was dredged to the deep of 12,5 meters and again 1998 up to 14,5 meters. The last project with which the port is currently busy is the extension to Trinity quay. In addition the port plans to significantly increase container capacity by reconfiguring the southern part of the Port, known as Felixstowe South.
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Given the particular structure of the port of Felixstowe, as originally it was a jointlyoperated railway and port company, the port has made considerable investment also on the landside both for rail and road. Of the 86 per cent of containers that move inland, it is projected that 26 per cent will, in the future, be transported by rail. Among the objectives of the port there is also the increasing of the share of domestic containers transported on the rail. For this reason a new rail terminal, the New North Rail Terminal, was also proposed for the Ports Trinity Terminal. The planning application for this new rail facility will be submitted as part of the Felixstowe South applications. Pilotage services are provided by the Harwich Haven Authority. Towage is provided by a private towage company and charges are negotiated with it independently of the port operating company. It is important to point out, that Felixstowe is a private sector company. As a commercial profit-making entity the port is operated according to the criteria and methods of any private industrial enterprise. With this respect among its management principles there are full cost recovery, the user pays principle, the need to take account of what the traffic will bear and of competitors in pricing, and pricing to increase capacity utilisation, as all being factors which are consistent with its overriding objective of maximising profits for the benefit of its shareholders (European Commission, 2002a). 6.1.3 The Felixstowe South Container terminal
PFL is proposing to reconfigure facilities at the southern part of the port to provide additional deep-water container handling capacity. The project Felixstowe South Reconfiguration (FSR) involve the conversion of the area previously used by P&O North Sea Ferries Limited, plus the now largely redundant Dock Basin and Landguard Terminal, into a new deep-water container terminal. It is planned that the first phase of the new terminal will commence operation in 2006, subject to the necessary permissions having been secured. This project has being proposed because the Port of Felixstowe is close to full operational capacity, already achieving the highest levels of utilisation of resources in the UK. The FLR would allow an additional capacity of 1,56 million TEU per annum. The port is developing primarily by re-engineering the existing operational areas within the Port and the FSR represents the most cost-effective way of adding major deep-water capacity. PFL is concerned to develop sustainably, making use of existing developed marine and landside infrastructure, bringing economic benefits to the region and with attention to the sensitivity of environmental context. This is consistent with the Government policy on maximising the use of existing facilities before creating new ones. The works for the Felixstowe South Reconfiguration will be constructed in part by the remodelling of the existing Landguard Terminal (the landward works) and in part by the reclamation of land from Harwich Haven that is currently covered by water (the seaward works). In order to remodel the existing Landguard Terminal and the landward works the port had to make a planning application to a Local Authority (Suffolk Coastal District Council). The seaward works will be constructed
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on an area that is currently below water and, therefore, outside the present jurisdiction of Suffolk Coastal District Council. For the powers necessary to undertake the works, has made an application to the Secretary of State for Transport for a provision deeming the seaward works (when constructed) to be part of the area of Suffolk Coastal as local planning authority.
Figure 5: Felixstowe South reconfiguration Source: Port of Felixstowe
All the project applications are subjected to an environmental evaluation in accordance with the Town and Country Planning Regulations of 1999. In addition, consent for the dredging and disposal of dredged material is also required under the Coast Protection Act 1949. This consent is also subject to the Harbour Works Regulations of 1999. Direct employment at the terminal will develop over time with the proposed expansion of berths and operations. It is expected that, by 2015, when all four berths are operational and the terminal is fully staffed, an additional 621 direct jobs will have been created. There will also be an estimated 860 additional jobs arising from associated activity and multiplier effects elsewhere in the area. The project will be financed by means internal sources or from capital borrowed on the open market on the basis of corporate financing or project financing.
6.2
6.2.1
Rotterdam The Maasvlakte 2 project

Policy framework in the Netherlands
In the Netherlands three main types of port management and administration model can be found (European Commission, 2002a):
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ports owned by a municipality, administered by a Havenbedrijf, essentially a Port Authority; ports administered by the Havenschap, a public body where the State cooperates with (small) local authorities; some privately owned ports.
Municipalities are in general responsible for the port management functions (European Commission, 2002a). They are also in charge for operation and regulation in the fields of authorisations, concessions and land use. The ports administered by a Havenschap have their own legislation, and rule and regulations on port dues are set port by port. Private ports, of more modest interest (mostly fisheries activities) are administered as independent commercial units (Rosier, 2004). All ports are represented in the national port council (Havenraad), that provides advice to the government on port-related issues. The dominant port model in the Netherlands is the Landlord Port model where the Port authority is responsible for: maintenance of quays, piers and water depth; planning the development of port land; providing and leasing the land to private operators. At least for the largest ports the traditional concept of a Landlord Port Authority begins to interfere with the requirements imposed by the dynamics of the port business. For example, the its annual report (RMPM, 2003) the Port of Rotterdam states the objective to overcome this traditional concept that may be no longer effective to provide policy and management with the necessary responsiveness. In the attempt to increase this responsiveness the port of Rotterdam has been corporatised in 2004 (Van Hoff, 2004). The Municipalities are also responsible for part of the investment in the port often jointly with the National Government. The situation can be summarised in general as follows (European Commission, 2002a: 49): The Government is responsible for the basic port infrastructure. Thus, investments in breakwaters, capital dredging of maritime access channels, etc are entitled for Public financial support. This is done because they are considered as public facilities and no tariff is charged. At least one third of this investment is financed by the Port Authority. As far as buoys and other navigational aids are concerned, the investment responsibility falls on the State if outside the port area and on the Port Authority within the port area; The Port Authority is responsible also for all investments in infrastructure within the port area, such as docks, quays, roads, channels, etc. whose costs are recovered form lease fees, harbour and quays dues, etc charged to the users; Superstructure and equipment is on the entire account of private operators. As far as cargo-handling activities are concerned, they fall entirely into the responsibility of private operators who lease areas from the Port Authority that has a large degree of freedom in setting lease fees in accordance with its goals. Tariffs on the other side are decided by the private operators who can confidentially negotiate
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with the users the terms of payments, guarantees, surcharges, etc. Reference tariffs, however, have to be published (Eurpean Commission, 2002a). Nautical services are provided by private companies under the supervision of the Ministry of Transport, Public Works and Water Management (Eurpean Commission, 2002a). The income of the Port Authority consists of lease revenues from areas granted to the private operators (terminals, quays, etc.), harbour dues for the use by vessels of harbours, quays, buoys, etc, wharfage and inland vessel dues (Eurpean Commission, 2002a). 6.2.2 The port of Rotterdam Rotterdam is the main port of European container transport7, with an average of about 6.5 million TEUs passing through the port each year. But the port of Rotterdam is of a multi-sector port in which substantial traffics are also oil and chemicals. The handling of containers in Rotterdam is basically concentrated at two locations: the Maasvlakte and the Waalhaven and Eemhaven area, which is situated more inland. Large container ships are mostly handled at the Maasvlakte as the Waalhaven and Eemhaven area is specialises in short sea shipping (Port of Rotterdam, 2004a).
Figure 6: Port of Rotterdam (1:50.000)
Source:
Port of Rotterdam.
The Port of Rotterdam used to be administered by a separate branch of the Municipal Government - the Rotterdam Municipal Port Management RMPM - led by the elected Alderman for Port Affairs. The Port Authority was the executive body of RMPM. The Rotterdam Municipal Port Management (RMPM) has been corporatised
7
The information container in this paragraph are derived from Port of Rotterdam (2004a), PMR (2004), Port of Rotterdam (2004b) and European Commission (2002a)
55
in 2004 of which the Municipality of Rotterdam is the only shareholder (Port of Rotterdam, 2004b). This has been done to improve the organisational conditions of the port in order to create a more business-driven structure still maintaining a certain degree of political accountability and responsiveness. The municipality operates at some distance from the operational business of the corporatised organisation but remains involved in strategic policymaking and the harbourmasters performance of assigned public tasks (Port of Rotterdam, 2004b). The port activities have been embedded in three divisions: the Commercial Division, the Division Port Infrastructure and the Division Rotterdam Port Authority. Five policy units are responsible for activities that include developing policy, communication and support in the finance, personnel and ICT fields. The Executive Board holds overall responsibility. At the top of the company there is a Supervisory Board constituted of not more than five directors including its chairperson. The Supervisory Board may be enlarged to a maximum of seven members (Port of Rotterdam, 2004b). The objective of RMPM is then at least twofold: on the one side the strengthening of the development of the businesses of the port and on the other the enhancement of economic activity in the region in a socially and environmentally acceptable manner. This is done in the recognition of the important economic, social and cultural interactions between the port and the local community. With this respect is should be noted that the municipality may also provide financial assistance for infrastructure development (Port of Rotterdam, 2004b). The distribution of investment responsibility between the various activities among the actors involved in the port is indicated in the table in the following page.
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Table 7: Port investment responsibilities for port of Rotterdam

Category Land development Maritime infrastructure Element Development of new port areas Capital dredging Sea locks, dams breakwaters VTS/Radar Light buoys & navigational aids Land reclamation Internal locks, Docks, quays, Light buoys & navigational aids, River berth & harbour basin dredging Pavements, Warehouses, sheds, Cranes and gantries, Link-spans, pontoons, Terminal and office buildings, Leasing/renting Fire fighting, Police, Pollution Control Railways & metro links in area Roads in area, Canals in area Tunnels & bridges in area Port maintenance Maritime maintenance infrastructure & exterior Responsibility Port Authority Government Government Port Authority Government 66% Port Authority 33% Government 66% Port Authority 33% Government Port Authority Government Port Authority Source Rents No tariff Port access (33%) Port access (33%) No tariff Rents Port access and Quay dues Terminal Handling Charges
Port infrastructure
Port superstructure
Private
Public utilities: Infrastructure links
Municipality/Port Authority/Government State Railway company Municipality Port authority National Government Port Authority Government Port Authority Private Private
No tariff Tariff to users No tariff No tariff Port access Port access Charges Charges
Maintenance of port infrastructure and superstructure Port services Cargo handling Technical-nautical services
Source: 6.2.3 The Maasvlakte 2 project
Adapted from European Commission (2002a)
The port of Rotterdam has planned to extend the space available for port activities and container handling by means of the expansion of the port area, know as Maasvlakte 2 (MV2). The MV2 will be mostly constructed on reclaimed land from the North sea and should be realised using the Doorsteekvariant in which the expansion will not have its own port entrance but will be accessible through the existing port by the opening of the Yangtze basin (PMR, 2004). The MV2 is part of a
57
wider-scope project, the Rotterdam Mainport Development Project (Project Mainportontwikkeling Rotterdam PMR), which includes also the development of new nature en recreation areas and of some Rotterdam's existing port areas. The total costs of the Doorsteekvariant are estimated at 2.3 billion (PMR, 2004). The realisation of MV2 is required in order to solve the space shortage in the port of Rotterdam. The stock of port sites started to run low in the late Eighties and already in 1991 the Rotterdam Port Authority issues a warning, (the Port Plan 2010), in which the port was proposing to solve the problem by a more efficient and intensive use of the existing sites and the construction of new port areas. In that occasion the concept of MV2 was introduced.
Figure 7: Maasvlakte 2
Source:
CPB, 2003
What is interesting about the project is that the government had conducted extensive studies into the options for developing plans together with private parties. The aim for this cooperation was a better timing and effectiveness of the project and
58
the involvement of private capitals. In this respect a special procedure (the KPD+)8 to start at the planning phase was set up. The Private Involvement Study Project was launched, in which seven public and twelve private parties participated, looked at which forms of cooperation were possible and what contribution private parties could make. Three types of risks were identified, namely political risks, construction risks and exploitation risks. The sharing of the (financial) risks in the construction and exploitation phase was the basis for the public-private partnership. The resulting proposal is known as the Combination Model, and it tried to incorporate the objectives of the public sector parties and of the business community. The involvement of a large number of parties in the preparation of the model was expected to allow running more quickly through the steps of planning and construction (Ham and Koppejan, 2002). In November 1998 the first results of this approach came about, when a consortium comprising a contracting firm (Ballast Nedam), a container handling company (ECT) and a financial institution (ING Bank) proposed the Binnenmeer concept. The subdivision of financial responsibilities was displayed in the proposal in a very traditional way as the government was held responsible for the construction of the sea walls while the construction of quays and port sites could be largely financed by private funds. The result of this role division was that the government had to bear the greater part of the project costs (Ham and Koppenjan, 2002). The PMR, however, decided to investigate the issue with a different approach. The study project, Private Participation, took place within the Rotterdam Mainport Development Project early in 1999. The government authorities involved in PMR took part in this study, along with companies with a potential interest in the project activities. The participants in the study project examined whether PMR would provide an opportunity for a public-private partnership and, if so, how such a partnership could best be organised (Ham and Koppejan, 2002). The results of the study were rather positive individuating in a partnership in which the business community would invest venture capital in project activities in return for potential profits as a possible structure. To evaluate whether the business community was interested in risk-bearing participation in the project activities of the PMR, the Dutch government publicised a Market Consultation Document in December 1999. In the document, which also contained government ideas about public-private partnerships structures and sharing of responsibilities, the private sector parties were asked to evaluate and give their opinion on the governmental public-private partnership ideas (Ham and Koppejan, 2002). The PMR Market Consultation Document drew a large number of responses from various companies in the sectors related to the port and that might have been
8
The KPD+ stands for Key Planning Decision, o r PKB in Dutch, and it is a procedure in which the Government intends to reach decision on integral measures that will find a solution for the shortage of space in the port and improve the quality of living in the area. The procedure should be so concrete that can be run through as quickly as possible and the + stands on the fact that it is binding also for other administrative bodies and interested parties. PMR has also investigated the possibilities to start a publicprivate partnership in the framework o f the KPD+ special procedure, but that was not feasible for the PMR project (Ham and Koppejan, 2002).
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interested in the PPP. Various parties declared they were interested in risk-bearing participation in land reclamation, possibly in combination with participation in the project activities to make more intensive use of the existing port area. Some parties saw great benefits in this type of combination, both in terms of coordination, planning and economic feasibility (Ham and Koppenjan, 2002). The majority of the respondents however, were not interested in any risk-bearing participation in project activities specifically linked with the improving of the quality of the living environment including, for example, the construction and operation of new wildlife and recreational areas. In order to evaluate the government contribution that would have been requested by the consortium for the Binnenmeer proposal, an assessment of the concept on the basis of a social cost-benefit analysis among other things was performed. It appeared from this that the private parties would have enjoyed the economic benefits of the project while the public parties would have entirely saddled with the social costs (Ham and Koppenjan, 2002). This resulted in a completely different division between public and private investments that resulted in the abandonment of the project. The Dutch government voted in favour of the plan in mid-2002 and the cabinet at the end of December 2003 indicated it was willing to invest funds in three sub-projects. The planning is aimed at making a start with the construction activities in the course of 2006, so that the first container can be handled at MV2 in 2012. A financial prospect was approved in June 2004, and as a result the Dutch Government will contribute substantially in this investment. As far as the land reclamation project is concerned, the State will grant 619 million to the RPM, to be used for the construction of the external contour of the Maasvlakte and for the public infrastructure necessary in the project. In addition the Government will pay the costs of Nature compensation ( 45 million) and will contribute to the 750 Hectares of nature and recreation areas with 139 million and 32 million for the reconfiguration of the existing areas around Rotterdam, both included in the PMR (Besturrsakkoord inzake uitvoering van het PMR, 2004). In addition the project includes relevant funding from the PMR, Municipality of Rotterdam, the Province of Zuid Holland, and the municipalities around the port (Stadsregio) (Besturrsakkoord inzake uitvoering van het PMR, 2004). In synthesis the state will contribute approximately with one third of the cost for the MV2, while the remaining will be provided by the other (public) parties. 6.3 6.3.1 Comparison results Summary of the characteristics of the two projects
In order to compare the two ports we can distinguish between national level, port level and project level. As far as the national level is concerned, the national port policy differs substantially between the Netherlands and the UK. While on the one side in the Netherlands the Government actively participate with its Ministries in the definition of objectives, coordination of investment interventions and financing of port assets, the UK policy
60
is characterised by a more laissez faire approach. In the UK in fact the Government is involved only in the approval of green-field port projects and in the frame of national interest policy issues. The different port policy approach is relevant not only for ports but also for other public infrastructures, so that in the UK also the inland connections have to be financed privately. The port policy results in the predominance of the Private Ownership and Operations (POO) model in the UK and of the Public Ownership and Private Operations (POPO) model in the Netherlands. In fact the government intervention in port investment finance and in terms of planning in the port sector, can only be sustained in the framework of public port assets infrastructure. On the other side, the full privatisation of port assets requires the government to maintain a more impartial position in order not to interfere in the level playing filed of ports. At the port level, the first aspect that is important to look into is the economic structure of the two pots. The port of Rotterdam is a multi-purpose port, in which container traffic constitutes less than one third of the total traffics handed, while Felixstowe is primarily a container port. Nevertheless it should be noted that Rotterdam handles almost the double of the TEU handled in Felixstowe. This aspects influence the complexity of the port in term of industrial activities and the decision making process in Rotterdam has to incorporate or at least take into consideration the instances of all the business present in the port. This represents a much more complex planning challenge for RMPM with respect to PFL. This leads to the different port model. In PFL we have a vertically integrated private service port, whose major objective is inevitable profit making for its shareholder. It is true that PFL is concerned in projecting an image of a company that attempts at rising the living standards of the communities in the proximity of the port and at protecting the environment, but the relations of the port with the local communities is inevitable looser than in the case of Rotterdam. The mediation of the industry requirements with the local needs could take place only in the framework of a landlord model in Rotterdam. Nevertheless, it is recognised that a dynamic port business requires a dynamic port administration. And this is particularly true in the case of containers. Among the responsibilities of the port authorities fall the promotion of port investment. If on the one side both ports have been relatively successful in expanding their capacity in line with the market requirements, it should be noted that maybe in other cases, full private sector financing responsibility may lead to under investment in the long run, while full private sector financing responsibility may generate inefficiencies. If we consider the project level what is interesting to point out is that in both the ports the projects involved rather substantial effects on the environment and the landscape. Both the projects have included measures to reduce the environment impact. What should be pointed out though as that while this measures fall under the scope of the public authority in the case of the MV2, for FSR they have to be financed at expanses of the PFL.
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Another element is the clear inclusion in the project Mainport Rotterdam (PMR) objectives of the development of the Rotterdam area. This aspect is fundamental in a port that is intimately connected with its region not only economically.
Table 8: Key elements in the comparison between FSR and MV2

FSR National Level: Dominant Port Model in the Country National Policy Private Service Port No national framework development Landlord Port National framework development MV2
Port Level Local Impact Model Adopted in the port Investment responsibilities Relative importance containers of
Smaller local impact Fully privatised port POO 75 % container National Relevance
High degree impact Landlord Port POPO 20% container
of
local
International scope of the port
International Relevance
Project level Rationale for expansion
Need for new space Local development Maintain competitiveness
Environmental impact Types of interventions required New container capacity Cost Sources of finance
High Land Reclamation Area redevelopment 1530000 250 Million Private
Need for new space Local development Maintain competitiveness Improvement Rotterdam area High Land Reclamation 750000 125 Million Public
Note: Estimated capacity and cost figures in Italics Source: Elaboration of the author on various sources 6.3.2 Advantages and disadvantages of the two approaches
It should be clear that the way container terminals are financed in the PFL is more advisable at least from point of view of the level of competition between terminals in different ports, for the reduced burden of public budgets and in terms of higher responsiveness to the container business requirements. However, it should be borne in mind that such an approach does not lack controversial aspects. The major issue that has been raised as far as the UK ports financing policies are concerned refers to the element o f investment. It may be argued that if the fully privatisation of the terminal in the short run is optimal, it still needs to be tested if
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privatisation generates a sufficient level of investment in infrastructure expansion in the long run. In addition the UK experience is still rather limited in terms of time and it is more complex to evaluate the consequences of full private investment in infrastructure in the long term. This issue is of major concern in the Continental Europe context where in general investment has anticipated demand for additional capacity. The effects in the long term are also of major concern when the issue of planning is taken into consideration both at a port/local level and at a national level. As far as the latter is concerned, it has been noted that the UK port sector is characterised by much more fragmented reality that may lead to inconsistency in the national policy level, and in the end to inefficiencies and the wasting of resources (Baird, 2000). At a port/local level, among the roles of the port authority there is that of directing and encouraging the development of production clusters within the port and in its industrial area. It is evident that in a multi purpose port this can be the responsibility only of the port authority. The sale of port land to a private operator would impede the port authority to perform this task effectively (RMPM, 2003). What then should be questioned is not so much a public port authority but a substantial public support to port investment that is not necessarily aiming at a recovery. The case of Felixstowe is particularly illustrative of the fact that at least as far as the container sector is concerned, it is able to generate enough revenues to sustain (large) infrastructure projects. On the other side various examples exist of misplaced container terminal investments that are not profitable because they are empty (the well-known case of the Ceres -Paragon Terminal in Amsterdam can be evocative with this respect).
Table 9: Characteristics of the investment approaches in FSR and MV2
FSR Private financing Risk of underestimating the social impacts More effective implementation Planning Risk of providing infrastructure under the level required MV2 Public financing Risk of overestimating the social impact The possibility to rise the quality of the project Planning Risk of inefficiencies
Source: 6.3.3
Elaboration of the author
Can a fully privatised approach be applied in Rotterdam?
The entire discussion among the differences, advantages and disadvantages of the two approaches may lead to the question on what would be a possible way to improve the private participation of the private sector in the financing of container terminal infrastructure in the port of Rotterdam on the basis of the analysis of the Felixstowes case. A few considerations though are required. It should be noted that the port of Felixstowe is in principle a dedicated container port (less than one quarter of its
63
traffic is referable to other goods), while the port of Rotterdam is a much more complex entity, that was originated mostly as a oil and chemical port. If then a fully privatised port approach in the Port of Felixstowe, resulted in a successful fully privatised approach in container terminals, this would not necessarily be same in Rotterdam. Furthermore, the port of Felixstowe has a less structured relationship with the town of Felixstowe and its region, than the port of Rotterdam has with its region. This consideration increases the relevance of the scope of the public sector in the port of Rotterdam with respect to the successful case of Felixstowe. The UK experience has various examples of unsuccessful privatised ports, that in principle were multipurpose and showed stronger linkages with their regions and hinterlands than Felixstowe (Baird, 2000). The option of full privatisation of the port is probably neither viable nor advisable in the case of Rotterdam, for the multi-purpose nature of the port, its distinctive connections with the local and urban hinterland and the national policy framework. The possible solutions, whose investigations may be the subject of further research, will necessarily involve some kind of mixed approach. With this respect two main alternatives may be indicated: full privatisation limitedly t o the container terminal sector and the encouragement of private initiatives such as the Binnenmeer concept. The following table summarises the possible advantages and risks of the two approaches given in both cases the benefit deriving from a higher private participation in the financing of the infrastructure.
Table 10: Advantages and disadvantages of container sector full privatization and of PPP initiative encouragement
Container Sector Full Privatisation Advantages Reduction of interference in the level playing filed Full implementation of recovery practices Effectiveness in delivering projects Increase dynamism Disadvantages Interference with the port authority roles Reduced bargaining power Reduced possibilities of activities crosssupport Higher charges PPP initiative encouragement Advantages Increase the quality of the project Effectiveness in delivering projects Partial implementation of recovery practices Disadvantages Difficulties in terms of organisation Increase in costs Increase in the risk of non-delivery Possibilities to have opportunistic behaviours
Source:
Elaboration of the author
The full container sector privatisation option would have the positive effect of reducing the interference of the public sector in the competition among container terminals and it will force container terminal operators to adopt full cost recovery practices, thus having a more clear charges structure. In addition the full
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privatisation option would increase the efficiency of the sector, as it would in principle enhance the responsiveness of investment to the needs of the operator and the effectiveness in delivering container projects. It has been argued that sector privatisation could lead to higher charges. It has been noted though that in general, tariffs in privatised terminals are relatively lower to those in publicly owned ports (Farrell, 2004). The reasons for this would require further investigation, but even if an increase in the charges was generated, it is questionable if it would have any substantial impact in the national economy. An additional problem of the full sector privatisation refers to the fact that the private sector investment decisions would have to be mediated by the Port Authority with the objections and requirements of the other parties involved in the port. It has been rightly pointed out (Rosier, 2004), that the results of this bargaining procedure would probably negatively affect the privatised operator, as it is likely that conflicts deriving from the negative impacts of the new investment on the environment or on the local communities would be difficulty successfully solved if the counterpart was a private company. In this case the doubt remains if this kind of issues can be better handled within a landlord port authority. This leads to the possible conflict of the private sector expansion projects with the objectives of the port authority. Apart from the planning role that has already been outlined in the previous paragraph, other obstacles could refer to the prevention of the creation of monopolies or the macroeconomic goals of the Port Authority (van Hoff, 2004). Another interesting element is the fact that full privatisation of the sector would not allow forms of cross-subsidisation of activities in the port (Rosier, 2004). It is likely in fact that in the current landlord situation, the port management is able to redirect the profits obtained from the most successful activities to the less remunerative one. As far as the PPP encouragement approach is concerned, it has been shown that this is the path that has been chosen by the Dutch Government for the PMR. Such an approach would have guaranteed a better implementation of planning and construction phases, the requirement to introduce recovery practices for the infrastructure and a general improvement of the project itself. The last point in particular is at the essence of a PPP. By allowing the private sector to provide ideas and alternatives for the project, in order to develop better business opportunities, the project as a whole may be improved (Ham and Koppenjan, 2002). The disadvantages of the PPP encouragement approach are referred to the complexity of such partnerships, especially if the scale of the project is big. This complexity may lead to delays large increases in costs and in the end of the risk of the parties abandoning the project. Furthermore the involvement of the government in such a project may generate phenomena of opportunism not only from the side of the private parties, but also for example of the local authorities involved. The risk is of exponential cost rising as every local authority is striving to obtain as much as possible from the project irrespectively of the wider national of international scope of it (the case of the Betuweroute is quite illustrative in this respect) (Rosier, 2004).
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7 7.1
Conclusion Major thesis conclusions
There are various types of port management and financing structures within the EU. In spite of the fact that the industry has been liberalized it is far from being harmonized. One can find public service types ports in Greece to fully private service type ports in the U.K. The most commonly found port type in the European Union is the landlord type port with private investment in superstructure of container terminals. There is also a wide range of private investment in port services such as pilotage, mooring, line handling etc (European Commission, 2002a) The characteristics of port investment differ from type of asset to type of asset. There are probably types of port investments that are and should remain in the public scope for their relevance for the port business, for the possibility of the inducement of free-riding behaviours, for the importance ports have in the national economy, for the difficulties in finding adequate pricing policies, or for the publicgood characteristics of the facility concerned (Haralmbides, 2002). On the other side there are types of investments, such as wharfs, storage and handling facilities, terminals, quays, etc that can be successfully financed on a private basis, and whose costs can be successfully charged on a user base. The characteristics of these types of assets and of the businesses that make use of them are associable to those of the purely commercial sectors and thus do not require public support. For this types of projects public intervention should be restrained to planning, regulation, security and safety control and eventually promotion in the frame of the entire port production complex (World Bank, 2001). Risk should be treated as in all production facilities investments cases. Too risky investment is and should remain less attractive for the private sector. The public sector should not bear operational or market risks as this may generate inefficiencies and may lead to the support of white elephant projects with little or none commercial value. On the other side, regulatory risk should be borne by the public sector and adequate contractual structures should be set up for these purposes. It has been shown that container terminals do not differ substantially from other investments, and various instruments to edge the normal project risks are already well established (Drewry, 1998). It should be clear that a large number of financial engineering techniques and financing parties are available for container terminals. If the project is viable the participation of the public sector in the deal is not required with the exception of marginal aspects. There is evidence of the possibility terminals have to recover entirely the cost of their infrastructure investments. Terminal infrastructure can and should be financed entirely as a responsibility of the private sector (Drewry, 1998). This element would be positive at least for one reason. It would force terminal operators to implement cost recovery pricing. If on the one side, cost recovery pricing would probably generate increase in transport costs, on the other side society would benefit from the availability to other uses of the resources previously
66
spent on port subsidies. Full private finance of container terminals would also benefit the level of competition among terminal operators and ports. If subsidisation was not allowed for any terminal, possibly finding some balancing mechanisms for existing leased terminals, the competition in the sector would take place more on the basis of market drivers (Farrell, 2004). Given the fact that large governmental presence is still found in the port and in the terminal sector, forms of more effective public sector participation in the investment can be found in the so-called Public-Private Partnerships (PPP). PPP may allow a gradual increase in the private sector participation in the terminal investments, from leasehold agreements to BOT (Allen, 2002). But PPP can generate extremely complex results that may seriously hinder the completion of the project. If projects are too complex or too expensive it is difficult that the private sector would be involved by means of PPP. On the other side PPP would offer to possibility to increase the quality of the project (Ham and Koppenjan, 2002). The main obstacles in the fully private finance of terminal infrastructure are related to the presence of countries that subsidise their ports and the adoption of the landlord model. As far as the former obstacle is concerned, the only possibility to reduce the impact of this type of obstacle is individuated in an adequate supranational policy (European Commission, 1997). At the European level the only entity that seems to be able to do this is the European Union. European Union legislation has not yet fully targeted the issue of port financing and state aid, as it is politically very sensitive. In general financial practices are linked to national heritage and the historical developments of ports (Farrell, 1999). The EU also d oes not have any competency to intervene into ownership structures. It only has competency over port legislation as longs as it is part of competition law or law dealing with transport infrastructure. Only the financing of superstructures shows involvement of private investment in most European Union ports (Chlomoudis and Pallis, 2002). As far as the latter obstacle is concerned, it refers to the existence of specific reasons that motivate the use of a landlord port model, that are connected with the history of the port, its cultural setting and the main macroeconomic objectives that are in its scope. Full private financing require the abandonment of such an approach that in the case of large, multi-purpose ports that have strong connections with their hinterland may result in large disadvantages both for the port community and for the inhabitants of the port region (van Hoff, 2004).
7.2
Recommendations
From the results of the thesis and of the case studies, it has been outlined that the private participation of the financing of container terminal sector should be extended also to include infrastructure. In order for this to be possible an effective European policy regulating port investment should be implemented (European Commission, 1997). The policy should aim at allowing container terminals to perform on the basis of their own
67
merits and not on the degree of public support they receive. This type of policy would necessary require the implementation of cost recovery practices in the port sector, such as long run marginal cost pricing (Haralambides, 2002). Ports would charge prices allowing them to recover costs only if they have to (Haralambides, 2002). For this reason the implementation of cost recovery seems to be rather crucial, especially if the existence of existing terminals financed with public monies is taken into account. How should these terminals be priced? A major problem in full private financing of container terminals in Continental Europe is constituted by the use of the landlord port model that is motivated by reasons that refer to culture and history, the attention of macroeconomic objectives and the role of the port authority. In the framework of the landlord model then it would be advisable, as far as container terminals are concerned to increase the private sector participation either by means of PPP or by the partial privatisation of the business segment. However both alternatives present controversial aspects that should be further investigated.
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European Parliament and the Council. Brussels and Luxembourg: Office for Official Publications of the European Communities. COM(2001) 35 final. 29. European Commission (2001c ). White paper European Transport Policy for 2010: time to decide. Brussels and Luxembourg: Office for Official Publications of the European Communities. COM(2001) 370 final. 30. European Commission (2001d). Public-Private Partnership; introduction, handbook, recommendation and conclusions PROFIT, Project Funded by the European Commission under the Transport RTD Program of the 4th Framework Program. 31. European Commission (2002a). ATENCO - Analysis of the cost structures of the main TEN ports , Project Funded by the European Commission under the Transport RTD Program of the 4th Framework Program. 32. European Commission (2002b). Amended proposal for a Directive of European Parliament and the Council on Market Access to Port Services . Brussels and Luxembourg: Office for Official Publications of the European Communities. COM(2002) 101 final. 33. European Commission (2002c ). Vademecum on Community rules on State aid and the financing of the construction of seaport infrastructures, Commission Staff Working Document, Brussel January 15th, 2002. 34. European Commission (2004). Green Paper on Public-Private Partnerships and Community Law on Public Contracts and Concessions . Brussels and Luxembourg: Office for Official Publications of the European Communities. COM(2004) 327 final. 35. European Sea Port Organization (2002), Survey on the possibilities on EU financing for port-related projects. Available from http://www.espo.be/publications/Possibilities%20of%20EU%20financing%20f or%20the%20port%20sector.pdf [Accessed Augustus 8th 2004] 36. Farrell, S (2004). Interview by the author. Farrell&Associates Ltd., London. 37. Farrell, S (ed.) (1999). Financing European Transport Infrastructure. Policies and Practice in Western Europe. Houndmills, Barsingstoke (Hampshire) and London: MacMillan Press Ltd. 38. Finnerty, J D (1996). Project Financing: Asset-Based Financial Engineering. New York, NY: John Wiley & Sons, Inc. 39. Foschi, Alga D. and Cazzaniga Francesetti, Dionisia (2001). The Impact of Hub and Spokes Port Networks on Transport Systems. SSRN Electronic Paper Collection, Available from: http://ssrn.com/abstract=275156 [Accessed June 23r d, 2004]. 40. Goss, R O (1998). British Port Policy since 1945, Journal of Transport Economics and Policy, Vol. 32, No. 1, pp. 257-271. 41. Goulielmos, A M (2000). European Policy of port Environmental Protection. Global Nest: The international Journal. Vol.2, No 2, pp.189-197.
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42. Haralambides H E (2002).Competition Excess Capacity and Pricing od Port Infrastructure. International Journal of Maritime Economics, Vol. 4, No. 4, pp. 323-347. 43. Haralambides H E, Cheung Tam He C and Tsolakis, S D (2000). The future of the hub-and-spoke system in liner shipping. Special Interest Group on Maritime Transport and Ports: Genoa International Workshop (June 2000: Genoa, Italy). University of Genoa. Available from: http://www.informare.it/news/forum/2000/sig2/haralambidesuk.asp [Accessed June 26th, 2004]. 44. Haralambides, H E, Cariou P and Benacchio M (2002). Costs, Benefits and Pricing of Dedicated Container Terminals. International Journal of Maritime Economics, Vol. 4, No.1, pp. 21-34. 45. Haralambides, H E, Verbeke, A, Musso, E, Benacchio, M (2001). Port Financing and Pricing in the European Union: Theory, Policies and Reality. International Journal of Maritime Economics , Vol. 3, No. 4, pp. 368-386. 46. Hoffmann, J (2001). Latin America Ports: results and determinants of private sector participation. International Journal of Maritime Economics, Vol. 3, No. 3, pp. 221-241. 47. Horton, M (2001). Financing port development through private investment. Intervention. Financing and investing in Ports (27-28 September, 2001; London). 48. House of Commons, Transportation Committee (2003). Ports. Ninth Report of Session 2002-03. London, The Stationery Office Ltd. 49. Howcroft, A (2001). Public private partnerships in the port sector. Presentation. Financing and investing in Ports (27-28 September, 2001; London). 50. Irwin, T, Klein, M, Perry, G E and Thobani M (eds.) (1997). Dealing with Public Risk in Private Infrastructure. Washington (D.C.): The International Bank for Reconstruction and Development/The World Bank. 51. Jansson, J O and Shneerson, D (1982). Port Economics. Cambridge, MA: The MIT Press. 52. Juhel, M H (1998). Globalisation, Privatization and Restructuring of Ports. 10th Annul Australasian Summit, Ports Shipping and Waterfront Reform (December 1998). Available from: http://www.worldbank.org/transport/ports/ps_docs/austral.pdfi [Accessed July 19th, 2004]. 53. Juhel, M H (2001). Globalization, Privatization and Restructuring of Ports, International Journal of Maritime Economics, Vol. 2 No. 3 pp 139-174 54. Keppenne, J P (2000). Les aides dEtat dans le secteur portuaire. In van Hooydonk, E (ed.) (2003). European Seaport Law: EU Law for Ports and Port Services and the Ports Package. Antwerp-Apeldoorn: Maklu.
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55. Longobardi, R (1997). I porti marittimi nella legge 28 gennaio 1994, n.84 (aggiornata con la legge 23 dicembre 1996, n.647). Turin: G. Giappichelli Editore. 56. Maresca, M (2001). La regolamentazione dei porti tra diritto interno e diritto comunitario. Turin: G.Giappichelli Editore. 57. Meersman, E, Van de Voorde, E and Vanelslander, T (2002). Port Pricing Issues: Considerations on Economic Principles, Competition and Wishful Thinking. Brussels: University of Antwerp, Imprint-Europe. 58. Musso, E (1996). Citt portuali: l'economia e il territorio. Milan: Franco Angeli. 59. Nevitt, P K and Fabozzi F (1995). Project Finance, 6th ed . Rochester, UK: Euromoney Publications PLC. 60. Nombela Merchan, G and Trujillo Castellano (1999). El sector portuario Espaol: Organizacin actual y perspectivas. Papeles de Economia Espaola, vol.0, No 82, pp 71-85. 61. Notteboom, T E and Winkelmans, W (2001a). Structural changes in logistics: how will port authorities face the challenge. Maritime Policy and Management, vol.28, No 1, pp 71-89. 62. Notteboom, T E and Winkelmans, W (2001b). Reassessing public sector involvement in European seaports. International Journal of Maritime Economics, vol.3, No 2, pp 242-59. 63. Obegi, M D (2002). Financing a port development project with limited recourse debt. Intervention. Port Investors Forum (17-18 June 2002; London) Paper 64. Osborne, S (2000). Public-Private Partnerships: Theory and Practice in an International Perspective. London: Routledge. 65. Peters, H J F (2001). Developments in Global Seatrade and Container Shipping Markets: Their Effects in the Port Industry and Private Sector Involvement. International Journal of Maritime Economics , vol.3, No 1, pp 326. 66. Peterson, M (2000). The tale Big Government in the United States: not over but undermined. Governance, vol.13, No 2, pp 251-64. 67. Piodi, F (1997). The Financing of Trans-European Transport Networks. Working Document, Directorate-General for Research, European Parliament. Luxembourg: European Parliament. PE 166.609. 68. RMPM (2003). Port of Rotterdam . RMPM Publication. 69. RMPM (2004). News available on the web page: www.portofrotterdam.nl. 70. PricewaterhouseCoopers (2004). Developing Public-Private Partnerships in New Europe. PricewaterhouseCoopers: UK. Available from: http://www.pwcglobal.com/Extweb/service.nsf/docid/6FDD654BE69A4B3385
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83. van der Laan, G, Ruys P and Talman, D (2001). Optimal Provision of Infrastrucure Using Public-Private Partnership Conracts. Working Paper, Tinbergen Institute. 84. van der Veer, J P (2001). Private Sector Involvement in Ports: Economics and Policy. Topics, NERA Working Papers, No 24, pp 1-13. 85. van Hoff, G (2004). Interview by the author, Port of Rotterdam. 86. Wiegmans B W, Ubbels B, Rietveld P and Nijkmap P (2002). Investment in Container Terminals: Public Private Partnerships in Europe. International Journal of Maritime Economics, vol.4, No 1, pp 1-20. 87. World Bank (2001). Port Reform Toolkit. The World Bank Group: Available from: http://www.worldbank.org/transport/ports/toolkit.htm [Accessed June 20th, 2004]. 88. Wray, R T (2002). New waves in port finance. Presentation. Port Investors Forum (17-18 June 2002; London).
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Annex 1 European Country Profiles

The following country profiles have been put together on the basis of excerpts taken from Chloumoudis and Pallis (2002: 29), the European Commission (2001a), European Commission (2002a), Farrell (1999: 215-), Longobardi (1997), ESPO (2004), various numbers of the ESPO news, Drewry (2002), and various port websites. The focus of the analysis is on the port management structure and on the responsibility for terminal investments. Belgium There are three kinds of ports: Ports that are run by an autonomous Port Authority (Antwerp, Oostende), ports that are run by a department of the city administration (Ghent) and Zeebrugge, that is administered by a private company with public participation under the supervision of the Flemish Community. The municipal ports are administered by the municipal authority and the Municipal Council that elects the port master. For all three types of ports, authorities deal with land and basic port infrastructure and leave the cargo handling to private operators. n I general the dominant typology is the Landlord Model. With regard to the financing of investments, the situation can vary between the various types of ports. Generally speaking, the basic criteria in municipal ports can be summarised as follows: the public sector (State and Flemish Region) has full responsibility for the construction of maritime access channels, light buoys, docks and navigational aids outside port, sea locks and exterior breakwaters; investments in port infrastructure (docks, quays, reclaimed land, etc.) are financed partly by the State and partly by the municipality. As a general rule: 60% State and 40% municipality; the Municipality has full responsibility for the cost of maintenance of navigational aids inside port and for port infrastructures; superstructures fall into the responsibility of private operators. All the ports have a relationship with the Vlaamse Haven Commissie which is an advisory body under the supervision of the Flemish Minister for Public Works. In 1998, a new decree was issued, that will afford each port the same legal position. One of the most important elements of this decree is the fact that all port authorities will be incorporated. This had already been allowed for in the municipal law of 1995. The ports of Antwerp and Oostende have already taken advantage of the new situation; the port of Zeebrugge possessed corporate identity even before. The new decree will lead shortly to corporate status for the port of Ghent. The new decree also determines very clearly responsibilities. Regarding financing practices, the decree states that the Flemish region has full responsibility for the construction of maritime access channels, the investments in port infrastructure, and the maintenance of the basic port infrastructure of the seaports. On the other hand, the port authorities will get a bigger responsibility for the investments in commercial infrastructure.
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Bulgaria The Bulgarian seaport system comprises two commercial port complexes -Varna and Bourgas- with a total handling capacity of more than 40 million tonnes. The seaports of Varna and Bourgas offer a combination of favorable geographical location, strong industrial hinterland and excellent rail and road access the strategic European gateway on the TRACECA route to and from the Caucasus, Caspian Region and Central Asia. The total throughput, which passed through Bulgarian ports in 2003, was over 25 million tonnes, of which 21 million tonnes were handled in seaports and 4 million tonnes in inland ports. Traffic increased for the following goods: metals, ores and not-metal minerals, containers. Bulgarian sea and inland ports are territorially united in incorporated public liability companies, with 100 % government shareholding. The present port management system is a tool port system, which is typical in countries like Bulgaria with a central planned economy. Following the adoption of the Law on sea, inland waterways and ports in 2000 and the establishment of the Port Administration as Executive Agency, appropriate conditions were created to ensure a transfer to a more modern port management system. In the new Land Lord Port system, the government owns the port infrastructure and concedes it for operation to private businesses under different conditions (concession, joint-venture, contract). Amendments to the Law on sea, inland waterways and ports are currently under preparation, which should determine and implement the Land Lord Port System. In 2003 the Law passed in first reading in the Bulgarian Parliament and it is expected to be finally adopted in 2004. This new Law will create opportunities for evolution and reform in the Bulgarian port system. There are plans for the establishment of a National Company for ports management in 4 territorial departments, in the cities of Varna, Bourgas, Rousse and Lom. The National Company will manage public transport in ports of national importance and will manage and organize the ports operation. Services in the ports will be performed by specialized operators. At this stage these are public joint stock companies. Some of the port services (i.e. nautical services pilotage, tugging, etc.) are fully performed by private companies. The process of concession (privatization) in Bulgarian ports is expected to start during 2004. Cyprus In Cyprus the ports are administered by the Cyprus Port Authority that is the Governmental department responsible for the formulation of the policy for the Cypriot ports and their development, management and operation. waters as Particularly Sensitive Sea Areas The Cyprus Ports Authority (CPA) is a semi governmental autonomous organization established by law in 1973, responsible for the development, maintenance and operation of the ports of Cyprus. CPA is managed by a nine member-board appointed by the Council of Ministers for a term of three years. Its main functions, besides its regulatory role, include the provision of port infrastructure, equipment and services for the accommodation and facilitation of ships, cargoes and
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passengers. Loading and unloading of vessels and handling of cargo are, on the contrary, carried out by the private sector. The main ports of Limassol and Larnaca are multipurpose ports and serve the Cypriot economy, while specialised oil terminals at Larnaca, Moni and Dhekelia handle petroleum products (mainly imports). The industrial port of Vassiliko handles mostly dry bulk cargo for the needs of the local cement factory. There are also a number of small ports (at Limassol (old port), Paphos, and Latchi) that are currently used for fishing and leisure boat activities. All port facilities of the island are under the jurisdiction of the Cyprus Ports Authority (CPA), a statutory body set up in 1973. The role of CPA is to implement and promote government policy but it also has the obligation to be commercially oriented as it has to be self financed. It is practically the only investor in ports and it carries out part of the port operations mainly pilotage, cranage and store keeping. However the bulk of the activity, stevedoring and shore operations, is in the hands of the private sector. This has enabled our ports to reach high standards of productivity, distribution and feedering services to wide international region. Denmark Danish ports even if respond to four different definitions are all entrusted to a collegiate body administered by the Mayor or a Port Director. There are four types of ports: ports owned by the state, ports owned by the municipality, privately owned ports and a trust port (Copenhagen). There are various types of management. Municipally owned ports are the largest groups in Denmark but there are also a couple of smaller privately owned ports. The ports act independently with the freedom to negotiate prices, dues and charges. If the port is holding a dominant position, the Ministry of Transport will supervise the charges. Copenhagen is the only trust port whose supervision falls under the competences of the Ministry of Transport and the Ministry of Environment and Energy. In general the dominant typology is the Landlord Model. The principal types can be described as follows: Municipally governed and self-owned ports (e.g. Aarhus, Aalborg, Odense and Fredericia) are set up by act of Parliament as economic independent and selfowned public bodies, directly responsible to the City Council with a Harbour Board entrusted with the immediate administration of the port. Trust port (only Copenhagen). It is a self-owned semi-independent body set up by Act of Parliament. With the exception of certain controls (see later) the port is an autonomous body. State owned ports (e.g. Fredrikshavn and Hirtshals) under control and supervision of the Ministry of Transport. Only the port of Esbjerg is owned by the state and administered by a local board responsible to the Ministry of Transport. Private owned ports. Municipal ports are the largest group of ports in Denmark including large ports as Frederecia, Aarhus, Kalundborg, Koege, Randers and Vejle. Some municipal ports are fairly small undertakings and have simple and comparable management structure, usually sharing certain key management posts with the municipality.
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In general, each port has a Chairman and a Board or a Harbour Committee, (the Chairman is frequently the Mayor of the town concerned, or is otherwise elected among the members of the City Council), and a General Manager or Harbour Director, who is always a full time employee either of the Harbour Board or of the municipality and is in charge of the running of the port authority in accordance with current legislation and the provisions laid down by the board and the statutory act. Public Danish Sea ports acts on an independent commercial basis with the freedom to negotiate prices, dues and charges with their customers. The Ministry of Transport only supervises Port dues and charges on ships and goods in cases where a port holds a dominating position. Estonia There are 14 major ports in Estonia which handle commercial traffic. The main port, the port of Tallinn, incorporates four individual ports: the old City Harbour, Muuga, Paljassaare and Paldiski. Besides, a new fifth harbour in Saaremaa to host cruise and passenger traffic will be completed by spring 2006. Other main ports in Estonia include Parnu and Kunda, both of which offer bunkers. As the largest passenger port in the Baltic States, Tallinn offers regular year-round ferry services to Helsinki in Finland and Stockholm in Sweden. Tallinn also has extensive transportation links to Europe and the rest of the world, by sea, road, rail and air. Port of Tallinn handles cargo and services passengers and is of landlord type by its nature. As a landlord it administers the infrastructure of the harbours (land, quays, etc.), looks after its development, receives vessels and sends them to roads and ensures safe navigation in port waters. Estonian ports are operated (no matter whether ports are privately, municipality or state owned) as public limited companies based on the articles of association of the company, commercial code and other legal acts of the Republic of Estonia. The Estonian Maritime Administration, a governmental unit under the Ministry of Economic Affairs and Communications, aims to ensure safe navigation in Estonian territorial and inland waters. It also controls marine traffic safety, offers lighthouse and hydrographical services and issues diplomas and service records. Finally, it also offers vessel traffic services, including pilotage and icebreaking. Port of Tallinn operates as a public limited company based on the articles of association of Port of Tallinn, commercial code and other legal acts of the Republic of Estonia. Port of Tallinn operates as a landlord type of port and its main fields of activity include the maintenance and development of infrastructure and reception of vessels. Finland In Finland, ports can be private or publicly owned. Privately owned ports are administered under the municipality that has a large decisional autonomy. Finland has more than 40 noteworthy ports of which the large and medium-sized ones function as commercial enterprises. The smaller ports operate in close contact with the municipal authorities, often as part of the technical bureau of the
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municipality. The relationship between the municipality and its port is generally quite close due to municipal legislation and old port traditions. From the institutional point of view, Finland has both public and private ports. All public ports are municipal, which means that municipalities are responsible for the administration. It is also possible to change ports into a company form. In addition, there are industrial ports, each serving transportation needs of only one industrial enterprise. Port Authorities are headed by a Port Director, or in smaller ports by the Harbour Master. The principal administrative body is usually a Harbour Board, elected during the local government elections. Boards consist of 5 to 9 members, elected for a period of 4 years. The remaining administrative functions are the remit of the port manager or port director and other personnel of the port authority. According to a law of 1995, the category of public-private ports has been envisaged, in order to create the framework for private commercial activities to be run in areas still remaining in the public administration. The administrative Scheme for Municipal ports is generally based on a Harbour Committee (which is part of the City Council) leading a body called Port Authority. The Harbour Committee has in turn to rely - in some issues - on the general policies and/or regulations of the Central Government, mostly the Board of Navigation (see below), the Board of Railways and the Ministry of Transport. Municipalities have the authority to decide on their tariff policies. Decisions are made by the Port Board, especially in larger port cities; in the smaller ones, decisions are mainly made by the municipal Council. In the port area, the port is in most cases responsible for investments in piers, quays, rail mounted cranes, road, railway, storage and navigation channels. For these purposes Port Authorities collect port dues on ships and cargoes. The State, on the other hand, is responsible for sea channels outside the harbour limits as well as for icebreaking, and collects fairway fees (including lighthouse and icebreaker expenses) and pilotage fees. Customs activities are regulated through a special law, according to which international traffic is allowed only via customs in public traffic places. The District customs office may for special reasons, decree that international traffic may also take place elsewhere. Cargo-handling activities are in the hands of private companies. All services, with the exception of mooring and provision of fresh water to ships, are supplied by private companies. The private sector employs dockworkers and invests in machinery, handling facilities, mobile cranes, warehouses. The Finnish National Board of Navigation, a body reporting to the Ministry of Transport, is responsible for the maritime administration. The Board follows closely developments in navigation and shipping, its activities aiming at promoting, safeguarding and arranging conditions favourable to navigation. Its administration comprises four maritime districts, organised as regional profit centres, and responsible for tasks such as rules concerning pilotage services, maintenance of
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sea and inland water lanes, public transport in the archipelago, the supervision of maritime safety, canals, timber floating lanes and small craft facilities. As for services, pilotage is the responsibility of the State. Some port authorities have port pilots, who work inside the area. Towage is the responsibility of the municipal port authorities, but most Finnish ports have given it to private towing companies. Mooring and unmooring are the responsibility of the port authority. All Finnish ports publish separate annual accounts. Where cargo-handling is carried out by limited companies, their accounts have to be accessible for public inspection. The same is true for any organization carrying out other port activities. In principle profit calculations on new investments are made on a commercial basis, so that port can function as a sound enterprise. The intention is that individual investments should pay for themselves, in the long term. However, such methods cannot be applied to the establishment of such items as safety facilities and some special services for shipping, e.g. fire fighting appliances, lifesaving equipment, etc. France In France ports are distinguished among Ports Autonome that groups six autonomous ports (Dunkerque, Le Havre, Rouen, Nantes St. Nazaire, Bordeaux and Marseilles) and eleven non autonomous ports that are considered of national interest. The autonomous ports are administered with high dependency in port management and administration on the government. The non-autonomous ports are under the control of the ministry of transport and have specific military characteristics, while the other are administered by local authorities. In addition, some smaller ports are either under the responsibility of the departments or directly under the supervision of the Minister of Public Works. At the six autonomous ports the state funds 100 per cent of the operating and maintenance costs, 80 per cent of the costs of breakwaters, access channels, locks and basins, and 60 per cent of other infrastructure costs. The remaining is financed with local budgets. In general ports are not expected to recover the state contribution to infrastructure costs. Superstructure, including cranes, has been traditionally been provided by the port authority and operated on its own account or hired to private operators. More recently the equipment has also been provided by the private operators or by the local authorities. The dominant model is the Tool Port. Germany In Germany the majority of ports are not administered by bodies with legal personality. This implies that even if the ownership of port territory and waters falls with the Lnder or other local communities, in general the administration and the different competencies vary from port and port. Ports can belong to a Bundesland (Emden, Cuxhaven), to a Bundesland and a municipality (Hamburg, Bremen, Wilhelmshaven), to a municipality alone (Kiels, Flensburg) or to a private company (Nordenham). Some of the former ports of Eastern Germany have been handed over to the municipalities as they were completely owned and operated by the state. The port of Rostock is a mixture of private (superstructure and cargo handling
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services) and public management structures. In general the administrative competencies fall on local agencies, private companies publicly owned and private companies. The dominant model is the Landlord model. Cargo-handling operations are entrusted to private companies in whose property Municipalities often have a share. Tariffs are fixed on a market basis without any intervention on the part of Port Authorities. As they are not an independent entity, ports have no separate accounts. As general rule, territorial authorities do not allow for the depreciation of investments. The main incomes of the ports are derived from: port duties for the use of port facilities; rentals for special use of areas of land or water dedicated to public traffic; harbour pilotage fees. Greece Greece has public and private ports and are classified in three categories: National, prefectorial and local. Pireaus and Thessaloniki are public corporations administered by public port authority, while the other ports are subjected to the Prefectures and have different degrees of autonomy. All the ports are under the supervision of the Ministry of Merchant marine. Public ports are managed by a port treasury with autonomous bodies under the control of the Ministry of Merchant Marine. The Port of Piraeus is a port organization with a higher degree of autonomy but under the Supervision of the Ministry. Fully private ports are specialized ports dealing with some industrial shipping cargoes (e.g. tankers). Even if the ports are publicly owned, the port of Piraeus and the port of Thessaloniki are listed in Athens Stock Exchange. The dominant model is the Tool port. As for the institutional framework, in Greece there are two different types of Ports, Public Ports and Private Ports, defined mainly according to their commercial or industrial nature. State Ports are generally operated, organised and managed by means of Port Treasuries, which are autonomous specialised bodies operating as Legal Persons in public law and exercising delegated state authority under the control of the Ministry of the Merchant Marine. More precisely, two kinds of State ports can be identified: Port Organisations (e.g. Piraeus) and Port Funds (58 at all), with different degrees of autonomy, higher in the former case. As for Port Funds, direct supervision and control is exercised by representatives of the Regions (Regional Directors), at a prefecture level, under the legislation relating to the decentralisation and delegation of authority to the Regions and Prefectures. Under a law of 1994, local ports can be administered by municipalities, according to a classification of ports into three categories, i.e. those of national, prefecture and local importance. Private ports are dedicated port facilities serving specific industrial activities. Goods handled through private port facilities are mainly liquid or dry bulk cargoes. T he
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relevant installations are constructed, maintained and operated by the private companies whose goods are handled there, and the private nature of these ports is evidenced by the fact that only ships with related business are allowed entry to these ports. With regard to the functions of Port Authorities and Port Ruling Bodies, all Public Ports in Greece are of the operating port type (Comprehensive Port Authorities). The functions of the administrative body (Port Organization or Port Fund) cover port development, management and cargo-handling. Pilotage, towage and mooring are assigned legally in a unified way to third parties (pilotage and mooring to the Pilot Service an organization under the Ministry of Merchant Marine -, and towage to authorised private companies). Port organizations are administered by a Board of Directors and managed by a General Manager appointed by the Ministry of the Merchant Marine. In Port Funds, administrative and management functions are carried out by Port Committees of nine or six members, according to their prefectural or local level. The Chairman of the Committee is elected by its members, but the appointment is subject to the approval of the Regional Director. Since ports in Greece are of the operating port type, there is limited scope for Authorizations and Concessions of Services to third parties. Concession of public berths to third parties is not allowed by the Civil Code (ports being considered public utilities of public use). On the other hand, the legal regime gives broad opportunities for concessions for the use of land area. In this case, concessions awards can be made either directly or through a tendering procedure; fees and terms are fixed by the administrative body of the port, but all decisions are subject to the approval of the Regional Director. In the case of private ports, concessions of land are awarded by the State to enterprises planning to construct port facilities to handle their own commodities or bulk cargoes of third parties. There are no specific drawbacks associated with this legislation. Nevertheless, the fact that all ports in Greece are of the operating type creates certain problems regarding ports ability to award concessions of services to third parties (cargohandling, storage, etc.). As far as land use is concerned, Port Administrative Bodies can establish a zone of land and sea, called Port Zone, where they undertake, or plan to undertake, port works. Within the Port Zone, the Port Administration Body can award concessions of land use to third parties, which is not possible for public berths. Work to design and construct maritime access and infrastructure is financed by the State (public investment programmes). Superstructures are financed by public investment programmes, Prefecture Funds and Port Treasuries. Ireland Irish ports have been traditionally autonomous local bodies under central government control, but the 1996 Harbours Act puts them on a more commercial basis by establishing state-owned companies to manage each one of the 12 largest
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ones on a self-financing basis. In 1997 The Irish government passed a legislation that corporatised 11 ports including Cork, Drogheda, Dublin, Dun Laoghaire, Galway, New Ross, Shannon Foynes and Waterford). This meant that each port was given responsibility for management, control, operation and development of its respective, harbours whilst generating sufficient revenue) but with less state influence and involvement. The government is now assessing whether there should be a change from this current operating method with possible greater private sector involvement that would entail further opening up of facilities in the counry to private investors. Even if they enjoy autonomy and are directly administered by local bodies, Irish ports are under the control of the Ministry of Marine. The Irish model can be identified in the Landlord model. Italy The ports of Italy are divided into three categories, military ports, commercial ports of national interest and commercial small ports. The military and the commercial small ports are directly administered by the Ministry of Infrastructure and Transport by means of the Director General for infrastructure and maritime navigation, while the commercial ports of national interest are administered by a Port Authority. The Director General deals with the formal nomination of the president and the administrative bodies of the port authorities. As far as port infrastructure is concerned, the Director General is responsible for the evaluation of the proposal of the peripheral offices and the allocation of National financial resources. Although Italy intends to move towards self-financing, its ports continue to receive substantial state aid. At the Voltri container terminal in Genoa for example, the infrastructure was fully financed by the Government and the superstructure on a 50/50 basis, even if the terminal is operated as a private concession. The dominant model is the Landlord model. Latvia There are 10 ports in Latvia. The three main ones are Ventspils, Riga and Liepaja all of them mostly working with transit cargoes. Around 90% of transit is going through these ports, mainly from the CIS countries to the west. Latvia is the main transit trade route through the Baltic Sea region. Ports of Ventspils, Riga and Liepaja are ice-free all year round. There are seven small ports in Latvia operating basically as fishing and yacht ports, handling also wood products. Ports of Riga and Ventspils are operating as Freeports for already 10 years. Port of Liepaja is part of the Liepaja Specialized Economic Zone. Companies working in Freeports and SEZ can receive up to 80% tax discount. The amount of rebate depends on investments made during the tax year. The first stevedoring company to be privatised was in 1998, in Riga. The country is in transition towards the landlord model. The ports in Latvia are operating as landlord ports according to the Law on Ports, adopted in 1994 as an umbrella law for the port sector. This model of port management provides that the port authority acting as a non-profit entity manages only infrastructure and looks after the policing of port operations, leaving the actual provision of port services to be the responsibility of the private sector that rent port sites from the port authority.
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The ma in functions of the port authority are maintenance of infrastructure, provision of safety of navigation, collection of port dues and charges, determining of the port regulations, control and prevention of pollution, provision of free zone licenses to companies operating within the port, monitoring of compliance of business activities to legislation. The head decision- making institution of the port is the Board, composed of four representatives of the respective municipalities and by one representative from the ministries of Transport, Finance, Environment and Economics. Subordinate to the board is the executive body of the port authority directed by the Chief Executive Officer. The State policy regarding the development and the operation of all ports in Latvia is coordinated by the Latvian Port Council, which is led by the Prime Minister and which comprises of head officials of the municipalities and professionals operating in the port sector. The operation of the Freeport of Riga is additionally determined by the Riga Freeport Law, determining the Free Port status to the whole territory of the Freeport of Riga. The main advantages of the status are tax relief to companies licensed to operate within the Freeport territory. Customs duty, excise and value added tax are applied at a rate of 0%, income tax is reduced by 80% and real estate tax by 80 to 100%. Lithuania Klaipeda is the only seaport in Lithuania, a landlord port where cooperation between public and private sector is very important. The main investment programme of Klaipeda State Seaport Authority (KSSA) covers the period 2002-2006 and costs LTL 382 million (i.e. approximately 107 million), aiming to the rehabilitation of the maritime access of Klaipeda port, the reconstruction of quays, and the reconstruction of road and railway access to the port. Klaipeda port is the only port in Lithuania and it is extremely important for the national economy. Port territory is owned by the state and it cannot be privatized. SE Klaipeda State Seaport Authority, representing the state interests, leases the port berths to private operators. Moreover Port Authority secures safe navigation in the port waters, executes common works, dredging works and berths reconstruction works as well as promotes the port itself. The main income sources are port dues and territory lease dues. Malta The Malta Maritime Authority (MMA), through its Ports Directorate, is the port authority for both ports at Valletta and Marsaxlokk. Together both ports handle about 1.3 million TEUs, mostly transhipment, 7 million tonnes of general and bulk cargoes and around 450,000 cruise and ferry passengers per year. The MMA is an autonomous public agency and is self-financing, including investments in infrastructure, dredging and the safe navigation in ports and approaches. Port services are provided by private enterprises through leases and contractual agreements entered with the MMA or Government. The container terminal is due to be privatized. Infrastructure investments projects in the short-term amount to circa 300 million Euro.
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The Malta Freeport Corporation manages the transhipment container terminal, the fuel installation and the distribution centre within the freeport zones at Marsaxlokk. At Marsaxlokk there are three other fuel installations , besides being an important fishing port. Valletta is a multi-purpose port for general cargo, fuels, passengers and ship-repair. The MMA, as the port authority, is responsible for the overall regulation of the ports, including the authorization of service providers, the provision of infrastructure, except for the free zones, dredging and safety of navigation in all ports and the promotion of the ports. The MMA is actively involved in the identification of niche markets, the consolidation of Valletta as a major cruise port and, given the islands geographical position, in initiatives that further enhance the concepts of the Motorways of the Sea and Short Sea Shipping. Netherlands In the Netherlands most of the ports are administered by the municipality while some ports are administered privately. In general the administration of municipal ports is different from port to port, but three models can be individuated: direct administration by municipal authority, Havensbedrijf, where the port authority is separated by the municipality and the Havenschap in which a collegiate body representing the various level of government administers the port, appointing a director for everyday administration. Ports are in a way or another owned by the municipality (Amsterdam, Rotterdam) or a state with participation of the municipality. There are also some ports owned by private companies. The port of Rotterdam is an autonomous company fully owned by the municipality that also detains ownership of the port land. Poland The ports of Gdansk, Gdynia, Szczecin and Swinoujscie handle about 90 % of all Polish maritime traffic. General trends of cargo traffic observed during the year 2003 show good developments in a majority of cargo types and especially in containers and ferry/ro-ro traffic. However, a decreasing trend in coal exports in Polish ports has been noted, due to the limits imposed on coal production resulting from the restructuring process of the Polish coal mining industry. This decreasing trend of coal exports is expected to continue during 2004. The major Polish sea ports of Gdansk, Gdynia and both Szczecin and Swinoujscie are managed respectively by three landlord type port authorities. The port authorities are joint stock companies, of which the State Treasury is a majority shareholder. According to the Act on Sea Ports and Harbours, port authorities must sell all their shareholdings in the port operational sector by December 2005. In 2003, the port of Gdynia authority has sold 100 % of the shares of its company operating Baltic Container Terminal to the International Container Terminal Services Inc. of Manila. The authority of Szczecin and Swinoujscie seaports has significantly reduced the percentage of its shares in the companies providing operational services within its ports area. The port of Gdansk authority is analysing various scenarios for restructuring and further privatising its general cargo stevedoring company. Successful privatisation of this company will end the process of
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privatisation of operational services in the port of Gdansk. All three port authorities plan to continue the process of privatisation during 2004. Portugal In Portugal ports are state owned, with the exceptions of the ports of the Azores and Madeira, which are controlled by autonomous regions. As far as management is concerned two groups can be divided a group managed by a Port Authority (Lisbon, Douro, Leixoes, Sines, Setubal and Sesimbra) under the supervision of the Ministry and a second group managed by an Executive Director/ autonomous council under the supervision of the General Directorate of Ports, Navigation and Maritime Transport in accordance to the provision of the port statutes. The Port of Lisbon is managed by a public body. Port land is state owned. The dominant model is the Tool Port. Rumania The port of Constantza and its satellite ports-Midia and Mangalia are public-private maritime ports, with regulatory and landowner function in the responsibility of the state, through specific duties accomplished by National Company Maritime Ports Administration SA Constantza (MPA) and Romanian Naval Authority (through its division - Harbour Master), both of them being coordinated by the Ministry of Transport, Constructions and Tourism. The day-to-day running of the ports is carried out by the Coordination Commission for the movement of maritime and river vessels in Constantza, Midia and Mangalia maritime ports. The management of the Commission activity is performed by MPA. The Commission is assigned to coordinate the traffic of maritime and river vessels, to establish the order of arrival/departure and transit for the maritime and river vessels in Constantza, Mangalia and Midia ports and to allocate the berths. Maritime and cargo related services in the Port of Constantza are mainly performed by private companies. Services are provided in a competitive environment, applying the free market principles, with no monopoly in the area. Authorization of public port services is transparent, non-discriminatory, and objective. The Romanian Naval Authority issues authorization for safety services and services of great importance for the port, such as loading - unloading, bunkering and supplying. For authorization of activities that use the port infrastructure, notification from MPAC is required. For other activities that do not require an authorization from the Romanian Naval Authority, MPA SA Constantza issues operation permits within the port area, against a specific procedure. Slovenia Slovenia has three main ports, Koper, Izola and Piran. The port infrastructure at Koper cargo port is in the majority ownership of the state and is managed, in accordance with valid regulations, by the Port of Koper joint-stock company, which is one of the most important economic entities in the country. Luka Koper, differs from other European ports by its organization, management and business operations. Besides the performance of some functions of the port's authority, the port provides for the management, operational management, performance and
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marketing of basic (handling and storage) and additional services at eleven specialized terminals which are marketing planning and technologically autonomous company's units. The terminals are included into profit centres. Spain Spanish ports were administered by the Puertos del Estado, that used to retain entirely the control over the port. The Spanish port system went under a recent infrastructure change and the ports were transferred to public bodies acting within the framework of private law. The Port Authorities are also now responsible for port services (mooring, pilotage and towage), which were before the responsibility of the military. Nevertheless Port Authorities are public bodies that act autonomously. Puertos del Estado remains the overall public body in charge of port development. It owns land and estates and receives means from the state and contributions from the Port Authorities. Port Authorities are responsible for all port infrastructures. The ports should be able to finance its infrastructure through revenues but can obtain subsidies for investments from Puertos del Estado. Port services can either be managed by the Port Authority or by private companies. Private investment is made in cargo handling equipment. In the Port of Barcelona, cargo handling equipment is part of private investment. Mooring and pilotage is public and towage is private. The dominant model remains the tool port in transition towards the landlord port model. Sweden Today there are approximately 50 commercial ports in Sweden, and the trend is to reduce their number within few the next years. Common trend is also an integration of the port and the stevedoring into one unit. Originally, all public ports in Sweden were owned by the local authorities and run as administrations, whereas the stevedoring activities were run as companies, often privately operated. In order to meet the demand for technical development in ports during the sixties, with considerable investment by both authorities and stevedores, ownership of the latter was gradually transferred to the municipalities. Development was pushed further during the 1980s, for reasons of both efficiency and costs, resulting in integration of the administrative and stevedoring functions. Such new organizations, port companies, have been established in a number of ports, including Gothenburg, Helsingborg and Malm. Although port companies are mostly municipally owned, there is an increasing involvement of trade and industry interests who are heavily dependent on efficient sea transport systems in order to compete successfully with companies located closer to the main European markets. With regard to the infrastructure, the owner is still in most cases the municipality, whereas the port company leases the area according to the terms of the lease as stated in an agreement between the port company and the landlord (municipality). In Sweden, municipalities have a considerable degree of independence vis--vis central government. As a consequence, the planning and financing of the infrastructure in the harbour system has been for many years the responsibility of the municipalities. It should be mentioned however that the State aims to get an
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annual overview of total investments in infrastructure, in which ports form an important part. Local authorities are free to set taxes and to decide dues. A special point is the new CM Port, a project under progress and expected to be a reality next year. In the CM Port, the communities of Copenhagen (Denmark) and Malmoe (Sweden) are joining forces in a venture where the two ports are operated and marketed as one unit. United Kingdom In the UK ports are divided into trust ports, municipal ports, and private ports. The internal working of the ports is determined independently by the statute. The UK is the best example in the European Union for its private service ports. Private ports are entirely independent from the government. They are either owned by shareholders, railways or private companies. Trust ports are autonomous bodies not owned by a public body. These are smaller ports that reinvest all profits. The most important trust ports in the UK are Dover and Milford Haven. Municipal ports are run by a local authority with control from the state. Most important municipal ports are Sullom Voe, Flotta and Portsmouth. All ports in the UK are responsible for the services and all investment in infrastructure. There is a higher degree of private investment, especially in basic infra- and superstructure. Ports are not publicly funded at all. Ports are free to charge what they consider to be feasible, as all costs have to be recovered from their revenues. Dover is a statutory corporation with no shareholders. Private stevedoring companies operate in the port supplying their own equipment and cranes. All infraand superstructure is financed by the port. Depreciation is up to 35 years for quays, berths and buildings. Felixstowe is operated by a private company. All investments are made by the port and have to be financed through revenues. The ports responsibilities are cargo handling operations, security and safety, stevedoring services, construction of all infrastructures and management of land within the port area. Capital is borrowed on the open market and profits are used as directed by the shareholders. Outside the port limits, a trust port is responsible for maintaining the maritime infrastructure. Towage is provided by a private company. Southampton is operated by a private company (Associated British Ports) which also owns and operates twenty-two other ports in the UK. The port is fully responsible for all managing and financing activities including the maintenance of navigational aids, surveying, dredging, pilotage and vessel traffic management. Investments are financed through traffic profits or from capital borrowed on the open market. Only cargo handling is operated by a different private company and is operated as a separate entity within the port. Profits are distributed as directed by the shareholders.
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Annex 2 Types of Public -Private Financing schemes

The annex should explain the various types of financing and management partnership schemes found in ports today. The description and definition of these schemes is based mostly on the Port Reform Tool Kit of the World Bank (2001: mod 3), the PROFIT project funded by the European Commission (2001; 37-46), Finnerty (1996: 195-9) and Notteboom and Narayana Murthy (2001). Agreements that entail temporary release of ownership Agreements that entail temporary release of ownership are the most popular type of model used to finance port terminals and entail the grant from the port of a (exclusive) concession for a specific amount of time to one or several private companies who will then either provide or develop a port service. Concession agreements may be restricted to the provision of services, i.e. without the involvement of private capital, or can include the full development and private investment of terminal infrastructure. A key features of a concession is some kind of exclusive right in the provision of the service as generally only a limited number of concessions is awarded. In this way the lessor is usually protected so that no other firm can handle container in the port. Concession agreements can be divided into: Management contracts (MC).In the Management contract system, the port authority/government contracts out the management of all, or parts, of the port to a specialised private operator for a given period of time, and under specified conditions, such as performance criteria, economic incentives and maintenance and infrastructure commitments Leaseholds contracts. A private company enters a long-term lease on the land or terminal facilities and is responsible for the superstructure and equipment. Leasehold agreements can be a substantial source of port revenue but do not generally entail the participation of the private sector in the financing of the infrastructure. The development of some part of the terminal requires a variation of a lease contract that is called Build Lease and Operate (BLO) or Lease, Develop and Operate Agreement (LDO). In this case a private company constructs and operates the facilities through a long-term lease on existing publicly owned facility and surrounding land from the host government. It develops and operates the facility under revenue-sharing contract with the host government while the host government holds legal title. The BLO model s i attractive when private entities are not able to raise the full purchase price of the existing facility (e.g. as the BBO model requires). Full Concession (or BOT) contracts. The Build Operate and Transfer (BOT) scheme is a concession arrangement for a specific period of time in which the concessionaire is responsible for the construction, the operation and maintenance of the facility over the term of the concession. During the concession the operator collects all revenues. At the end of the period, the asset is transferred back to the port at no cost. Under this scheme, the private investors take over the full risk of completing the project and operating it profitably. The benefit for the port is that the private
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sector will finance entirely the infrastructure bearing the risk. There are several variations of the BOT scheme, some of which are described below here. Design Build Finance - Operate (DBFO): Variant of BOT in which also the phase of design is included in the responsibilities of the private sector. Build Operate Renewal (BOR): This is a combination of DBFO where the private party takes up the cost of financing the project, operates it and is allowed to charge a tariff on the use of the facility in order to earn back its investment. After completion of the agreement, the private company can once more negotiate for a renewal of the concession agreement. Build Own Operate Transfer (BOOT): The BOOT scheme is also a variant to the Build Operate Transfer (BOT) scheme. The World Bank (2001) differentiates this agreement from the BTO (Build Transfer Operate) agreement by specifying the way of transferring the facilities back to the port. The difference is that in the BOOT scheme, the ownership of land and facilities is transferred bac k to the port at an agreed price at the end of the concession period. Build Transfer Operate (BTO): This is another variant of the BOT scheme where the facility is directly transferred back to the port after construction and a certain amount of testing period. Private Entities design, finance and build the project. They transfer legal title to the host government (or some local or regional public authority administered by the host government) immediately after the project facility passes its completion tests. The private entities then lease the project facility back from the public authority for a fixed term. A longterm lease agreement gives the private entities the right to operate the project facility and to collect revenues for its own account during the term of the lease. At the end of the lease term, the public authority operates the project facility itself or hires someone else (possibly the private entities originally involved) to operate it. Under this model, the host government or public authority has, at most, only very limited responsibility for the projects financial obligations; the project company has principal responsibility. It can be found in less developed countries or countries where legislation restricts private ownership of port infrastructure (e.g. South Korea). The private party also takes the risks for any cost due to delays and the implementation of the facility. Another variation of this scheme is that the private company after transferring the facility back to the government lease it back and continues to operate it under a lease or rent contract. Buy Build Operate (BBO): A private firm buys an existing facility from the host government (taking legal title), modernize or expands it, and operates it as a regulated, profit-making public-use facility. Underdeveloped, deteriorating, or congested infrastructures are good candidates for this financing structure. The BBO Model may prove to be popular in coming years because of the many public existing facilities that require repair or expansion. Wraparound BOT (WBOT): This scheme is used for port expansion. A private firm expands an existing government owned core facility. The private firm holds legal title to the addition only. The private firm might operate the entire facility under contract to the government, or only the portion it owns.
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Furthermore, the private sector can manage the government owned sector under a management contract and expands the facility under a Build Operate Transfer (BOT) contract with another company. In many cases the government invests in basic infrastructure and the private company in superstructure. The most important advantages of this model are that the ownership is shared and the private firm is not responsible for repaying any debt incurred to build the core facility. Rehabilitate Operate Transfer (ROT): This is another variation of the BOT scheme in which the port transfers the asset temporarily to a private company for a certain period of time. The private company operates it and rehabilitates it. After this period, it is transferred back to the government or a concession agreement is granted to another concessionaire. Temporary Privatisation: A private firm takes over operation and maintenance of an existing government-owned facility. It then expands or repair the facility, operates it, and collects user charges long enough to recover the cost of the expansion/repair (including a reasonable return on invested capital), or until its temporary franchise expires. The host government continues to hold legal title. From the standpoint of the host government, this models biggest advantages are that the private firm bears the financial risk and provides to the host government a contractual agreement the tolls are temporary. Agreements that entail indefinite release of ownership Private entities receive a franchise to finance build and operate the project for a fixed period of time, after which ownership would revert to the host government (or some local or regional public authority administered by the host government). Ownership reversion would be planned to occur only after the private sector entities had received the return of, and a satisfactory return on, the capital they had invested in the project. In return for the ownership revision, the host government might be asked to furnish some limited credit support for project borrowing. The BOT structure is attractive to host governments because of the ownership revision feature. The Build Own Operate (BOO) scheme is the one that represents full privatisation. This variant is going towards full privatisation of the terminal since the port land and the facilities built on it are not returned to the port at the end of the project. In the EU, it can primarily be found in the U.K. This scheme always requires the respective legislation to go along with it. It further requires that the private investor has to bear the full risk. Rehabilitate Own Operate (ROO) is another variant of full privatisation. The agreement for the private company is to rehabilitate the asset and to run it indefinitely that is as long as the private company does not violate the contract. It is not a full privatisation but could be classified as such due to the option of having an agreement without time frame. Perpetual Franchise Model (PFM) The private entity finance and operates the project under a perpetual franchise from the host government. These entities retain title to the assets. Within this model all the financial support for project related
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borrowing is provided by private entities. The government regulates safety, quality of service, and, possibly user charges and profits. Joint Ventures Joint ventures represent another type of financing where the ownership is divided between the port authority and a private company. In joint ventures, the investment is shared between the public and private sector taking joint responsibilities and commitment. The government and one or various private companies set up a company sometimes called Special Purpose Company or Special Purpose Vehicle (SPV). It is used commonly with new projects.
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Annex 3 EU Legislative References

1. EC Treaty Articles 81, 82, 87, 88 2. COM (2002) 0101 final COD 2001/0047: Amended Proposal for a Directive of the European Parliament and of the Council On Market Access to Port Services 3. COM (2001) 0035 final COD 2001/0047: Proposal for a Directive of the European Parliament and of the Council On Market Access to Port Services 4. COM (1998) 0251(01) final SYN 98/0158: Proposal for a Council Regulation (EC) amending Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage) 5. COM (2002) 0542 final COD 2001/0229: Amended Proposal for a Decision of the European Parliament and the Council amending Decision No 1692/96/EC on Community guidelines for the development of the transEuropean transport network. 6. Regulation (EEC) Nr. 954/79 of 15th May 1979 concerning the ratification by member States of, or their accession to the UN Convention on Code of Conduct for Liner Conferences 7. Regulation (EEC) Nr. 4055/86 of 22nd December 1986 applying the principle of freedom to provide maritime transport between Member States and between member States and third countries. 8. Regulation (EEC) Nr. 4056/86 of 22nd December 1986 laying down detailed rules for the application of Articles 85 and 86 of the Treaty to maritime transport 9. Regulation (EEC) Nr. 4057/86 of 22n d December 1986 on unfair pricing practices in maritime transport 10. Regulation (EEC) Nr. 4058/86 of 22nd December 1986 concerning coordinated action to safeguard free access to cargoes in ocean trades 11. Regulation (EEC) Nr. 479/92 of 25th February 1992 on the application of Article 85 (3) of the Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia) 12. Regulation (EEC) Nr. 3577/92 of 7th December 1992 applying the principle of freedom to provide services to maritime transportation within Member States (maritime cabotage) 13. Regulation (EEC) Nr. 2236/95 of 18th September 1995 laying down general rules for the granting of Community financial aid in the field of transEuropean networks. 14. Council Decision 31996D1692 of 23 rd July 1996 on Community guidelines for the development of the trans-European transport network
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15. Council Resolution 31997Y0408(01) of 24th March 1997 on a new strategy to increase the competitiveness of community shipping 16. EC Directive Nr. 52/2000 of 26th July 2000 on the Transparency of financial relations between Member States and public undertakings
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Erasmus University Rotterdam

MSc in Maritime Economics and Logistics 2003/2004

Private Sector Financing of Container Terminal Infrastructure

Copyright MSc Maritime Economics & Logistics

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

AI MIEI GENITORI PER L AFFETTO , LA FIDUCIA E IL SUPPORTO. GRAZIE.

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Introduction Background and objective

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

The thesis is structured as follows.

6. Case study comparison Felixstowe Rotterdam

Figure 1: Thesis structure

Elaboration of the author.

Private Sector Financing of Container Terminal Infrastructure

Relevance of the topic

Private Sector Financing of Container Terminal Infrastructure

Difficulties, possible improvements and further research

Private Sector Financing of Container Terminal Infrastructure

Transformations in the port business

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Shifting bargaining power

Development of Hub and Spoke distribution pattern

Private Sector Financing of Container Terminal Infrastructure

Environment, safety and security issues

Private Sector Financing of Container Terminal Infrastructure

The transfer of port operations to the private sector

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Port models and investment responsibilities in Europe

Public and pr ivate drivers

Private Sector Financing of Container Terminal Infrastructure

World Bank (2001).

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Table 2: Port model characteristics

Dominant Private Sector

van der Veer (2001)

Private Sector Financing of Container Terminal Infrastructure

Table 3: Port investment responsibilities in port models - basic definition

Source: 3.2.1 Service ports

World Bank (2001)

Private Sector Financing of Container Terminal Infrastructure

Private Sector Financing of Container Terminal Infrastructure

Port models and investment responsibilities in Europe

See Annex 3 for the various European country profiles.

Private Sector Financing of Container Terminal Infrastructure

Table 4: Institutional models in European Countries (including Bulgaria, and Rumania)

Landlord Port Private Port