port reform toolkit - ppiaf second edition of the port reform toolkit has been produced with the...

PORT REGULATION MODULE

M O D U L E 6

PORT REFORMTOOLKITSECOND EDITION

THE WORLD BANK

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© 2007 The International Bank for Reconstruction and Development / The World Bank

All rights reserved.

The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of Public-Private Infrastructure Advisory Facility (PPIAF) or the Board of Executive Directors of the World Bank or the governments they represent.

Neither PPIAF nor the World Bank guarantees the accuracy of the data included in this work. The boundaries, colors,denominations, and other information shown on any map in this work do not imply any judgment on the part of PPIAF or theWorld Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

The material in this work is copyrighted. Copyright is held by the World Bank on behalf of both the World Bank and PPIAF.No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including copying,recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank.The World Bank encourages dissemination of its work and will normally grant permission promptly.

For all other queries on rights and licenses, including subsidiary rights, please contact the Office of the Publisher, World Bank,1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected].

ISBN-10: 0-8213-6607-6ISBN-13: 978-0-8213-6607-3eISBN: 0-8213-6608-4eISBN-13: 978-0-8213-6608-0DOI: 10.1596/978-0-8213-6607-3

MODULE SIX CONTENTS1. Introduction 2672. Regulatory Concerns When Formulating a Port Reform Strategy 268

2.1. How Ports Compete 2702.2. Assessing Port Sector Competition 271

2.2.1. Transport Options 2722.2.2. Operational Performance 2722.2.3. Tariff Comparisons 2732.2.4. Financial Performance 274

2.3. Costs of an Inadequate Regulatory Framework 2743. Strategies to Enhance Port Sector Competition 277

3.1. Structural Strategies 2773.2. Structural Remedies 2793.3. Regulatory Strategies 2803.4. Decision Framework for Selecting Port Competition: Enhancement

Strategies and Remedies 2824. Designing a Port Regulatory System 283

4.1. Step 1: Specify Regulatory Objectives and Tasks 2854.2. Step 2: Conduct a Legal Review of the Regulatory System 2864.3. Step 3: Determine Institutional Arrangements for Regulatory Oversight 2864.4. Step 4: Determine Degree of Regulatory Discretion 2934.5. Step 5: Identify Appropriate Regulatory Tools and Mechanisms 2944.6. Step 6. Specify Operating and Financial Performance Indicators 2964.7. Step 7: Establish an Appeal Process and Procedures 2994.8. Step 8: Incorporate Regulatory Details into Laws and Contracts 299

5. Summary and Conclusions 302Annex A. Port Tariffs: General Structure, Items, and Flow of Charges 304Endnotes 308References 310

BOXESBox 1: Intraport Competition in Buenos Aires, Argentina 271Box 2: Port Sector Competition Factors 272Box 3: The Case of Israel: From National Monopoly to Port Monopoly 275Box 4: Potential Anticompetitive Behavior in the Port Sector 276Box 5: Predatory Pricing and Service Bundling in Cartagena, Colombia 276Box 6: Competition Enhancement 277Box 7: Dividing the Port into Terminals to Induce Competition 279Box 8: Terminalization in Limited-Volume Ports: The “Overlapping Competition” Strategy 280Box 9: Subsidy Bids for Management Contracts in Low-Volume Ports 281Box 10: Checklist for Port Sector Restructuring or Unbundling 281Box 11: Decision Framework for Port Competition Enhancement 282Box 12: Reviewing Port Regulatory Responsibilities in Victoria, Australia 287Box 13: Establishing a Port Sector Regulatory Agency in Colombia 288Box 14: A Simple Port Regulatory Structure for Sri Lanka 290Box 15: Safeguards for Creating an Independent Regulatory Body 292Box 16: Reconciling Independence with Accountability 293

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Box 17: Price Cap versus Rate-of-Return Regulation 295Box 18: Port Production Process 297Box 19: Port Performance Indicators 300Box 20: International Arbitration 301Box 21: Checklist of Regulatory Items for Port Operating Contracts 302Box A-1: Relative Weights of Different Port Charges 304Box A-2: Relationship between Port Charges and the Location Where the Charge is Incurred 305Box A-3: Transaction Complexities Pre- and Postprivatization 305Box A-4: Port Charges in Miami, Florida 306Box A-5: Port Charges in Cartagena, Colombia 307

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Acknowledgments

This Second Edition of the Port Reform Toolkit has been produced with the financial assistance of a grant fromTRISP, a partnership between the U.K. Department for International Development and the World Bank, for learningand sharing of knowledge in the fields of transport and rural infrastructure services.

Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure TrustFund (Netherlands Ministry of Transport, Public Works, and Water Management) for the enhancement of theToolkit’s content, for which consultants of the Rotterdam Maritime Group (RMG) were contracted.

We wish to give special thanks to Christiaan van Krimpen, John Koppies, and Simme Veldman of the RotterdamMaritime Group, Kees Marges formerly of ITF, and Marios Meletiou of the ILO for their contributions to this work.

The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technicalcontributions of the following organizations.

The Public-Private Infrastructure Advisory Facility (PPIAF)PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the qualityof their infrastructure through private sector involvement. For more information on the facility see the Web site: www.ppiaf.org.

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

International Maritime Associates (USA)

Mainport Holding Rotterdam Consultancy (formerly known as TEMPO), Rotterdam Municipal PortManagement (The Netherlands)

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

United Nations Economic Commission for Latin America and the Caribbean (Chile)

PA Consulting (USA)

The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel,Ronald Kopicki, Cornelis “Bert” Kruk, and Bradley Julian of the World Bank Transport Division.

Comments are welcome.Please send them to the World Bank Transport Help Desk.Fax: 1.202.522.3223. Internet: [email protected]

267

The public is also interested in having portsoperate safely and with minimal environmentalimpact. An oil spill within a port’s harbor candamage the coastal environment and devastatelocal fishing and tourism sectors for severalyears. Port operations involve the use of heavymachinery and handling of dangerous cargo

that, without proper systems and safeguards,can result in serious and sometimes fatal injuryto port laborers or third persons present in theport.

Ensuring the efficient and competitive function-ing of a port in a context of limited or weak

6Port Regulation:Overseeing theEconomic PublicInterest in PortsSECOND EDITION

1. INTRODUCTION

There is a strong public interest in ensuring that ports operate efficientlyand safely, that fair and competitive services are provided, and thatports support and foster economic development locally and nationally.

The public interest in ports stems from the vital role that ports play as gate-ways of economic trade and commerce for most nations. In 2004, interna-tional seaborne trade totaled approximately 6.7 billion tons of internationalcommerce, which corresponded to 27,635 billion ton-miles of maritime activ-ities (Review of Maritime Transport, 2005 UNCTAD). With the globalizationof the world economy, a nation’s economic competitiveness is linked increas-ingly to its ability to ship raw materials, intermediate goods, and final prod-ucts efficiently and economically. Excessive port costs or delays can promptinvestors to locate new production facilities in other countries or regions.In many countries, high port costs have an economic impact similar to ageneralized import duty, increasing the cost of all imported goods.

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competition is the purpose of economic regula-tion of ports. Economic regulation typicallyinvolves intervention in the functioning of mar-kets in terms of setting or controlling tariffs,revenues, or profits; controlling market entry orexit; and overseeing that fair and competitivebehavior and practices are maintained withinthe sector. The determination of when economicregulation of ports is necessary and how to tai-lor the intervention to the particular port com-petitive environment is the principal focus ofthis module.

While not discussed at length in this module,there are other public interest concerns regard-ing technical, environmental, and social aspectsof port operations. These other areas include:

• Technical oversight of port operations andservices, such as navigation and safety(for example, licensing of pilots, berthingrules, or emergency plans).

• Environmental oversight of the disposalof dredging spoils; discarding of haz-ardous materials and liquids used in portoperations and maintenance; contingencyplanning for environmental and safetyincidents; ensuring sound land-use plan-ning and coastal preservation; and moni-toring compliance with internationalstandards for vessel wastes (for example,the International Convention for thePrevention of Pollution from Ships[MARPOL]).

• Social or administrative oversight of theequitable and just treatment of portworkers, and review of labor contracts,health benefits, and working conditions.

In most instances, guidelines and procedures foroversight of these elements of the public interesthave already been established and their effec-tiveness is not materially altered by portreforms, although they need regular adaptationand updating.

This module is intended to assist public officialsin designing an economic regulatory frameworkthat will keep ports cost-effective and responsive

to changing demand. The module providesguidance on how to:

• Identify regulatory requirements andissues to be considered when developinga port reform strategy.

• Design a port regulatory system.

• Formulate an institutional strategy forestablishing the regulatory structure andcapabilities to perform the relevant regu-latory functions.

• Select appropriate regulatory techniquesand instruments under a spectrum of portreform options and competitive condi-tions.

• Prepare a checklist of items that need tobe included in port reform concession oroperating agreements.

• Specify operational and financial infor-mation necessary for monitoring per-formance of terminal operators.

Public officials can use the module when initiallyformulating a port reform strategy or for estab-lishing an effective postreform port regulatorysystem.

2. REGULATORY CONCERNSWHEN FORMULATING A PORTREFORM STRATEGY The decisions about reform strategy, industrystructure, and regulatory frameworks are close-ly linked. Therefore, regulatory issues, options,and their consequences should be considered atthe early stages of the reform process, and notleft until other key decisions about reform strat-egy have been made. As demonstrated by thereform experience in other sectors, to do so canincrease the regulatory burden and cost, restrictthe range of options that may be available tothe regulator, and risk incongruity between reg-ulatory requirements and institutional capacity.

Governments do not need to undertake detaileddesign of the regulatory framework when theyare first considering private sector participation.However, they should take regulatory needs and

Port Regulation: Overseeing the Economic Public Interest in Ports

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costs—and their own regulatory capacity—intoaccount when making choices about private sec-tor participation. And when embarking on thefirst private sector participation in ports, it isimportant to consider whether the regulatorysystem proposed for the first transaction willpreclude the regulatory options that might bemost appropriate as private sector arrangementsbecome more common. A government that failsto get the structural and regulatory packageright from the outset can face an immenselycostly, time-consuming, and acrimoniousprocess to rectify matters later.

Considering regulatory issues before formulat-ing the framework of the contract has a numberof important purposes:

• To avoid legal challenges to the privatiza-tion program or transaction.

• To identify any constraints in the lawthat would limit the ability to transferservices to private providers or the rangeof options that might be available for theprivatization approach.

• To define the regulatory role of the gov-ernment in the reform and postreformeffort and related institutional frame-work.

• To anticipate the competitive environ-ment (the extent of competition) of theport sector and the need for competitionmonitoring or economic regulation.

• To consider the potential for restructur-ing the port sector to make it more con-ducive to regulation by competitive forcesrather than government oversight.

• To determine the range of strategies thatmight be available to the regulator toinduce competition or discourage anti-competitive behavior.

• To identify the form of interventions thatthe regulator may take when anticompeti-tive behavior occurs.

• To determine what issues not specificallyaddressed in the existing or proposed law

need to be addressed on a transaction-specific basis.

All of these purposes are closely related. Forexample, as was shown in the Malaysian experi-ence at Port Klang, the failure to have an ade-quate legal framework in place prior to the pri-vatization effort can impose substantial delays aslegislators debate legislative actions to facilitatethe privatization process. The continuing refusalof the Sri Lankan government to corporatize orprivatize its publicly owned container terminalin Colombo has delayed the necessary portexpansion for years. And Colombia’s failure toproperly define anticompetitive behavior before-hand led to the need for the regulator to con-stantly solicit legal opinions before intervening.

In many countries, the broad regulatory frame-work may not adequately support a private sec-tor arrangement. Private sector ownership ofport assets may be prohibited by the legal sys-tem. Tariff setting responsibility may residewithin an operating port authority that wouldcompete with the private operator. But govern-ments can still make private sector participationin ports work by taking one or both of the fol-lowing actions1:

• Choose a private sector arrangement thatreduces the risks associated with deficien-cies in the regulatory framework. Forexample, a fee-based management con-tract may bring in technical capabilityand management expertise if investmentrisks rule out a private sector interest in aconcession.

• Develop appropriate regulatory capacities.For example, if the national law givesresponsibility for asset ownership andservice provision to a level of governmentthat has limited capacity to regulate or isvulnerable to short-term political interests,consider separating ownership from regu-latory oversight and locate the regulatorybody at a higher level of government.

Prior to undertaking port sector reform, thepublic interest in ports has typically been vestedin a public port authority. In a traditional port,


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the public port authority provided all basic portservices and functions (for details see Module 3).There was no need for a separate regulatoryagency as the public port authority was the insti-tution charged with operating the port as a pub-lic monopoly consistent with the public interest.

Under port sector reforms, many ports haveevolved into landlord port authorities wherefacilities are leased to private operators, who inturn directly provide their services to carriersand shippers. In this situation, private operatorsmay provide services previously provided by thepublic port authority, such as pilotage, tugassist, vessel stevedoring, cargo handling, stor-age, and yard services. Private operators will bemotivated by profit maximization objectives.They may not necessarily provide facilities orservices that are of economic, environmental, orsocial value if doing so would conflict withprofit maximization. This creates the need forregulatory oversight to ensure that the publicinterest is upheld.

2.1. How Ports Compete Generally, port-related competition can bedefined as one of three types: interport, intra-port, and intraterminal. Interport competitionarises when two or more ports or their termi-nals are competing for the same trades (forexample, New York and Halifax; Hong Kongand Singapore; Los Angeles, Long Beach, andOakland; or Rotterdam, Hamburg,Bremerhaven, and Antwerp). Interport competi-tion may be for origin-destination traffic or fortransit traffic. Intraport competition refers to asituation where two or more different terminaloperators within the same port are vying for thesame markets (for example, StevedoringServices of America, Evergreen, and HutchisonInternational Terminals in Manzanillo-Cristobal, Panama). In this case, the terminaloperator has jurisdiction over an entire terminalarea, from berth to gate, and competes withother terminal operators in the port. See Box 1for a similar example of intraport competitionin Buenos Aires, Argentina. Intraterminal com-petition refers to companies competing to pro-vide the same services within the same terminal

(for example, the stevedoring companiesEstibadora Caribe and COOPEUNITRAP inPort Limon, Costa Rica). However, this type ofcompetition, applied within the framework ofthe tool port system, in general does not resultin stable labor relations and optimum portdevelopment (see Module 3).

Competition also helps ensure that the privatesector passes savings on to users and reducesopportunities for monopolistic abuses. A pri-vate terminal operator can be presumed to bemore tempted than a public port authority toexploit any market power that it may have. Butone should not forget that experience hasshown that public sector monopolies are oftenstronger, more authoritarian, and noncompro-mising than private sector monopolies.Moreover, they are often more difficult to fightas they are either claimed not to exist or to bejustified for the public good. As long as a mar-ket is competitive, private operators cannotprice much above their long-run marginal costs;they may be able to do so in the short run ifdemand temporarily outstrips supply, but onlyfor as long as it takes to provide additionalcapacity. If the markets are noncompetitive,however, public port or terminal operators areoften able to sustain prices well in excess ofmarginal costs whether they are located indeveloped or developing countries. In practice,governments consider such ports as “cashcows” and are often reluctant to limit or lowerport tariffs and terminal handling charges.Private terminal operators will equally betempted to raise their tariffs above the level thatis economically reasonable. In such a case, tariffregulation by an independent regulator is theanswer, although the history of government reg-ulation attests to difficulties in preventing mis-use of the dominant position of such operators.

When effective competition can be establishedand maintained in the relevant markets andactivities, privatization has proven to have greatpotential for reducing costs and improving serv-ice quality. Without competition, privatizationcan still bring some improvements, but thegains are relatively limited.


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2.2. Assessing Port SectorCompetition This section presents a conceptual frameworkfor assessing the extent of competition within aport sector. The conceptual framework may beused when deciding the optimal form and scopeof port modernization or in determining whetherregulatory intervention may be warranted aftermodernization. The framework is not intendedto determine definitively that a particular port orterminal operator is engaged in anticompetitivebehavior. Instead, it indicates conditions where

anticompetitive behavior may occur. When theseconditions exist, the framework serves effectivelyas a red flag to indicate to the regulatoryauthority that the situation should be closelymonitored. Alternatively, the framework couldbe applied when complaints are received todetermine if in fact there may exist sufficientgrounds for the complaint. Factors indicative ofthe extent of market competitiveness include:

• Transport options.

• Operational performance.


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Following the Ports Law of 1993, theArgentine government decided to offerconcessions for six terminals at the

Puerto Nuevo Port Authority facilities. Bidderssubmitted separate technical and financial pro-posals linked to anticipated tonnage.Essentially, those guaranteeing the most trafficwith the best technical proposal would win.Five concessions were awarded, but only twoconcession holders would control facilitiescapable of handling containers.

Single operators were charged with operat-ing their respective terminals, controlling theentire berth-to-gate operation. Upon the take-over of the terminals by the successful bid-ders, the terminal operators had to plan,finance, and commission extensive civil struc-ture improvements and undertake heavyequipment investments. Meanwhile, theybecame immediately liable for their paymentobligations to the port authority. As part oftheir concession obligations, terminal opera-tors had to pay the port authority concessionpayments based on $4 per ton for imports and$2 per ton for exports. They were also prohib-ited from pricing collusion, and would have toadhere to safety and environmental legislation.And, in an effort to mitigate the impacts on for-mer port authority employees, the terminaloperators had to agree to employ some of theformer employees or, alternately, provide aseverance payment program. As a result, theterminal operators all began operations withoverstaffed work forces.

The concession agreements contained per-formance guarantees; in the first year, 40 per-cent of established target volumes would have

to be met before the port authority imposedfinancial penalties. This percentage wouldincrease in stages to 60 percent and 80 per-cent in subsequent years. In return, the termi-nal operators would get the use of the publicfacilities, could provide whatever services theywanted, and could set tariffs as they saw fit aslong as the tariff structure adhered to the oneprescribed by the port authority.

While great attention was drawn to the ter-minals within the confines of the city, anotherport facility was being developed in SouthDock, just outside the city under the jurisdic-tion of the Province of Buenos Aires. Biddersat Puerto Nuevo were aware of this site andhad discounted the possibility that it could beconverted to a full-fledged container terminal.However, a consortium of local and foreigninvestors was granted a 30-year concessionfor South Dock by Buenos Aires Province onterms far more favorable than those affordedthe Puerto Nuevo operators by the federalgovernment (see also Module 4, Box 20).

The Puerto Nuevo bidders were obviouslyconcerned with the entry of another competitor.Container growth was projected to be some-what modest given available capacity, so com-petition had already developed to a high level.Due to labor cost savings and lower wharfagefees, the South Dock facility had lower coststhan Puerto Nuevo operators at $40 per move.a

In 1997, the South Dock terminal handled366,000 TEUs, compared to 600,000 TEUShandled at Puerto Nuevo facilities.

Source: Author.a 1997. “Terminal velocity.” Containerization InternationalJune, p. 95.

Box 1: Intraport Competition in Buenos Aires, Argentina

• Tariff comparisons.

• Financial performance.

Box 2 presents an overview of the key elementsof a conceptual framework for consideringthese factors. Each of the framework’s salientfeatures is described below.

2.2.1. Transport Options

The most important indicator of competition isthe degree to which a shipper has transportoptions (substitutes). The choices or optionsavailable to a shipper or consignee largely deter-mine the extent of competition within the portsector. In examining options, one should analyzea specific cargo flow as defined by cargo type,shipping characteristics, inland point, and direc-tion (import or export). The number of optionsis defined according to the technical capabilitiesof the ports and their available inland connec-tions. For example, there may be situations inwhich one port has already captured a largeshare of the cargo market. One might, therefore,label this as a noncompetitive market. However,

the market power of this port (or its capability toincrease the price) would be limited if other portscould provide an attractive alternative and keepcompetitive pressure on the other port’s prices.

The availability of competitive options is basednot just on the existence of a physical servicealternative, but on overall transport system costs(land and port). Thus, the first step in assessingthe competitiveness of the port and transport sys-tem is to identify the lowest cost option. Then,the competitiveness of each option is determinedby comparing it to the lowest cost option,defined here as cost proximity. A cargo flow thatmoves through a system with many options andpossessing close cost proximity (small cost differ-entials) faces a highly competitive market setting.Conversely, if there are few options and the costdifferentials among the options are large, themarket setting is defined as noncompetitive.

2.2.2. Operational Performance

Operational performance indicators can be usedto assess the relationship between supply and


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Box 2: Port Sector Competition Factors

Source: Author.

HinterlandAnalysis

TariffAnalysis

Port CostAnalysis

FinancialAnalysis

AnalyticalModules

Inputs forthe model

EvaluationCriteria

Results Only OneOption

CongestedPort

Very High orLow costs

Negative Finan. Eval.

AcceptableLevels

ReasonableCosts

AcceptablePerformance

MultipleOptions

TransportAlternatives

HinterlandTransport Charges

PortTariffs

Model PortCosts

Port FinancialPerformance

Indicators of PortCongestion

BerthPerformance

PortCosts/Tariffs Profitability

demand for port services in a particular country.Presumably, a chronic shortage in supply indicatesa possible tendency toward monopolistic practicesby a port or terminal operator. However, using thesupply-demand relationship itself as an indicatormay be inadequate because of difficulties in directestimation of these two market factors.

Instead of the throughput-capacity (supply-demand) ratio, two measures that can indicate apotential shortage in supply of port services can beused: berth occupancy and ship waiting for berth.Both measures are, in fact, two different aspects ofone phenomenon, port congestion. Berth occupan-cy has a direct relationship to capacity utilizationin ports where the berthage is the limiting factorof terminal capacity. This, however, is usually notthe case in container terminals, where the limitingfactor is often the container storage capacity of theyard. Nevertheless, even in container terminals,berth occupancy provides a good indicator forcapacity utilization. To provide a more telling pic-ture of a port’s operational performance, berthoccupancy should be complemented with theberth utilization ratio, which compares theamount of time ships are worked at berth to thetotal time that the berth is occupied, and with theberth productivity ratio, relating berth occupancytime and berth throughput.

Ship waiting has a direct relationship with berthoccupancy. When occupancy is low, there isusually no (or minimal) ship waiting. However,at a certain occupancy level, waiting begins toincrease very rapidly. Thereafter, a smallincrease in the level of berth occupancy resultsin congestion and long waiting times for ships.Although these two indicators are closely relat-ed, both can be examined to obtain a morecomprehensive assessment of port congestion.

The input data for berth occupancy are typical-ly readily available from operational reportsgenerated by the ports or terminal operators.The occupancy indicator should be calculatedseparately for container, general cargo, and bulkships. For vessel waiting time, the input dataare also typically available from port (usuallythe harbormaster’s office) or terminal operator

operational reports. The ship waiting indicatoris calculated as the average waiting hours pership, by type of commodity. Average waitingtime is also sometimes compared to averagetime at berth to produce the ship-waiting rate.The various elements contributing to the wait-ing time should be analyzed to allow the portauthority to precisely identify cases whereby itwas the result of nonavailability of port facili-ties or equipment. Practitioners should be awarethat terminal operators are increasingly seekingto acquire the ability from port authorities tooffer guaranteed priority berthing windows tosecure long term contracts with some of thelarger main line vessel operators.

Berth occupancy and utilization and wait timeare strong indicators of undercapacity, which inturn may indicate the absence of significantcompetition.

2.2.3. Tariff Comparisons

The objective in examining tariffs is to determineif the tariff level of a port is within a reasonablerange. Presumably, abnormally high tariff levelsin a port indicate a tendency to exert marketpower and employ unfair trade practices. Thisinflates total port costs, which include charges toshipping lines and cargo. The calculation of portcosts should be based on a representative basketof basic services and their respective charges.

An indication of whether tariff levels are withina reasonable range can be based on three com-parisons. The current rates of the port underconsideration are compared with: (1) historicalrates of the same port, (2) rates (tariff differen-tials) at other ports in the same country, and (3)theoretical rates based on model port costs.Historic rates measure the difference in portcosts between the time of analysis and the past,either in the previous year or before a recentrate increase. Differences in port costs (tariffdifferentials) are examined by comparing a spe-cific port with the average of the country’s portsthat handle the same cargo (including the portunder consideration). Model port costs measurethe difference between the actual and theoreti-cal costs of a specific port based on a port cost


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model that generates the model costs for acountry’s ports in general.

2.2.4. Financial Performance

A variety of financial performance measures canbe used to examine whether a port has beenearning abnormally high profits. The assump-tion here is that abnormal profits may indicatea noncompetitive market setting and the possi-bility that a port is engaged in anticompetitivebehavior (taking advantage of dominant marketpower). Economic theory maintains that suppli-ers possessing monopoly power tend to chargeprices that exceed marginal and average costs.

Ideally, a competitive assessment should be basedon the comparison of price and marginal cost.However, direct measurement of the differencebetween price and marginal cost is impractical.The financial profit (net income and earnings) ofa port is used as a proxy for the differencebetween market price and marginal cost.Presumably, abnormally high profits indicate anoncompetitive setting that, in turn, suggests thepossibility of anticompetitive behavior. The levelof profit is usually compared to some measure ofinvestment. Two common indicators that relateprofit to investment are return on equity andreturn on assets, and both are typically found inport financial statements or can be calculatedfrom data readily available from the port.2

2.3. Costs of an InadequateRegulatory Framework Failure to provide an adequate economic regulato-ry framework can be very costly in terms of ineffi-cient and high-cost port services. In many coun-tries, excessive port costs function like an addi-tional import duty on all goods entering the coun-try and a tax on exports. Excessive port costsreduce the competitiveness of a nation’s productsin world markets and can stifle economic growthand development. In fact, shipping lines or confer-ences may further compound the unfavorableeffects inefficient ports have on a nation’s economyby imposing penalty surcharges to offset the carri-er’s operating costs and disruptions to its servicerotation or itinerary. Unfortunately, the anticipated

benefits of free trade associated with reduction ofimport duties and removal of trade barriers maybe offset by the inefficiencies of an improperly reg-ulated and noncompetitive port sector.

In some instances, port reform efforts havetransferred public ports to single private opera-tors, thereby creating private monopolies for localport services. This type of transfer does nothingto lessen the vigilance governments must maintainif abuses of market dominance are to be avoided.Box 3 presents the experience of Israel, whichdissolved its national port authority in favor ofindividual port operating companies for its threeports. Similarly, in Mexico terminal operations atthe ports of Veracruz and Manzanillo were trans-ferred to private operators. However, due to thelack of interport or intraport competition, portusers have repeatedly complained about hightariffs and have requested that a regulatoryinstitution be established to limit the monopolisticposition of terminal operators.3

Due to the nature of the sector, it is common thateven when competition for port services is strong,there may be only two or three direct competitors.Thus, market shares and concentration ratiosmeasured by traditional antitrust techniqueswould typically be high. In most circumstances, ahigh industry concentration indicates that condi-tions are such that they may encourage anticom-petitive practices (see Box 4). For example, havingfew competitors invites pricing collusion,agreements to allocate customers or geographicterritories, or the establishment of cartels orboycotts, all of which are typically prohibited in acountry’s antitrust legislation. Having one domi-nant firm may also encourage predatory pricing,another practice that is typically prohibited.

After pressure from the European Union,Maersk Line (APM Terminals) and P&ONedlloyd were allowed to operate two compet-ing terminals. The take-over of P&O Nedlloydby Maersk Line however, has created the nextproblem, as these large terminals are nowowned by one common shareholder which,again, might violate EU competition rules. InAntwerp, competition between the original


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three major container operators (Hessenatie,Noord Natie and Seaport/Katoennatie) hasalways existed, but because of the need to gainin scope and scale, the two main operators havemerged into Hesse-Noord Natie. To cope withgrowth, Antwerp has built a new tidal contain-er port, the Deurganck dock, on the left bank,doubling its handling capacity. On the west sideof the Deurganck is Antwerp InternationalTerminal – operated by PSA Hesse-Noord Natie– which started operations in December 2005and will be fully completed by 2007. To the eastis the Antwerp Gateway Terminal – operated byDPW-owned P&O Ports, Cosco Pacific, P&ONedlloyd (now owned by Maersk), CMA-CGMand Duisport – which started work in

September 2005. All in all, major global termi-nal operators and shipping lines acquired a sub-stantial stake in Antwerp’s container terminalbusiness, thus enhancing intraport competition.

It is the growing scale of the users that makeslarger scale operations in ports imperative. Withthis pressure for increased size, one might askwhether any regulatory framework can ensurethe continued existence of more than one con-tainer terminal operator. One should keep inmind that in the early years of 2000, the toptwo Antwerp terminal operator consortiumsmentioned above, Hesse-Noord Natie andSeaport/Katoennatie, handled more than1,000,000 and more than 2,000,000 TEU per year


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Israel’s Shipping and Port Authority Act of2004 introduced a new port managementstructure with the objective of introducing

more competition in the country’s port sector.The existing Israel Ports Authority, owner andoperator of Israel’s three commercial ports,was disbanded and various new port authori-ties were established.

The main elements of the new law included:

• All Israel port authority assets were returnedto the government (including ownership ofport land, financial assets, equipment, mate-rials, and superstructure).

• All existing employees were transferred tonewly created government companies (seebelow), with existing salary and workingconditions guaranteed.

• Port property rights were transferred to theIsrael Ports Company (100 percent owned bythe government), which would lease or con-cession port land to port operators while thelegal ownership remains with the government.

• All movable assets and facilities and out-standing obligations and liabilities weretransferred to the appropriate companies inthe various ports.

The new government-owned (limited liability)port operating companies, one for each port(Haifa, Ashdod, and Eilat), were tasked withthe management of the existing terminals aswell as the maritime services, including trafficcontrol, pilotage, and towage.

The law also created a Shipping and PortAuthority as a governmental unit within theTransport Ministry. Its responsibilities includeadvising the minister on port service levels,infrastructure planning and development, andsystems and port facilities, and the drafting ofport regulations.

In addition to the above, the legislation andsubsequent ministerial regulations created theposition of port manager with (harbormaster’s)responsibilities such as vessel traffic control, portclearance, aids to navigation, and marine works.

Analyzing this port management structure itis evident that:

• The various port companies in Haifa, Ashdod,and Eilat are virtually monopolists within theirrespective port areas, and in practice they willallow only limited intraport competition.

• The development of the ports still is a nation-al issue under the Israel Ports Company,which acts as a national landlord.

• The port companies are also responsible formarine operations, which may give rise to aconflict of interest in the event that moreintraport competition is allowed in the future.

• The functioning of the port manager is highlyimpaired as the marine department’s activitiesare part of the respective port companies.

• The entire structure will generate many com-petence problems.

• Fair competition within this structure is limited.

Source: Author

Box 3: The Case of Israel: From National Monopoly to Port Monopoly

respectively. Thus, the nominal size of theirthroughput does not explain the merger in itself.

In an unregulated market, profit may be soughtthrough the creation of a stevedoring companycartel to exclude competitors from access tofacilities. Controlling anticompetitive commer-

cial behavior requires a regulatory institutionto prevent the acquisition and exploitation ofexcessive market power. Even withoutcartelization, wherever there is a financiallystrong incumbent in a market, there is a dangerthat anticompetitive behavior will occur(see Box 5).


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In the absence of economic regulatory over-sight, a port operator with a dominant ormonopoly position could attempt to engage

in the following anticompetitive practices,driving out potential competitors and increas-ing costs to port users and the economy atlarge:

• Price gouging: Using monopoly power tocharge excessive tariffs for port services.

• Service bundling: Extending monopolypower in one area of port operations toanother potentially competitive area (alsoreferred to as tying arrangement). Forexample, a terminal operator’s extension ofa monopoly position in the provision ofcargo handling to require use of theirtug assist services rather than obtainingthose services from an independentprovider.

• Increasing entry barriers: Constructing hur-dles to increase the share of the marketneeded to operate at maximum efficientscale, raising absolute costs of entry, or by

tending to foreclose competitors from need-ed resources or outlets.

• Raising rival’s cost: Increasing the cost ofservices required by a rival to place it at acompetitive disadvantage.

• Exclusive dealing: Requiring suppliers to sellonly to them and not to any potential com-petitor. An example would be restricting atugboat company from providing service toa rival terminal.

• Predatory pricing: Selling services belowcost to induce a rival’s exit from the market,deter future entry, or dissuade a rival fromfuture competition. An example would betemporarily lowering container handlingcharges below long-run marginal costs toforce a rival out of business.

• Price discrimination: Similar to predatorypricing in that selective price discriminationby a powerful seller can eliminate competi-tion or otherwise entrench the discriminatingseller’s monopoly power.

Source: Author.

Box 4: Potential Anticompetitive Behavior in the Port Sector

Law 1 of 1991 placed the responsibility forthe direct administration of Colombia’spublic ports in the hands of regional port

societies, which were private sector entities withthe state entitled to up to 30 percent of the totalshares of the society. To induce investment ingantry cranes, the Cartagena Society receivedpermission to provide cargo handling services inaddition to the provision of crane services. Thiswould mean that not only would they competewith the already existing stevedoring companies,but that also they had a clearly advantageousposition: they could bundle their service chargesfor an array of services offered from berth togate, a strategy that could not be matched bythe stevedoring companies since they couldoffer relatively limited services by comparison.

The Cartagena Society felt compelled tooffer stevedoring services as their own busi-ness because that is what its nonregional portsociety competition was doing. For example, aprivate port in Cartagena (El Bosque) offeredpilotage, tug assist, stevedoring, and storageservices, and could thus price the services atan all-in-one price. It was later alleged that ElBosque was offering tug assist and pilotage atno cost to the carrier to attract their business.If true, this bundling could constitute a preda-tory pricing practice in Colombia, which theport superintendent would resolve by settingthe prices for all of the pilotage and tug com-panies in Cartagena.

Source: Author.

Box 5: Predatory Pricing and Service Bundling in Cartagena, Colombia

3. STRATEGIES TO ENHANCEPORT SECTOR COMPETITION The previous sections presented the importantconsiderations for determining conditions inwhich anticompetitive behavior may exist. Thelack of transport options, congested facilities, rela-tively high prices, and high profits alone or incombination may encourage terminal operatorsand other port service providers to breach thethreshold of what may be regarded as acceptablecompetitive behavior. This section provides a dis-cussion of port sector restructuring strategies thatcan be used to enhance competition within theport sector, an overview of regulatory strategiesand remedies to enforce port competition stan-dards, and a decision framework for selecting portcompetition enhancement strategies and remedies.

Port sector reformers have two generalstrategies to choose from when considering howto enhance port sector competition (Box 6):structural and regulatory. Clearly, the preferredstrategy is the one that results in more competi-tors. In a perfect market, characterized by alarge number of buyers and sellers, the extent ofcompetition is optimized so prices reflect marketefficiencies. Therefore, port sector reformers, incontemplating port reform, should strivetoward structural enhancements that increasethe number of competitors before resorting toregulatory enhancements. Regulatory enhance-ments (particularly economic regulation) are

intended to improve efficiency by correctingvarious market imperfections; essentially, theyare aimed at forcing ports to behave as if theywere competing in a competitive market. Due tohigh market concentrations, some form of regu-lation is often appropriate regardless of thestructural strategy.4 Box 6 shows how structuraland regulatory approaches give rise to potentialcompetition enhancement strategies.

3.1. Structural Strategies Experience suggests that many of the benefitsfrom involving the private sector stem from com-petitive pressures, not just the presence of a pri-vate owner.5 Competitive pressures also affect theamount and appropriate form of sector regulationneeded: the more competitive pressures arebrought to bear on private operators, the less reg-ulation may be required. So governments—eventhose with substantial regulatory capacity—standto gain a great deal from introducing as muchcompetition as the port’s traffic and facilities allow.

Competition becomes increasingly likely as anindustry becomes more disaggregated. The morethe system can be structured to allow entry atdifferent levels, the more competitive pressurecan be introduced. And the more competitivepressure there is, the less the need for regulatoryintervention.6 As discussed later, extensiveunbundling may mean sacrificing efficiencies theoperator may gain through the bundling of


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Box 6: Competition Enhancement

Source: Author.

CompetitionEnhancement

Strategy

Structural

CompetitionDiagnosis

Regulatory R1-File/monitor tariffs

S1-Introduce new berths/terminalsS2-Divide existing port into terminalsS4-Short-term operating agreement/

lease/management contact

R2-Set tariffs/profitability limits

CompetitiveEnhancement

Remedies

services, particularly within the terminal area(defined as the area between the berth and thegate). For this reason, “terminalization,” wherea single operator controls the berth-to-gateoperation, is frequently the preferred approach(with the level of economic regulation depend-ing on the competitive setting, either within theport itself or coming from the outside).

Establishing competition for port servicesrequires three steps. The first step is to examineclosely the structure of the sector, assessingmarket conditions and how the services may berestructured. The next step is to implement theport sector restructuring, creating opportunitiesfor competition in one or more segments of theport sector. If unfettered competition is possible,the process ends. If only limited scope forcompetition exists, the third step involves estab-lishing regulatory oversight to maintain faircompetition and to protect port users. Theextent of restructuring, the exact nature of com-petition, and the objectives of regulation dependupon the physical, institutional, and marketcharacteristics of the sector.

Port restructuring involves trade-offs. Whereeconomies of scope exist, it may be cheaper fora single terminal operator to produce and deliv-er two or more terminal services jointly than forseparate entities to provide services individually.A bundled sector, where all services are organ-ized under one umbrella, also known as a mas-ter concession as discussed in Module 4 of theToolkit, allows exploitation of economies ofscope and eases coordination and efficiencyamong intermediate input suppliers and finalservice providers. An argument against restruc-turing also applies when a single provider bene-fiting from economies of scale is split up toinduce competition. However, even in suchcases, gains from economies of scope and scaleneed to be weighed against benefits of cost-min-imization due to competitive pressures.7

Typically, the private sector would prefer toengage in interport or intraport competitionrather than intraterminal competition, and thisis understandable because modern cargo

handling techniques most often do not actuallyallow for efficient intraterminal competition.Even though the private sector investmentwould normally be greatest under these compet-itive circumstances, the private sector also hasthe ability to capture a wider range of revenues.For example, in interport competition, portswill compete for the entire handling charge ofperhaps $200 per container, which capturesrevenues from the sea buoy to the gate. Thevalue of the handling charge when intraportcompetition is present might decline to perhaps$150 per container (berth to gate), and evenfurther to $100 per container when intratermi-nal competition (berth only) is present.Competitors in an interport context have amuch greater span of pricing strategies forcapturing their markets, meaning that at thelowest level (intraterminal competition) rivalswill have a much smaller range of pricing flexi-bility when it comes to their ability to formulatestrategies for capturing the activity. In short,competition at this level is vying for a muchsmaller piece of the pie.

Also from an efficiency standpoint, having asingle operator per terminal tends to be prefer-able because of the direct control the operatorwould have over the range of activities fromberth to gate. In addition, because of greaterrevenue capturing ability, a greater investmentcan be leveraged from the operator assuming aconcession period adequate for full investmentcost recovery. However, if cargo volume issufficient to support only one operator, thengovernment has to weigh the trade-offs betweengranting a monopolistic position to the soleoperator versus the potential loss of efficiencyresulting from intraterminal competition. Forthe intraterminal competition option, mainlyprevailing in the tool port system (see Module3) for general cargo traffic, revenues are collectedonly from vessel stevedoring. In France,intraterminal competition was promoted andterminal areas were dedicated to different oper-ators. The result, however, was a very inefficientoperation. Ultimately, because of competitionfrom more efficient European ports, thisarrangement was abandoned.


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3.2. Structural Remedies There are a number of actions governments andport authorities can take to enhance competi-tion. Several key issues are discussed below.

One way to improve competition is to introducenew berths or terminals. The availability of thisoption is largely dependent on the existence of asuitable site for port expansion as well as suffi-cient volumes to justify capacity expansion. Manyports do not have expansion possibilities adjacentor in close proximity to existing facilities for avariety of reasons, including limitations imposedby terrain or urban encroachment, or lack of suf-ficient land. Alternative expansion possibilitiesmay also be relatively costly, requiring substantialcargo volumes for cost recovery. This is particu-larly true if the port expansion is to be achievedvia land reclamation, or if the new facility is agreenfield, requiring additional investments inland access and utility infrastructure.

Dividing an existing port into competing termi-nals, or terminalization, is another way ofenhancing competition. Terminalizationinvolves dividing existing port facilities into sep-arate terminals, each leased or concessioned toa different operator. The facility’s configurationand structure may limit the ability to pursuethis option, particularly for purposes of estab-lishing gate access for each operator, and build-ing heavy load bearing structures8 and berths(Box 7). This measure, of course, generallyassumes there is sufficient volume to supportmore than one terminal handling the samecargo type (for example, two dedicated contain-er terminals). For further information, Box 8presents an example of how the terminalizationmay be implemented when traffic volumes donot justify two container terminals, and Box 9discusses how subsidy bids may be used formanagement contracts when low cargo volumeswould not otherwise generate bids.

Competition from the market occurs when pri-vate sector operators bid for a concession, lease,or management contract. Indeed, contracts typi-cally contain minimum performance standards,which if breached, may result in contract termi-

nation or could bar the incumbent from rebid-ding at contract expiration.

Where markets consist of large cargo volumes,countries will not encounter difficulty in gener-ating interest in concessions by the internationalmaritime community. While there is a relativelysmall number of companies today engaged inoperating terminals outside their native coun-tries, there are also instances of smaller compa-nies within a region that are seeking investmentopportunities elsewhere. For example, smaller-scale companies from Argentina and Colombiaare seeking port investment opportunities else-where in Latin America. At the same time, bothlarge international companies as well as theirsmaller regional counterparts will often seeklocal joint venture partners due to political con-


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Box 7: Dividing the Port into Terminals toInduce Competition

Aport can be divided into terminalsthrough the allocation of berths (forexample, one terminal per berth). Berth

length in older ports may not allow for this,however, depending on the characteristics ofvessels calling at the port. For example,assume that an older port consists of twoberths, each having a berth length of 122meters. The two berths together can accom-modate 2,400 TEU vessels, the typical feedervessel size today; but one berth alone cannotaccommodate such vessels, thereby negatingthe possibility of dividing the port into sepa-rate terminals. The anticipated future fleetcharacteristics, therefore, are important fac-tors in deciding whether to divide a port intoseparate terminals.

To overcome this limitation, the port can stillbe divided into terminals, say one for container,and the other for breakbulk, where priority isgiven to one type of operation over another.For example, the breakbulk operator under theterms of its contract could be required to for-feit its rights to its berth area when a containervessel calls. Typically, container vessels aregiven first-berth rights in ports due to theirrelatively high cost of operation, the higherrevenue impact on the port, and the sensitivityof delays on their remaining itineraries.

Source: Author.

siderations as well as the local partner’s clearerunderstanding of the peculiarities of the locallaw, culture, and operating environment.

Because of the mutual benefits accrued fromjoint local-international partnerships, govern-ments should encourage such partnerships byminimizing overly stringent prequalification cri-teria. For example, some countries have in thepast imposed the same qualification criteria onall parties of a joint venture when, in fact, it isonly necessary for one of the partners to satisfythe minimum qualification standard.

Countries should also be aware that vessel opera-tors might emerge as part of the responding bid-ders. Today, increasing numbers of carriers areemerging as terminal operating companies (forexample, Maersk, COSCO, MSC, CMA-CGM,and APL). Although these carriers may create sub-sidiaries to operate terminals, there is an inherentconflict of interest in their participation in bothshipping and terminal operations activities becausethere is the potential to engage in service or

pricing discrimination: in the former, terminaloperators owned by carriers (or their holdingcompanies) may offer preferential berthage rightsto their own carriers, while in the latter case theymay offer discounts to their own carriers. Moreimportantly, a carrier-operated terminal will haveaccess to proprietary data (for example, cargomanifests) that identify shippers (importers andexporters) served by another carrier calling at theterminal. Carriers are thus reluctant to call at car-rier-operated terminals if other options (other ter-minals) exist. Governments should be aware ofsuch potential practices of carrier-operated termi-nals and can discourage such behavior in the con-cession agreements (for example, operator billingsbeing subjected to audits). Box 10 presents a sum-mary of some of the key issues and analyses thatshould be addressed when preparing a strategy forport sector restructuring.

3.3. Regulatory Strategies Even when structural strategies are employed toenhance competition in the port sector, regulatory


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Many ports may have facilities that arewell suited for pursuing a terminaliza-tion strategy. Whether this strategy can

be executed depends on the size of the mar-ket for a particular cargo type. Large containermarkets, for example, of 1.5 million TEUs cantypically justify five single-berth terminalsserved by two gantry cranes each. But howcan a port induce competition where the vol-ume (for example, 150,000 TEUs) can only jus-tify one container terminal? One method is touse the “overlapping competition” strategy.

Here’s an example of how it can work: Theport’s facilities can be divided into two single-berthterminals; one can be dedicated to container han-dling and the other to breakbulk. Each terminal isconcessioned to an operator. The concessionagreements can be structured so that either oper-ator can handle the other’s cargo. Certainly, eachterminal’s cargo will be dominated by the type ofcargo for which the terminal is dedicated.Nevertheless, the breakbulk operator can attemptto compete for the container business as well.

Although most breakbulk facilities are notdesigned to accommodate gantry cranes, the

breakbulk operator can encroach successfullyon the container business. Why? Because toreduce the cargo handling charges, a vesselwith its own gear may prefer to call to a termi-nal not offering gantry services. Moreover, theload-bearing capacity of most breakbulk termi-nals can accommodate mobile cranes; manyports today have the mobile cranes workingalongside the ships’ gear. Though overall han-dling productivity is not as high as gantry serv-ices, it is sufficient to divert some cargo fromfully dedicated container terminals for vesselsnot requiring the more expensive handlingequipment. Though not commonly done, it isalso possible for the container terminal toencroach on the breakbulk business. If thecontainer terminal has excess capacity andlow berth utilization, it can fill the revenue voidby handling breakbulk cargoes as long as itdoes not interfere with its core business.

Source: Ashar, Asaf, and Paul E. Kent. 1996. Diseo de Plande Expansin Portuaria en Buenaventura (Design of a PortExpansion Plan in Buenaventura). Sociedad PortuariaRegional de Buenaventura, Buenaventura, Colombia (thisstrategy was recommended as part of an effort to inducecompetition at the Port of Buenaventura, Colombia).

Box 8: Terminalization in Limited-Volume Ports: The “Overlapping Competition” Strategy

measures may still be required. Economic regu-latory measures typically used within the portsector fall within two categories:

• Tariff filing (or R1 in Box 6) would berequired by the regulator to monitor foranticompetitive behavior.9

• For other operational settings, setting tar-iffs10 (or R2 in Box 6) may be necessaryif there is a high risk of monopolisticbehavior.

In contemplating the need for regulation, itshould also be emphasized that regulatorsshould communicate with port planners todetermine what regulatory and operationalmeasures are most appropriate given the port’s

operational setting and market outlook.Establishing a productive relationship betweenregulators and planners can be problematicgiven the sense of ownership that many portauthorities have over their facilities. The portplanner’s most efficient operational strategymay run counter to the antitrust concerns of theregulator. At the same time, the port plannerand potential operators should be made awareof the regulatory environment that they canexpect after contract award. The ultimate strat-egy selected would logically reflect a balancebetween the need to promote operational effi-ciency (the planner’s perspective) and the needto avoid antitrust behavior (the regulator’s per-spective). This, in turn, reflects the conflictbetween the goal of efficiency gains from thescale of economies (size) versus increasing thenumber of competitors by dividing them into


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Box 9: Subsidy Bids for ManagementContracts in Low-Volume Ports

Under certain circumstances, cargo vol-umes may be so low that solicitations willnot generate any responses to tenders.

Regulators in these circumstances can take alesson from the approaches used in the utilitysector where the government awards a conces-sion for utility services in a low demand environ-ment (for example, telephone services in ruralareas) through what is called a “subsidy” bid.

In the port sector, management contractstypically obligate the port authority to pay acharge per unit cargo handled by the operator.The port authority bills the shipper and carrier,and these revenues would be used to offset thecost of paying the operator. But in low-volumeports, the revenues derived may not be sufficientfor the operator’s full cost recovery plus profit.

Under these circumstances, port authori-ties may have received subsidies to cover thecost of their operation (particularly true forlife-line service or cabotage and interislandservice ports). Therefore, the solicitation mayconsist of two bid items: the first setting outthe charges the operator would impose onshippers and carriers on a per unit or volumebasis, the second setting out the subsidypayment that the operator would expect fromthe port authority. Offers consisting of a com-bination of the lowest charge and subsidywould be awarded the contract.

Source: Author.

Box 10: Checklist for Port SectorRestructuring or Unbundling

The following are issues to consider whenassessing the suitability and potentialbenefits of port sector restructuring:

• Is there current or potential interport com-petition?

• Is there a specialized private port facilitynearby that could compete for public trafficif granted permission to handle generalcargo or containers?

• Is the inland transport network adequate toprovide competition from another regionalport?

• Is port traffic sufficient to permit intraportcompetition? Is any of the terminal owned oroperated by a shipping line that might notprovide universal service to other carriers?

• Is there more than one firm capable of pro-viding cargo handling services?

• Can licensed, private operators providevessel services such as pilotage, towing,and berthing?

• Can private providers compete for cargohandling and storage contracts?

• Is the port layout sufficient to support com-peting yard operations?

Source: Author.

smaller units (for example, single port operatorversus multiple terminal operators).

3.4. Decision Framework forSelecting Port Competition:Enhancement Strategies andRemedies Box 11 presents a decision framework forselecting port competition enhancement strate-gies for a variety of port conditions and com-petitive environments. The decision frameworkincludes three major elements:

• “Setting” refers to the operational envi-ronment in which the port exists, specifi-cally regarding the port’s relative size,number of berths, and cargo volume.

• “Diagnosis” refers to the criteria describedearlier in this module that serve as indica-tors for measuring the extent of competi-tiveness existing in the sector. These includetransport options, berth utilization, tariffcompetitiveness, and profitability.

• “Solutions” refer to the previouslydescribed structural and regulatory meas-

ures that should be undertaken given theport’s operational environment andextent of competitiveness.

Each of the elements of the decision frameworkis discussed in more detail below.

Setting. This is the port’s operational and physi-cal environment as it pertains to the port’s rela-tive size, the scale of its facilities, and the cargovolume handled. The scale of facilities is present-ed in terms of number of berths, but it should beemphasized that this is intended to represent onlyan order of magnitude. That is, while a port withonly one to three berths is certainly small, a five-berth port could be small as well. Similarly, a 22-berth port can be considered large, but so is a50-berth port. The competitive conditionsencompassed in the three elements are the same,be it a 22-berth port, or a 50-berth one.

For example, in determining if the relative vol-ume of a port is low, the port planner willknow the extent of excess capacity (if any) theport may have in quantitative terms given theexisting throughput and projected outlook for aspecific cargo type (for example, containers).


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Box 11: Decision Framework for Port Competition Enhancement

Source: Author.

Operational Environment

PortSetting

FacilitySetting

smallport

mediumport

largeport

1 berth1 berth2 berths3 berths

3 berths

12 berths12 berths12 berths12 berths12 berths

22 berths22 berths22 berths22 berths22 berths

Transport option codes: Structural codes: Regulatory codes:1 - No other ports or intermodal options2 - No possibility for facility expansion/construction of a new port3 - Possibility to expand existing facility4 - Possibility to construct a new port/terminal nearby5 - Other port or intermodel options

S1 - Introduce new berths-terminals R1 - Fle/monitor tariffsR2 - Set tariffs/profitability limitsS2 - Divide existing port into terminals

S4 - Short-term operating agreement/lease/management contract

highhighlowmediumlow

lowmediumhighhighhigh

lowmediumhighhigh

medium

low N/AN/AN/AN/A

N/A

N/AN/AN/A

N/AN/AN/A

N/Asimilar rates

lowersimilar rates

1medium1

high3,4high1,2

medium1

low

lowhighlow

mediumlow

13,43,455

lowhighlow

mediumlow

mediumhighhighlow

1,21,21,23,45

lowmedium

highhigh

medium

low S4

S2 R1R1R1R1

R1R1R1

N/A

N/AS2S1,S2S2S2S2 N/A

S2S2S1,S2S2

S1S1S2S2S2

R1R1R1R1R2R1

mediumhighhigh

medium

VolumeTransportoptions

Berthutilization

Relative Tariffcompetitiveness

Portprofitability Structural Regulatory

Competitiveness Indicators CompetitiveRemedies

Setting Diagnosis Solutions

If there is significant excess capacity, then cargovolume is low relative to the port’s capacity andis so described in Box 11. If there are, or poten-tially could be, capacity shortages, then cargovolume is described as high.

Diagnosis. This identifies the most important crite-ria for assessing the extent of competition thatexists. Recall from earlier in this module that thelack of existing or potential transport options,high berth utilization (as a measure of congestion),high tariff levels (relative to competitors), and highport profitability are conditions that may indicateor encourage anticompetitive behavior.

Solutions. The diagnosis of the competitiveenvironment in light of the port’s setting definesthe potential operational and regulatory solu-tions for enhancing port sector competitiveness.This represents the course of action that theport planner and regulator may take.

The decision framework can be used to selectport competition enhancement strategies andremedies. Referring to Box 11, consider a smallport consisting of three berths and high volume.This is the only port serving its particular hinter-land; there is no potential for adding capacity,and there are no intermodal options. Berth occu-pancy is high and profitability is high. Here, wehave a classic monopolistic setting—high volume,high berth occupancy, high profitability, and nocompetition. The preferred strategy is to dividethe port into terminals (indicated by solution S2)and to impose tariff filing and limits, with thepossible need for tariff monitoring (solution R2).

Looking at the other extreme, a one-berth, low-volume setting, with low occupancy, no compe-tition, and low profitability suggests enteringinto a short-term operating or managementcontract (solution S4), with the possibility for asubsidy bid.

Other scenarios include:

• For a medium-sized port with a low-vol-ume setting and a lack of existing orpotential transport options, low berthoccupancy and low profitability point to

the need to even close some berths andplace them into reserve. Placing excesscapacity into reserve status reduces theport’s maintenance costs while at thesame time facilitating ease of entry as vol-umes increase.

• The situation changes in a scenario of amedium-sized port with a high-volumesetting and interport or intermodal com-petition, excess capacity (as indicated bylow berth utilization), competitive rates,and medium profitability. Here, the pre-ferred solution is to divide the port intocompeting terminals.

• A large port with no competition, highvolume, low berth occupancy, and lowprofitability points to terminalization(again, with possible berth closures) with-out the need for tariff filing as the excesscapacity allows for easy entry if pricingbecomes monopolistic.

• A setting with medium volume, mediumberth occupancy, medium profitability,and similar rates to competitors’ offers thepossibility to terminalize the port withcomplementary tariff filing requirements.

As demonstrated, the decision framework canbe a useful tool for the port sector reformer tooptimize the design of a competitive setting. Itcan also serve to curtail the government’s natu-ral inclination to tightly regulate in circum-stances where it is not needed. Overregulationwould have the unintended consequence of con-straining efficiency. Indeed, as Box 11 shows,only rarely is it necessary to actually set tariffsor profitability limits (solution R2) because ofthe structural remedies that are available.

4. DESIGNING A PORTREGULATORY SYSTEM The shift in the role of the public sector fromport services provider to landlord and regulatorwill require that the public sector develop newskills, institutional capabilities, and practices.These include regulating unfair or anticompetitivepractices; designing and negotiating contracts


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with private providers of port services; monitor-ing performance and enforcing compliance withgeneral standards; and creating processes forwider participation in developing and imple-menting transport policies and programs.11

Changing the role of governments from havingdirect control over state-owned and operatedports to exercising indirect guidance throughappropriate regulation and pricing policy islikely to put greater demands on institutionalcapabilities in developing and transitioneconomies than can be satisfied immediately. Insome cases, improving regulations is largely amatter of strengthening the existing monitoringand enforcement capability. In other cases, itinvolves setting up participatory developmentand appeal processes. In yet others, whetherthere is a need for transport-specific institutionswill depend on how these issues are dealt withat an economywide level.12

Regulation, however, must not become a strait-jacket that stifles initiative. This would be areturn to the past, where the port authoritieswere often so heavily regulated by the supervis-ing authority that they could not take any ini-tiatives or soon lost their drive to innovate,invest, and improve efficiency.

To help design an economic regulatory policyand avoid the pitfalls of heavy handed regula-tion, the following guidelines will be helpful:

• Government should have a clear under-standing of the competitive environmentof the port sector.

• A decision on economic regulation shouldbe based on the risk of anticompetitivebehavior or on evidence that monopolis-tic behavior is occurring and that othermethods of intervention (for example,cease and desist orders, sanctions, orfines) are not feasible, adequate, orappropriate.

• The regulator should clearly define whatform of economic regulation (for exam-ple, rate of return or tariff setting) is tobe applied and under what circumstances.

• Responsibilities for regulation of portoperations13 and competition should beformally separated. Because of the risk of“agency capture” and the potential con-flict of interest between the two forms ofregulation, they should be separated andassigned to two different entities.

• In the event that economic regulation isimposed, regulators will need to have areasonable understanding of the coststructure of the operation; this meansthat regulators will need proprietaryfinancial information and will have toweigh the tradeoffs between the need forinformation and the burden of the report-ing requirements on the operators.14

• When a determination is made that eco-nomic regulation is not necessary, butinstead tariff monitoring or approval iswarranted, then the regulator will need toclearly set out the tariff reporting require-ments, the review process, and impose atime limit on itself as to when anapproval decision is to be made.

• The entire competition regulation policyshould be conveyed to the port and ship-ping community, as should the disposi-tion of antitrust cases and regulatory pol-icy decisions.

• Policy and case deliberations shouldinclude the opportunity for affected par-ties to present their views.

• Any decisions made by the regulator shouldbe enforceable with recourse for appeal.

In designing a port regulatory system to protectcustomers and the general public interest, gov-ernments need to keep several broad principles inmind. First, it is important to be realistic; a bal-ance must be struck between what is ideal (thatis, as close as possible to perfect competition)and what is achievable. Second, regulationshould not be too restrictive or controlling.Overly restrictive regulation could deter privatecompanies from providing services or limit theirability to introduce innovative and efficient prac-tices. Regulation that seeks to control in detail


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how the private port operator runs its businessrisks defeating the central purpose of private sec-tor participation—improving service delivery atthe lowest possible cost to the user. Third, a reg-ulatory system must be consistent with the insti-tutional capabilities and resources of regulators.

Designing a port regulatory system to accom-modate private sector participation can be bro-ken down into eight basic steps15:

Step 1. Specify the essential regulatory objec-tives and tasks.

Step 2. Determine how far existing laws gotoward assigning these tasks.

Step 3. Determine institutional arrangements forregulatory oversight.

Step 4. Consider how much regulatory discre-tion should be allowed.

Step 5. Consider what regulatory tools andmechanisms will be used.

Step 6. Specify port operating and financial per-formance indicators.

Step 7. Establish an appeal process and proce-dures.

Step 8. Incorporate regulatory details into lawsand private sector contracts.

Presented below is a discussion of issues to beconsidered in completing these steps, along withchecklists and illustrations to provide guidancefor the design of a port regulatory system.

4.1. Step 1: Specify RegulatoryObjectives and Tasks Economic regulation of the port sector mayhave multiple objectives. These include:

• Promotion of efficiency.

• Satisfaction of demand, notably by pro-moting investment.

• Protection of consumers and users, par-ticularly against monopolistic or otherabuses by the operator(s).

• Protection or even promotion of competi-tion, including protection of those com-peting against a dominant operator.

• Prevention of pricing or service discrimi-nation.

• Protection of investors against unfair orunreasonable government action.

The primary purpose of economic regulation isto control anticompetitive behavior resultingfrom shortcomings in the marketplace. It shouldbe distinguished from technical, safety, environ-mental, and other forms of regulation, althoughin practice these may often be intertwined.16

Regulators typically have the power to adjudi-cate disputes between port operators orbetween port users and operators. This may bethe most important function of a regulatorwhen a sector is liberalized and an operatorengages in anticompetitive behavior.

Competition regulators are normally in chargeof verifying and enforcing compliance withantitrust legislation. Monitoring compliancewith concession and lease terms and conditionsis normally assigned to the port authority as thelessor of the facilities (or land). The portauthority is also given the power to enact gener-al norms and regulations governing operationalpractices within the port.

The competition regulator’s legislated powerstypically authorize the regulator to require peri-odic submittals of tariff, financial, operational,and any other data necessary to support theregulator’s industry monitoring responsibilities;receive and issue complaints about alleged anti-competitive behavior; compel operators to pro-vide proprietary and other data during inves-tigative (discovery) proceedings; deliberate overcases of alleged violations of antitrust legisla-tion; and impose remedies in the event that theregulator determines a violation occurred.

The objectives of regulation in most developingand transition countries, however, frequently aredifferent. The level of profits earned by the privateoperator should be of secondary importance. Themain challenge in many underdeveloped markets


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is to meet existing and latent demand for servic-es. Hence, the primary objective of regulationshould be to ensure that the operators (public orprivate) meet minimum performance standards,thereby taking action to close the gap betweensupply and demand. Consumers in most of thesecountries often prefer a high-priced service to noservice at all. Furthermore, distributional objec-tives or concerns can, if needed, be addressedthrough subsidies or other mechanisms.

Depending on the objectives to be met, regula-tion may focus on tariff policy; direct and indi-rect subsidies; access to congested facilities;investment levels; performance targets; servicequality and continuity; and so on. Most coun-tries use a range of regulatory instruments(including specific stipulations in concessionagreements or licenses and general rules) to gov-ern the award of licenses, the oversight of thelicensees, and more generally, the rights and obli-gations of users, competitors, and other parties.17

4.2. Step 2: Conduct a LegalReview of the Regulatory System In assessing how the broad regulatory frame-work will affect the design of a port reformregime and the attractiveness of that regime tothe private sector, governments need to considera wide range of constitutional provisions, laws,rules, regulations, and activities of governmentagencies. These include:

• The constitutional and legislative divisionof responsibilities for service amongnational, regional, and local govern-ments.

• Responsibilities and relationships of rele-vant government entities.

• General legislation affecting private sec-tor involvement, including by foreigncompanies.

• Issues relating to land use titling.

• Competition law, and competition orantitrust enforcement agencies.

• Environmental laws.

• Contract and concession law.

• Labor law.

The minimum requirement for effective regula-tion is a framework of law pertaining to prop-erty rights, liability, conflict resolution, and con-tracting. There must also be capacity to enforcethe laws and credible assurances that the lawswill not be changed by political whim.

Box 12 presents the review and revision of portregulatory responsibilities in the state ofVictoria, Australia. Further discussion of thelegal aspects of the port regulatory system ispresented in Module 4 of this Toolkit.

4.3. Step 3: Determine InstitutionalArrangements for RegulatoryOversight A key element in the design of a port regulatorysystem is determining the appropriate institu-tion or institutions that should have primaryresponsibility for competition oversight. Itemsthat need to be considered include:

• Should the regulatory entity be multisec-toral or specific to the port sector?

• How can the regulatory entity bestencourage direct participation or inputfrom port users?

• Should it be centralized or decentralized?

• How can the regulatory entity’s inde-pendence be protected from short-termpolitical pressures and from the undueinfluence of port operators and serviceproviders?

• How should the regulatory entity coordi-nate with other regulatory institutions?

• How can requirements for staffing andtechnical capabilities be met?

Should governments set up a regulatory bodyfor the port subsector, as has been done inArgentina, Colombia (Box 13), and the UnitedKingdom; a single agency for the transportsector as in the U.S. Surface TransportationBoard; or a multisectoral agency for all or


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The Marine Board: Significant amendments to theMarine Act of 1988 enlarged the powers andresponsibilities of the Marine Board, making it theprincipal point of reference for navigational safetyand containment of marine pollution. Some ofthese powers were transferred from the variousport authorities in anticipation of the repeal of theport authority statutes.

Regulatory powers relating to harbormasters,direction of shipping, maintenance of certainaids to navigation, promulgation of standards forthe dredging of channels, and responsibility tocoordinate compliance.

The powers previously residing in the port authori-ties under the POWBONS Act were transferred tothe Environment Protection Authority.

Pollution of waters.

The Office of the Regulator-General.Economic regulation of marine services.

The Victorian Work Cover Authority. TheDangerous Goods Act of 1985 was extended tocover the transfer, handling, and storage of dan-gerous goods in ports.

Transfer, handling, and storage of dangerousgoods.

Creation of Melbourne Port Corporation andMelbourne Port Services.

Management of the Port of Melbourne.

Creation of the Victorian Channels Authority.Management of channels in port waters, includingdredging and maintenance of navigation aids.

Responsible Authority Revised Responsibilities

In January 1995, the State of Victoriaannounced its intention to reform Victoria’sports. Until 1993, the chairmen of the port

authority boards were also the chief executiveofficers of the port authorities. As a prelude toport reform, so-called “reorganizing boards” wereestablished for each port authority, and the posi-tions of chairman and chief executive were sepa-rated under the State Owned Enterprises Act of1992. The port authorities continued, however, toexercise their considerable statutory powers toregulate, administer, and fund the operation ofeach port. In essence, while they remained undergovernment control, the port authorities wereregulating both their customers and themselves,and the Minister for Roads and Ports, to whommany of the statutory powers were deferred, wasboth the “regulator” and the “shareholder” of thebusinesses the port authorities conducted.

Examination of the statutes indicated thatsignificant shifting of regulatory responsibilities

was necessary to ensure that a framework forregulation of the ports was in place prior totheir sale, out-sourcing, or reorganization. First,it was necessary to provide for the orderlyretirement of the port authorities’ existing func-tions and powers as these were superseded bythe new legislation. Second, new entities wouldhave to be created to provide for the manage-ment of the Port of Melbourne and the shippingchannels, since it had been determined that thechannels should remain under public manage-ment but with a commercial focus. Third, envi-ronmental and occupational health and safetyissues would need to be devolved to the mostappropriate government body. Fourth, land andplanning statutes would need to be altered tomake possible the definition of each of theports as a saleable entity or an entity whoseoperation could be outsourced. The revisedresponsibilities for regulation of the ports underthe port reform regime are summarized below.

Box 12: Reviewing Port Regulatory Responsibilities in Victoria, Australia

most infrastructure sectors, as in Australia?On the other hand, perhaps there should be nospecial regulatory body at all, as in New

Zealand, where the Commerce Commission,the national competition agency, is in chargeof economic regulation of the infrastructure


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Box 12: Reviewing Port Regulatory Responsibilities in Victoria, Australia (Continued)

Source: McCallum, Elizabeth. 1999. “Privatising Ports: A Legal Perspective.” Privatisation International, November, pp. 53–55.

Responsible Authority Revised Responsibilities

The Governor-in-Council, on the recommendationof the Minister for Conservation and Lands, toissue title to the relevant port authority.

Revocation of reservations, surrender of Crownland, issue of freehold title.

The Minister for Planning was given facilitativepowers to prepare specified amendments to theplanning schemes so far as they affected the portareas.

Amendment of planning schemes.

During its prereform days, Colombianports were known for low productivityand poor efficiency. Average length of

stay for a vessel was twice that of other portsin the region. Colombia’s institutional frame-work was typical of the prereform situations inLatin America. The port sector was highly cen-tralized in an organization known asCOLPUERTOS, whose responsibility includedthe administration, operations, management,and planning of the country’s four primaryports: Cartagena, Santa Marta, Barranquilla,and Buenaventura. Private terminals were per-mitted, but could not be offered as public usefacilities. COLPUERTOS also controlled thetariffs for each of these ports. In addition tohaving separate administrations for each port,COLPUERTOS had a central administrationoffice in Bogotá. The total number of publicsector employees was nearly 11,000.

Law 1, passed in 1991, sought to liquidateCOLPUERTOS and create theSuperintendencia General de Puertos (SGP) to:

1. Oversee COLPUERTO’s liquidation.

2. Implement a new system of port societiesand operating concessions.

3. Prevent monopolistic abuses among the portsocieties and operators (primarily throughtariff review, tariff setting, determining thenumber of concessions to be awarded, andimposing fines and sanctions).

4. Establish technical norms for port operations.The SGP became part of the Ministry ofPublic Works and Transport as an independ-ent entity with financial and administrativeautonomy. Its costs are covered through theassessment of a supervision fee to be paidby the port societies and port operators.

In exercising its supervisory function, SGPestablished offices at the regional port societies’facilities. Total SGP employees originally num-bered just over 100, including employeescharged with monitoring operations at eachport. By 2000, SGP employees had increasedto more than 200. Regional port societies havethe freedom to issue subcontracts for port serv-ices. For instance, in Cartagena, more than 25private stevedoring companies licensed by theSGP compete for contracts with ship agents.

The approach to port sector reform inColombia created a competitive environmentthat goes beyond the competition betweenstevedoring companies. Interport competitionfor container cargo was promoted among theAtlantic Coast ports of Cartagena, SantaMarta, and Barranquilla. Law 1 also permittedprivately owned terminals to become publicuse facilities and to compete with the regionalport societies.

Source: Kent, P., and A. Hochstein. 1998. “Port Reform andPrivatization in Conditions of Limited Competition: TheExperience in Columbia, Costa Rica, and Nicaragua.”Journal of Maritime Policy and Management 25(4): 313–333.

Box 13: Establishing a Port Sector Regulatory Agency in Colombia

sectors on the basis of the country’s generalcompetition rules.

A strong case can be made for a multisectoralregulatory agency. A multisectoral agencyshould contribute a greater degree of coherenceand consistency in the regulation of differentsectors. It also allows lessons from one sector tobe applied to others, creates administrativeeconomies of scope, and may limit the risk ofcorruption or undue influence by a particularenterprise or ministry. It is particularly wellsuited for countries that lack the necessaryfinancial, human, and administrative resourcesto equip separate agencies. Some argue that thatit does not promote the development of in-depth sector expertise, but this can be addressedby a degree of technical specialization withinthe agency. Basic legal, economic, and financialskills and experience are, in fact, largely com-mon to various infrastructure sectors.

A new generation of transport agencies is beingintroduced, inspired by the integrated U.S.model and led by Bolivia and Peru. Both coun-tries have regulatory agencies that are muchmore independent from policy makers. Theagencies cover all transport sectors and havetheir own sources of funding. They rely on thisfunding to subcontract for skills that they donot have in house. To ensure good coordinationbetween the agency monitoring competition andthe transport regulator in Peru, one of the mem-bers of the Transport Regulation Board is also amember of the Competition Commission.18

A typical regulatory approach is one in whichcountries monitor the port sector through anagency established to monitor and enforceantitrust law generally. Mexico, for example, hasthe Federal Competition Commission as theagency with primary responsibility for competitionlaw. The Swedish and British counterparts are theSwedish Competition Authority and the Office ofthe Director General of Fair Trading, while in theUnited States it is the Federal Trade Commission.

The nonsectoral emphasis of these countriesassures uniform application of competition poli-cy across all sectors and allows consideration of

the impact of corrective or enforcement actionwithin one sector on another. Moreover,antitrust monitoring and enforcement is dis-tinctly separated from other sector-specific regu-latory aspects; this assures neutrality or objec-tivity and reduces the possibilities of regulatorycapture sometimes associated with sector-specif-ic regulatory agencies.

In spite of such advantages, having an antitrustagency responsible for all sectors is a significantburden on the agency itself because of the arrayof cases that it may need to pursue. Moreover,specialists assigned to particular cases may nothave specific industry expertise; specialists withbackgrounds in commercial advertising prac-tices, for example, may be assigned to pricingcollusion cases related to the automobile indus-try; individuals who are experts in grocery storepricing practices may be assigned to maritimeterminal operator cases. This approach meansthat a cadre of specialists will not be developedto the extent that assurances can be given thatthey will make a decision based on analysesreflecting a thorough understanding of the sec-tor. An alternative approach, therefore, could beto establish an antitrust practices office withinan agency already responsible for planning,development, and regulation of the sector, butwith ratemaking independence.

How can the regulatory entity best encouragedirect participation or input from port users?

Consumers, both individuals and businesses, arenot typically heavily involved in the port regulato-ry process, even though their input can be criticalto efficient service when the regulator has onlylimited means of acquiring information. Finalconsumers are often the best monitors of servicequality. Ways to obtain consumer feedbackinclude establishing user advisory boards or hav-ing user representatives on port authority boards.

While providing a formal basis for user feedbackcan be useful to operational regulators, applyingit to an antitrust regulator should be discour-aged. User input, or input by other interestedparties, will often be sought by regulators duringthe investigation associated with an alleged


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violation. Under these circumstances, allegedviolators, complainants, and other interestedparties are typically given the opportunity toexpress their views and present evidence duringthe case disposition process. If a port user sits as aregulator, as the Sri Lankan legislation proposes,

this creates the potential for a user to sit in judg-ment over a customer or another competitor,giving rise to conflicts of interest (Box 14).

Advisory bodies should be considered seriouslyas sources of input to the port regulatory entity.


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As part of the port modernization processundertaken in Sri Lanka in 1998-1999, asimple but effective proposal was for-

mulated and embedded in the signed conces-sion agreement for Queen Elizabeth Quay,which includes the establishment of a smallregulatory Commission to resolve competitiveissues concerning public and private portoperations.The establishment of the commis-sion in a period of 5 years (before 2003) willprovide private port operators and private sec-tor participants/investors with reassurance thata fair and transparent process would be avail-able to resolve competitive issues. The objec-tives of the Commission are:

• To encourage and promote fair competitionbetween all port operators, be it public orprivate, and to create an atmosphere of con-fidence for investors in port services andfacilities;

• Upon complaint of any interested party, tojudge disputes concerning these parties inan impartial and non-discriminatory mannertaking into account the particular conditionsof Sri Lanka, principles of equity and equalopportunity, revenue adequacy and commonpractices in the industry and other criteriathe Commission shall deem appropriate;

• In response to complaints from interestedparties, to regulate tariffs of port servicesbased on transparent and objective criteriaof rate reasonableness, in the event thatspecific tariffs are proven before theCommission to be incompatible with theprinciples of fair competition or with thecommon practice of the industry. TheCommission would not interfere, at its owninitiative, in the tariff setting of public or pri-vate commercial legal entities carrying outactivities in any port area in Sri Lanka;

• To act upon complaints from users of SriLanka port facilities that carry out legalcommercial activities related to shipping,transport of passengers and transport

and/or storage of goods, regarding the waypublic services are being provided by SLPAand to direct under threat of penalty thatSLPA correct the way it provides publicservices.

The Commission will consist of six regulatorswho will serve a single, six-year term. Theterms of the regulators shall be staggered sotwo new regulators will be appointed everytwo years. The Minister for Ports,Rehabilitation and Construction will appointthe regulators based on nominations received.The Chairman and one regulator shall beappointed from lists nominated by the SriLanka Ports Authority; one regulator eachfrom nominations by a representative organi-zation of shipping agents, an organization ofprivate terminal operators, the Sri LankaChamber of Commerce and the ArbitrationInstitute of Sri Lanka.

Proceedings will be advocative. Interestedparties shall have an opportunity to presentfacts and arguments in support of their inter-ests before regulators. Proceedings will beopen to the public and transcripts of evi-dence presented and discussions held duringproceedings will be maintained for publicreview. The decisions of the Commission willbe reached by majority decision. Eachdecision will be accompanied by a set offindings that explain the basis of the rulingand clarify issues of administrative law andprecedent.

Decisions are binding on parties to dis-putes. An appeal of the findings and directivesmay be submitted to the Chairman of theCommission; the sole basis for appeal shallbe the failure of the Commission to uniformlyand equally apply its principles of its ownadministrative law. The Commission shallhave the power to apply civil sanctions andpenalties which devolve from the power ofthe Minister for Ports, Rehabilitation andReconstruction.

Box 14: A Simple Port Regulatory Structure for Sri Lanka

They offer a degree of transparency and injectanalysis and debate in discussions that previouslywould have taken place in the secrecy of aministerial cabinet. The advisory body can seeits role and influence increase when the authoritycompetent to make a specific decision is notonly forced to seek its advice and take it intoaccount, but also to justify any departure fromsuch advice. Furthermore, for certain matters,the competent authority may not be allowed toreach a decision going against the opinion oradvice received.

How can the regulatory entity’s independencebe protected from short-term political pressuresand from the undue influence of port operatorsand service providers? The independence of aregulatory body is worth little unless it isupheld against undue influence by the regulatedindustry or by unreasonable political interven-tion. Cases of regulatory capture by the indus-try are not uncommon. The problem is particu-larly acute when regulatory agencies are set upas part of the civil service in countries wherestaff is not adequately compensated. By remov-ing regulatory staff from civil service con-straints, governments may remunerate them inways that better protect them from industrycapture and that allow the agency to attractqualified candidates, hence enhancing the “pro-fessionalization” of the regulatory function.

Rules need to be laid down concerning poten-tial conflicts of interest among the regulator’sstaff (for example, by prohibiting former staffof the regulatory agency from working for aregulated operator for a specified period afterleaving the agency). If independence fromundue industry influence is to be achieved, thencompetition and operational regulation shouldbe assigned to two different entities.Traditionally, a public port entity had fullresponsibility for administration and operationof the port sector. This included regulating oper-ational practices applicable to navigation andvessel calls as well as providing the full range ofcargo handling and vessel services. In a priva-tized setting, the port authority (landlord form)will retain operational regulation responsibility

in a privatized setting, along with other func-tions associated with its ownership of facilities(for example, infrastructure maintenance, leasemanagement, and monitoring for compliance).

Today’s modern port authorities have a certaindegree of independence, many having theauthority to engage in contracting and leasing,setting their own capital and operating budgets,tariff setting (for port authority charges), andhiring and firing, all without the need forapproval from other government entities. In thedischarge of many of these duties, port authori-ties are in contact with port operators on a fre-quent basis.

Similar independence can be accorded the com-petition regulation agency. Box 15 enumerates anumber of strategies that can be used to ensurea more independent agency culture. Two of themost critical factors are independence relativeto budgeting and case disposition. As Box 15notes, it is imperative that the competitionagency develop budget independence, as thepower and independence of the agency can belimited by the budget process itself. Agenciesrequire funds to operate, and executive and leg-islative review can exert powerful influence overagency actions. Retribution, in the form ofbudget cuts, can be taken against regulators iftheir decisions or functions are politicallyunpopular. It is possible, therefore, for the com-petition regulatory body to enhance its inde-pendence by securing at least a portion of itsbudget from fees assessed on port operators.

A critical aspect of regulatory independence isthe ability to reach decisions on cases based ona fully developed public record. Such decisionsshould only be affected by the evidence anddata collected in the course of the agency’smonitoring responsibilities and in investigatingcomplaints, which may include testimony aswell as data collection and review of propri-etary information that may be requested of thealleged violator. This suggests also that theindustry need not be informed of which profes-sionals within the agency are assigned to do theanalysis of a particular case, although the


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agency would assign a contact person duringthe course of case disposition. This anonymitycan contribute toward the independence of deci-sions related to a case and reduce the opportu-nity for industry and political forces to undulyinfluence them.

Independence needs to be reconciled with meas-ures to ensure that the regulator is accountablefor its actions. Checks and balances arerequired to ensure that the regulator does notstray from its mandate, engage in corrupt prac-tices, or become grossly inefficient (Box 16).

How can requirements for staffing and techni-cal capabilities be met? Many developing coun-tries confront a challenge in assembling experi-enced professionals to staff a regulatory agency.Regulatory agencies have limited resources andare often unable to attract qualified people. Theability of independent agencies to sidestep civilservice salary restrictions and to have access toearmarked funding makes it possible to recruitand retain better-qualified staff and to hire exter-nal consultants. Much of the work traditionallyperformed by regulators lends itself very well tocontracting out to private experts. Complex reg-ulatory functions need to be performed profes-sionally. When limited administrative capacity is

a constraint, at least in the short and mediumterm, contracting out of regulatory tasks shouldbe considered.

Governments and regulators can, and often do,hire consultants, advisers and experts to assistthem in all aspects of their regulatory tasks.Such contracting out can be taken one step fur-ther and formalized through, for example, per-formance audits or certifications performed byindependent verification companies under con-tract with the regulator. Auditors could beasked to certify that information provided bythe regulated port operators (including perform-ance targets) is fair and reliable. The verifica-tion company will base this opinion on checksthat they have performed and on their assess-ment of the systems the companies establishedto produce the required information. In addi-tion, they could be asked to certify that the reg-ulated company is in compliance with the legis-lation in effect, and if not, to determine thedegree of noncompliance and the factors thatmay have contributed to it. Their task couldalso include surveys of port user satisfaction.

Finally, verification companies could measurethe regulated companies’ performance againstkey parameters, prepare time series showing


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Creating an independent agency, no easytask in any setting, is even more chal-lenging in countries with a limited tradi-

tion of independent public institutions and lim-ited regulatory experience and capacity.Measures that can aid in establishing an inde-pendent agency include:

• Provide the regulator with a distinct legalmandate, free of ministerial control, with anindependent board.

• Establish minimum professional criteria forappointment.

• Involve both the executive and the legislativebranches in the appointment process.

• Appoint regulators for fixed terms and pro-tect them from arbitrary removal.

• Stagger terms so that they do not coincidewith the election cycle, and for a board or

commission, stagger the terms of themembers.

• Exempt the agency from civil service salaryrules that make it difficult to attract andretain well-qualified staff.

• Provide the agency with a reliable source offunding, usually earmarked levies on regulat-ed firms or consumers.

In addition, persons appointed to these posi-tions must have personal qualities to resistimproper pressures and inducements. Andthey must exercise their authority with skill towin the respect of key stakeholders, enhancethe legitimacy of their role and decisions, andbuild a constituency for their independence.

Source: Smith, Warrick. 1997. “Utility Regulators—TheIndependence Debate.” In The Private Sector onInfrastructure: Strategy, Regulation, and Risk, p. 23.Washington, DC: World Bank.

Box 15: Safeguards for Creating an Independent Regulatory Body

trends, and compare these results with interna-tional norms. But, performance comparisonsrequire highly knowledgeable experts to doproper performance benchmarking. For exam-ple, to explain why a terminal achieving 20container moves per hour may be a much betterperformer than a terminal achieving 25 contain-er moves per hour requires in-depth knowledgeof the business and full availability of allrequired information.19 None of these functionsimply any discretionary decision making on thepart of the auditor. What such audits would do,however, is provide the decision makers with asound analytical basis for their decisions. 20

4.4. Step 4: Determine Degree ofRegulatory DiscretionA key question in designing a port regulatorysystem is to determine how much discretionshould be granted to regulators. Discretion helpsregulators respond flexibly to changing condi-tions, but it also creates regulatory risks for pri-vate partners and may, therefore, discourage

their participation or raise the price of theirinvolvement. A delicate balance needs to bestruck between allowing regulatory discretionand developing very tightly specified contractsthat will have to be renegotiated when unex-pected changes occur.

Once a contract has been awarded to a privatecompany, it is that company’s job to run thebusiness. This may seem an obvious point, butexperience suggests that great care is needed toensure that regulators do not interfere in theday-to-day management of the port.Regulations should focus on desirable publicinterest outcomes, not on the specific stepstaken to achieve these outcomes. For example,it is the regulator’s task to monitor whether thestated performance standards are met. It is theoperator’s task to decide what technical meas-ures and operating practices are needed to meetthe standard. When a government specifies theregulator’s duties and decides on the appropri-ate staffing and skill mix for the regulatoryagency, it must have a clear understanding ofthe dividing line between regulation and opera-tional management.

When discretion is retained on tariffs or otherissues of concern to investors, the challenge isto manage it in a way that minimizes the risk ofmisuse. The exercise of discretion needs to beinsulated from short-term political pressuresand other improper influences and to be basedon competent analysis. Entrusting regulatorydiscretion to ministers with broad authorityoften will not meet these tests, particularlywhen the government continues to own otherport enterprises. In this case, there will be noarm’s-length relationship between the regulatorand the government-controlled firm, and theremay be concerns that, in exercising discretion,ministers will favor the state enterprise overrival private firms. But even if the governmenthas no ownership role, ministers will still besubject to short-term political pressures andchanges in regulatory policy. Restrictive civilservice rules in many countries also make it dif-ficult for ministries to attract and retain well-qualified professional staff. What is required is


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Box 16: Reconciling Independence withAccountability

Striking the proper balance betweenindependence and accountability isnotoriously difficult, but the following

measures to do so have been adopted by agrowing number of countries:

• Mandating rigorous transparency, includingopen decision making and publication ofdecisions and their rationale.

• Prohibiting conflicts of interest.

• Providing effective arrangements to appealthe agency’s decisions.

• Providing for scrutiny of the agency’s budg-et, usually by the legislature.

• Subjecting the regulator’s conduct and effi-ciency to scrutiny by external auditors orother public watchdogs.

• Permitting the regulator’s removal fromoffice in cases of proven misconduct orincapacity.

Source: Smith, Warrick. 1997. “Utility Regulators—TheIndependence Debate,” In The Private Sector onInfrastructure: Strategy, Regulation, and Risk, September,p.23. Washington, DC: World Bank.

an agent at arm’s length from political authorities,regulated port firms, and consumers.Organizational autonomy helps to foster therequisite expertise and preserve those spatialrelationships.21

Before they can calculate the price they areprepared to offer, investors will want to knowthe regulatory system under which the compa-ny will operate. They will also form a view onhow this regime can be expected to evolve inthe years ahead. To reassure investors, thegovernment may have to promise not to alterthe regulatory system substantially, or at leastnot to do so to the detriment of the investors.To be effective, however, this commitmentneeds to be credible. Credibility could beenhanced by provisions in the privatizationagreements allowing the company to automat-ically adjust its tariffs based on a given formu-la, or by a provision that the government willcompensate the operator for any negativeimpact that results from government rejectionor delay of a contractually agreed tariffincrease.

4.5. Step 5: Identify AppropriateRegulatory Tools and Mechanisms The pricing regime, particularly the tariffs andtheir adjustment formula, is typically a corner-stone of the economic regulatory system. It willdetermine the return investors can expect andthe incentives they may receive to provide qualityservice.

The chosen tariff formula must be one that canbe effectively applied by the competent authority.This presupposes, in particular, that the infor-mation needed by the authority to perform itsfunction is available, that the authority canrequire the regulated enterprise to disclose suchinformation, and that it can check its accuracyand reliability. The degree of complexity of theprice adjustment mechanism thus account forthe regulatory agency’s technical resources andcapacity. In other words, the regulatory mecha-nism should be tailored to the specific charac-teristics and constraints of the country andsector concerned.

Traditionally, governments have relied on rate-of-return regulation as the primary instrumentof economic regulation. In other words, govern-ments have generally guaranteed to port opera-tors that they would recover their costs (withinvery general guidelines) and get a mark-up toreward investors; thus, the label cost-plusregime. These regimes, however, do not givestrong incentives to operators to cut costs. Theintroduction in the United Kingdom (U.K.) ofprice caps changed this by showing that the reg-ulatory regime could be designed to minimizecosts. Price caps allow the operators to keep aportion of the cost savings they realized, withpart of these savings being shared with portusers, and sometimes governments. In manycountries, hybrid systems have been developed,which result in some degree of immediate rentsharing at the beginning of the period for pri-vate sector operations.22

Rate-of-return regulation allows the regulatedcompany to charge prices that would cover itsoperating costs and give it a fair return on thefair value of its capital. While rate-of-returnregulation gives operators little incentive to cutcosts, it protects investors in risky environmentsand may persuade some of them to bid for dealsthey would not otherwise have considered. Aproblem with this regime is its demanding infor-mation requirements. To allow regulators todetermine reasonable rates of return, the regimeplaces them in a position to make decisionsabout the wisdom of investments and operatingprocedures, confusing the role of managers andregulators.23 Box 17 presents a comparison ofthe benefits of price caps and rate-of-return reg-ulation.

Price-basket controls such as the RPI-X formulaused in the U.K. limit tariff and price increasesto the increase in the retail price index (RPI) ofa 12-month period minus a percentage thattakes into account expected productivity gains.

One difference between the RPI-X and the rate-of-return formula is that the administrativeburden of the former is lighter because it is lessdependent on information supplied by the


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regulated enterprise itself, it requires lessverification on the part of the regulator, and itallows the regulator’s discretionary interven-tions to be spaced more widely. Some argue, onthe other hand, that the administrative burdenof price caps may be higher rather than lowerbecause in the end regulators need to performthe same analysis as required for rate-of-returnregulation and they must forecast productivityimprovements over the next four or fiveyears.24

In many ways, the biggest difference betweenprice controls and rate-of-return regulation isone of emphasis. Regulators must not ignorethe rate of return when they reset a company’sprice cap, but the price cap is an indirect, ratherthan a direct, control on the rate of return.Rate-of-return regulation has depended on for-mulae designed to ensure that the regulatedcompany receives the right amount of revenue,and it has often been bogged down in legalarguments. The formulae are only a guide tothe level of the price control, however, and stillleave room for judgment. The regulator mustdecide whether to set prices so that they equalthe company’s predicted costs at the end of thereview period or over the period as a whole.The regulator may look at the company’s cashflow, as well as the discounted value of its costsand revenues. The regulator may use formulaeto check the impact of alternative assumptionsabout factors such as the growth of demand,and might adopt a price control that seemsslightly generous on the base case because oth-erwise the company would be in a difficult posi-tion if the alternative assumption became true.Finally, if a company knows that a formula willbe used in a mechanistic manner, it will have anincentive to attempt to manipulate the inputs tothe formula. It may be that giving some discre-tion to the regulator can reduce this incentive.This discretion should not be excessive, howev-er, because the company must remain confidentthat it can recoup its investment, but it shouldalso allow the regulator to use its judgment ofwhat is fair under a particular set of circum-stances, rather than simply blindly following aset of rules.25


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Box 17: Price Cap versus Rate-of-ReturnRegulation

In practice, price cap and rate-of-return reg-ulation have differences and similarities.First, a rule such as RPI-X considers only

how prices should be changed from year toyear; it doesn’t tell a regulator how to set themin the first year. A regulator wanting to useprice cap regulation for a new service wouldneed to set the initial price in some way, andone obvious option is to consider the price thefirm needs to charge to earn a satisfactoryrate of return. Second, a price cap needs tobe periodically reviewed; a regulator cannotreliably predict what changes in productivitywill be possible in say, 10 years. In the UnitedKingdom, price caps typically are reviewedevery five years. And during a review, the regu-lator naturally takes into account the regulatedutility’s rate of return. If it is too high, the pricecap is likely to be reduced; if it is low, theprice cap may be relaxed.

But as long as price cap reviews are suffi-ciently infrequent (say, every five years), pricecap and rate-of-return regulation should havedifferent effects on the behavior of regulatedfirms. In particular, a price cap regime sub-jects businesses to more risk. For example,under price cap regulation, if a firm’s costsrise, its profits will fall because it cannot raiseits prices to compensate for the cost increasesat least until the next price review, which maybe several years away. Under rate-of-returnregulation, however, the business wouldseek—and typically be granted within a yearor so—a compensating price rise, so itsprofits would not change much. But if thefirm’s costs fall, the price cap regulation ismore advantageous to the firm than rate-of-return regulation because it would retain moreof the resulting benefits as profits. Thus,under rate-of-return regulation, consumersbear some of the risk that firms bear in pricecap systems. The difference in impact meansthat firms subject to price cap regulation havea stronger incentive to lower their costsbecause they keep more of the cost savingsthan they would if they were subject to rate-of-return regulation. But the increased riskthey bear tends to raise their cost of capital.

Source: Alexander, Ian, and Timothy Irwin. 1997. “PriceCaps, Rate-of-Return Regulation, Risk and the Cost ofCapital,” In The Private Sector on Infrastructure: Strategy,Regulation, and Risk, pp. 33–34. Washington, DC: TheWorld Bank Group.

Revenue-yield controls allow the regulated com-pany to set tariffs as long as the total revenueor revenue per unit of activity stays within lim-its established by the regulatory body. Anadvantage of this approach is that the regulatordoes not have to specify or review individualport tariffs. Disadvantages include the possiblefluctuation of tariffs as the regulated firm seeksto earn the maximum revenues permitted, thecomplexity of setting the maximum allowablerevenue per unit of activity, and the difficulty inforecasting demand if the upper limit is basedon total revenues.26

If several ports or companies within a port areregulated together, the regulator may be able tomake “yardstick” comparisons among them. Ifall entities face the same operating conditions,they could, in theory, achieve similar levels ofcosts. The regulator then could calculate theaverage cost among them (either over the wholegroup or among the most efficient companies)and set price limits based on this level (althoughone should take into account that terminalshave very different sizes and hence very differ-ent unit costs). Each company, then, has anincentive to reduce its costs, since this will notaffect its allowed revenues.

4.6. Step 6. Specify Operating andFinancial Performance IndicatorsIn an ideal competitive setting, market dynam-ics will force ports to offer efficient services atthe lowest possible costs. But in many cases,port competition may be insufficient to induce apositive effect on port performance. For reasonsexplained elsewhere in this Toolkit, a variety offactors, particularly limited cargo volumes andthe required levels of specialization (that is, lim-ited cargo volumes for the different terminals orport facilities), will affect a country’s options toencourage competition. Low cargo volumesgenerally will either greatly restrict the numberof terminal operators providing services, or mayenable competition for vessel stevedoring whileretaining the public sector’s monopoly over theyard or storage operation. Therefore, in envi-ronments where “ideal” levels of competitioncannot be established, regulators must seek

ways to replicate the conditions that disciplinecompetitive behavior. One of these ways isthrough regulation of service performance.

Regulators, typically through provisions in con-cession, operating, or lease agreements, willincorporate performance standards (or mini-mum thresholds) expected of the concessionholder during the life of the agreement. Thesethresholds may change in accord with theinvestment obligations scheduled during theterm of the agreement. For example, when afacility is first turned over to the operator, per-formance standards should consider the tech-nology available in the port at the time of theagreement. This effectively means that the per-formance standards should be regularly recon-sidered and possibly revised.

When considering the use of performance stan-dards, it is helpful to view port services as aproduction process. This process refers to therange of services provided to the vessel andcargo from the port’s entrance buoy to theberth and on to the gate, and then from thegate to the berth and back out through theport’s entrance buoy. Box 18 shows the produc-tion process for a typical port. At the port’sbuoy, the marine pilot will board the vessel,which may or may not anchor, depending onberth availability. The vessel then proceeds tothe berth, where a tug will assist in the vessel’sberthing operation. Line handlers stand readyto tie the vessel to the berth, following whichgangs will appear to provide the vessel withstevedoring and quay cargo handling services.Once the loading and discharging and lashingoperations are complete, the line handlers willreappear to untie the lines, the vessel willreceive a tug assist once again in the deberthingoperation, and a pilot will reboard the vessel toguide it to the entrance buoy for the vessel’sdeparture from the port.

The vessel may be delayed at each step in theproduction process, which in turn affects thetotal time (referred to as port time) a vesselspends in the port. For example, on arrival atthe entrance buoy, the vessel may have to wait


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for the pilot’s arrival, a berth may not be avail-able for the vessel, a tug may not be readilyavailable for the berthing operation, stevedoringand cargo handling gangs may not be standingready at the vessel’s assigned berth, a crane maynot be available for the vessel’s hatch removal,a crane may break down during the loading ordischarge operation, there may be nonopera-tional times (that is, times when work cannotproceed because gangs cannot be recruited as,for example, in ports where only one or twoshifts per day are worked or where no work iscarried out Sundays), and so on. Each of theseevents is associated with times, which, whensummed, will result in the vessel’s total time inport. In addition to these, the vessel may be vul-nerable to a number of uncontrollable factorsthat may substantially increase the vessel’s porttime, such as having to wait for high tide at theentrance channel, inclement weather, or labordisruptions.27

In the port planning process, analysts will fre-quently assess the relative performance of theirports against other ports in the region. They dothis by developing a series of standardized indi-

cators that reflect the degree of efficiency ateach step of the port operation. As Box 18shows, the times at which each step starts andstops are documented, allowing for the calcula-tion of a variety of parameters, also shown inBox 18, that the industry uses to calculate per-formance.

There needs to be a clear nexus between theparameters being measured and the tasks beingperformed by and under the control of theoperator. The scope of services provided by theoperator is dictated by the concession agree-ment. In exceptional cases, an operator may begiven a concession covering all of the servicesbetween the entrance buoy and the gate. Thismeans that the operator will provide pilotageand tug assist as well as all of the services con-ducted within the confines of the terminal. Thiswould suggest that the regulator can reasonablyapply indicators that include these services. Theregulator, therefore, must be careful in its selec-tion of performance measures. The regulatorshould be sensitive to what is controllable andwhat is not from an operator’s point of view.For example, the “port accessibility” parameter


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Box 18: Port Production Process

Source: Author.

anchor in anchor out first line gang onboard gang offboard last line

net berth time (t6-t5)

gross berth time (t7-t4)

port time (t8-t1)

buoy

in

buoy out

t1 t2 t3 t4 t5

t9 t10 t11 t12

t6 t7 t8

shift start1st box handled

unlashing

gang starts late

delays/indirect activities

loading/discharge

net-net gang time

net gang time (t11-t10)

gross gang time (t12-t9)

loading/

last box handledshift end

gang finishesearlydischarge

ship

men

tla

bor

time

may be affected by the government’s efficiencyfor clearing ship’s documentation. The timespent for this purpose can greatly skew the per-formance of the operator, who is responsible forother elements that define port accessibility,such as pilotage and tug services. Therefore,what is acceptable performance from the regu-lator’s point of view should consider only thefactors that the operator can control. On theother hand, the terminal operator may be givenresponsibility only for services renderedbetween berth and gate, meaning that the regu-lator would exclude port accessibility as aparameter. One should not lose sight of the factthat indicators will only work if they have beenset for specific tasks or operations and take intoaccount the many factors that can influence per-formance.

An important factor for a country’s shippers isvessel service availability, which comprises con-nectivity and frequency. Connectivity refers tothe number of times a shipper’s cargo is trans-ferred or otherwise handled en route to its des-tination. Generally, the greater number of trans-shipment moves the cargo undergoes, the moretime the cargo will take to reach its final desti-nation. Frequency refers to the number of callsa vessel makes to the port within a prescribedperiod of time, usually referred to as weekly,twice-weekly, biweekly, fortnightly, or ten-dayservices (in the case of liner and feeder servicetrades). Increasingly, to maximize the utilizationof their largest and most expensive vessels, ship-ping lines use a system of feeder vessels andtransshipment ports to sort and redirect cargo.From a shipper’s perspective, this may improve(increased frequency) or degrade (increasedtransit time and damage) service.

Assuming volumes justify it, a port may benefitfrom both connectivity and frequency if it canminimize the vessel’s port time. If the carrier issubjected to congestion or delays, then it mayavoid a call, minimize its calls, or impose penal-ty charges as part of its freight bill to shippers.Therefore, performance clauses within the con-cession agreement should focus on indicatorsthat address the vessel’s time in port (or at the

terminal, depending on the operator’s responsi-bility). As earlier noted, the clauses should alsorecognize the responsibility and span of controlaccorded to the operator in the concessionagreement. For example, a terminal operatorshould not be penalized if port time was lessthan desirable because of inefficiencies associat-ed with pilotage (which the operator does notprovide) and not the operation at the berth.

Regulators should be concerned with a vessel’stime in port, regardless of the operator’s responsi-bility, if for no other reason than to have the abil-ity to ascertain the causes of undue vessel time. Interms of imposing performance standards onoperators, however, the regulator should focus onwhat occurs at the berth, as the vast majority ofcountries that have undertaken port privatizationhave awarded concessions to operators for activi-ties at the berth and within the terminal’s backuparea. Indicators that focus on berth performancealso reflect what is happening on the vessel (whileat berth) as well as in the backup area of the ter-minal.28 Such measures should be general in thatthe regulator is concerned with the operator’soverall productivity, and not with the productivityof every subactivity and the incremental timesassociated with them.29

For concession agreements, the regulator shouldconsider incorporating gross berth productivity,which refers to the number of moves (in the caseof containers) or tons (in the case of bulk car-goes) handled in a unit of time, usually expressedin moves per hour or tons per hour. In additionto the time in which the vessel and its cargo areactually worked, gross berth time includes thetime the vessel waits for the gang, lashing andunlashing time, and other times associated withthe preparation required to perform each activity.

The technology used is an important factor indetermining what the number of moves perhour should be. For example, a terminal withno ship-to-shore crane must rely on the ship’sown gear to handle the cargo. In the containertrades, acceptable productivity levels may be onthe order of 10–12 moves per gross hour percrane for such operations. In a port with mobile


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cranes, expected productivity can be 15–20moves per gross hour per crane, while gantrycranes can operate at 20–30 moves per grosshour per crane and higher.

Establishing such thresholds for bulk handlingfacilities is more difficult. There is a plethora oftechnologies available for solid bulk handlingthat offer a wide productivity range. For thisreason, the regulator may consider regulating inaccord with berth congestion factor or shipwaiting rate, which compares the time a shiphad to wait for a berth compared to the time itactually spent at berth. Simply put, berth occu-pancy denotes the total time a berth is occupiedas a function of total available berth hours. Anaccepted standard would be a waiting rate thatdoes not exceed 5 percent for a full containervessel, does not exceed 10 percent for a generalcargo or breakbulk vessel, and 10–20 percentfor a bulk vessel. In the event an operatorexceeds this threshold, the operator could berequired to invest in more productive technolo-gy to reduce the time that vessel would have towait for a berth.

The performance threshold used by the regula-tor should, therefore, take into account thetechnology available at the port, or envisionedas part of the required investment programincorporated into concession agreements. In thisregard, it is conceivable that the same agree-ment may have different performance thresh-olds by berth in accord with the port’s capabili-ties at different stages of an investment pro-gram. This is because a port may have differenttechnologies available at different berths at dif-ferent times during the concession period, orvessels may simply choose not to use gantrycranes, which are relatively costly for smallervessels. Box 19 lists some of the more commonindicators used to measure port performanceand that may be appropriate for inclusion inconcession agreements.

4.7. Step 7: Establish an AppealProcess and Procedures The design of an appeals regime should be afunction of the specific institutional set-up and

legal traditions of a country. Courts may playa role where they have or can reasonablyacquire the expertise, integrity, and efficiencyneeded to settle appeals on regulatory matters.Generally, in the design of a regulatory frame-work, the interests of speed and certainty(which lead to denying appeals against regula-tory decisions or limiting the grounds and timeframe for filing such appeals) should be bal-anced against those of fairness toward regulat-ed entities (and consumers) and accountabilityof the regulator.30

In situations where private port investors andoperators are concerned that local conditionsmay not provide a competent, fair, and impar-tial appeal, the regulatory framework may spec-ify that such appeals will be adjudicated by anagreed-on international arbiter (Box 20).

4.8. Step 8: Incorporate RegulatoryDetails into Laws and Contracts Often, a concession agreement or managementcontract contains most of the regulatory provi-sions governing the performance of the privatesector partner to the contract. In deciding whatregulatory elements the contract should coverand in what depth, two questions arise31: Is itpossible and desirable to encompass all the nec-essary regulatory provisions within the con-tract? If so, what degree of regulatory discretionshould be available?

Though it is sometimes argued that a tightlywritten contract can remove the need fordirect regulation, this is rarely the case. Evenfor a short-term management contract, some-one needs to be able to monitor performanceagainst the contract, have the authority toallow minor variations in contract specifica-tions, and arbitrate disputes between the com-pany and its customers and between the gov-ernment and the contractor. And for longer-term concession and build-operate-transfer(BOT) contracts, it is usually neither possiblenor desirable to have highly specified con-tracts, especially in countries undergoingrapid social, political, or economic change(although one should aim to have as much


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detailed specification in the contract as rea-sonably possible, therefore limiting the degreeof uncertainty for investors, users, and gov-ernments alike).

Detailed, unambiguous, and very specific contractconditions do have advantages, especially in coun-tries that do not yet have fully developed maritimeand port legislation (see Box 21). In particular,


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Box 19: Port Performance Indicators

Some of the more common indicators of port operating and financial performance included inmanagement contracts and concession agreements are presented below. Often separate val-ues for indicators will need to be specified corresponding to different major categories of port

traffic and vessel types (containers, breakbulk, dry and liquid bulk).

Average ship turn around time Total hours vessels stay in port (buoy-to-buoytime) divided by total number of vessels.

Average waiting rate Total hours vessels wait for a berth (buoy-to-berth time) divided by total time at berth.

Gross berth productivity Number of container moves or tons of cargo (forbreakbulk and bulk cargoes) divided by the ves-sel’s total time at berth measured from first line tolast line.

Berth occupancy rate Total time of vessels at berth, divided by totalberth hours available.

Working time over time at berth Total time of vessels being serviced at berthdivided by total hours at berth. Reasons for non-working time may include labor agreements andwork rules, rain, strikes, equipment failure, portoperating schedules, and holidays.

Cargo dwell time Cargo tons times days in port from time ofunloading until the cargo exits the port, dividedby cargo tons.

Ship productivity indicator Total number of moves (for containers) or tonshandled (for breakbulk and bulk cargoes) dividedby total hours in port.

Tons per gang-hour Total tonnage handled divided by total number ofgang-hours worked.

TEUs per crane-hour Total number of TEUS handled divided by totalnumber of crane-hours worked.

Tons per ship-day Total tonnage of cargo handled divided by totalnumber of vessel days in port.

Operating surplus per ton handled Net operating income from port operations divid-ed by total tonnage of cargo handled.

Charge per TEU Total charges for container handling divided bytotal TEUs handled.

Collected charges per billed charges Total collected charges as a percent of accountsbilled (with 30-day lag).

Source: Author.

Operating Measures

Financial Measures

they help protect the private company from politi-cally motivated and frequent changes in servicerequirements. By reducing revenue risk, suchprotection may help attract more bidders for thecontract, reduce the cost of capital, and help thegovernment strike a more advantageous bargain.

The experience generally has been that weak reg-ulatory bodies have been given too much discre-tion without sufficient policy guidance to makedecisions on matters left out of the contracts. Indeveloping countries, the combination of weakregulatory bodies and poorly written contractshas resulted in an extremely large percentage ofcontracts being renegotiated. The losers in thesenegotiations have usually been the taxpayers, asgovernments often end up granting the privateparties significant financial concessions.32

One solution is to use rule-based contractsbecause they tend to make regulation easier in

the face of significant uncertainty. The challengeis to develop and incorporate rules that are fairand have reasonable information requirements.This is one of the advantages of price cap regu-lation.

The control of prices charged by a regulatedfirm is often characterized as a contestbetween the regulator and the service providerin which the two players do not share thesame information. The asymmetry of informa-tion places the regulator at a disadvantage.Thus the regulator must define its informationrequirements and data processes early in thedesign of the concession contract andtransaction. And it should take advantage ofthe government’s leverage during bidding toextract information from concessionairesas well as commitments to continueproviding flows of information to aid tariffreviews.


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International arbitration is a form of disputesettlement under which the disputing par-ties agree to abide by the ruling of inde-

pendent arbitrators, who are typically select-ed for their technical expertise in particularareas as well as their reputations for integrity.International arbitration has a long history ininternational trade and investment, whereproceedings are typically held in a neutralthird country. While the cornerstone of arbi-tration is the consent of each party, to beeffective the decision or award needs to beenforceable in the country where the losingparty holds assets. This is generally achievedby treating the award as equivalent to a judg-ment of a local court.

International arbitration is a potentiallyimportant part of the legal and regulatoryframework for infrastructure privatization inthree main contexts:

• Foreign investors will typically feel morecomfortable submitting contractual disputesto a neutral and expert forum than to localcourts, which may be perceived to bebiased toward local parties, prone to politicaldirection, slow, less expert, and sometimescorrupt.

• In some limited circumstances, arbitrationmay be an alternative to creating a separateregulatory agency. The key requirementswould include that:

~ The dispute in question relates to theinterpretation and enforcement of a spe-cific obligation, rather than the need toexercise a broader regulatory discretion inthe public interest.

~ Political acceptance of the decision doesnot require participation by a broad rangeof interests in addition to the disputingparties.

~ The dispute in question does not requireurgent attention.

~ Compliance with the arbitrator’s ordersdoes not require ongoing supervision.

In some circumstances, arbitration may beadopted as an appeal mechanism for deci-sions of regulators. As in the previous case, akey requirement will be that there is some rea-sonably objective standard that can be appliedin determining the appeal.

Source: Kerf, Michel, and Warrick Smith. 1996. “PrivatizingAfrica’s Infrastructure: Promise and Challenge,” p. 44.Technical Paper No. 337, World Bank, Washington, DC.

Box 20: International Arbitration

5. SUMMARY ANDCONCLUSIONS It is in a country’s best interest to ensure that itsports operate efficiently and safely, that fair andcompetitive services are provided, and thatports support and encourage economic develop-ment locally and nationally.

The purpose of economic regulation is to ensurethe efficient and competitive functioning of theport. Regulations often intervene in the function-ing of markets, including the setting of control-ling tariffs, revenues, or profits; controlling mar-ket entry or exit; and maintaining fair and

competitive behavior and practices within theport sector.

Decisions about reform strategy, industrystructure, and regulatory frameworks are inti-mately intertwined. Therefore, evaluation ofregulatory issues, options, and their conse-quences should be conducted early in thereform process. As shown by the reform experience in port and other sectors, delay can add to the regulatory burden and cost,restrict the availability of options for the regulator, and risk incompatibility betweenregulatory requirements and institutionalcapacity.


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1. Are the rules for establishing the level andstructure of tariffs clear?

2. Does the contractor have the freedomwithin specified limits to vary the tariffstructure and levels?

3. What are the procedures for raising tariffs?What is the frequency of updating? Is thereany requirement for operating efficiencygains?

4. Is the operator responsible for collecting alltariffs and charges?

5. Will the tariffs be remitted to the govern-ment or retained by the operator?

6. How will depreciation and taxes be treatedin the rate structure?

7. If the tariff adjustment method inflates indi-vidual cost components, is a locally pub-lished index available for each component?

8. What are the trigger events that will allowthe operator to adjust the tariff? Typicaltrigger events include significantvariations in reference volumes, a changein the concession area, significant infla-tion requiring more frequentadjustments, and changes in tax anddepreciation laws.

9. Are the guidelines for tariff appeals to the reg-ulatory authority clear and unambiguous?

10. Will the concessionaire provide informationas may be reasonably required by the regu-lator? What is the definition of reasonable?

11. What are the mechanisms for independentverification of financial data, data on thecondition of assets, and the achievementof performance targets?

12. What are the provisions for market testingwhen the contractor subcontracts tasks orpurchases services from associated com-panies?

13. What is the goal of contract informationrequirements?

14. What access will the regulator have toassets and records?

15. Who will pay for independent financial audi-tors and technical auditors and who will beresponsible for their selection and training?

16. What are the provisions for submission ofregulatory accounts and performance dataand for disaggregated accounts to aidcomparative competition?

17. What are the requirements for publicationof financial information and performancestandards?

18. Will the regulator require audits by an inde-pendent auditor? What auditing proce-dures will be used to confirm the tariff costcomponents?

19. What technical information is the conces-sionaire required to report?

20. What financial information is the conces-sionaire required to report?

Source: Author.

Box 21: Checklist of Regulatory Items for Port Operating Contracts

Due to port sector reforms, many ports haveevolved into a landlord port authority, withfacilities leased to private operators, that direct-ly provide their services to carriers and ship-pers. In this situation, private operators mayprovide services previously provided by thepublic port authority, such as pilotage, tugassist, vessel stevedoring, storage, and yardservices. Private operators are typically motivat-ed by profit and may not necessarily providefacilities or services that are of economical,environmental, or social value if they conflictwith profit maximization. Therefore there is a need for regulatory oversight to ensure thatthe public interest is protected. The scope ofregulation depends on the extent of existingcompetition.

Factors indicative of the extent of competitive-ness within the port sector include:

• Transport options: Competitiveness of acountry’s port and inland transport sys-tem in terms of total system costs andavailable options.

• Operational performance: Competitivenessof each port in terms of capacity and levelof cargo handling services.

• Tariff comparisons: Competitiveness ofeach port in terms of level of portcharges.

• Financial performance: Competitivenessof each port in terms of its overall prof-itability.

The lack of transport options, congested facilities, relatively high prices, and high profits alone or together may encourage terminal operators and other port serviceproviders to breach the threshold of what may be regarded as acceptable competitivebehavior.

Port sector reformers can choose from two gen-eral strategies to increase port sector competi-tion: structural remedies and regulatory reme-dies. Clearly, the ideal strategy is the one thatresults in increased competition. Therefore,

when considering port privatization, reformersshould strive toward structural improvementsthat increase the number of competitors beforeresorting to regulatory improvements.Regulatory enhancements (particularly econom-ic regulation) are intended to improve efficiencyby correcting various market imperfections;essentially, the regulations attempt to forceports to behave as if they were competing in aperfect market.

Structural remedies include:

• Introduction of new berths or terminals.

• Division of the existing port into termi-nals.

• Entering into short-term operating agree-ment, lease, or management contract.

Regulatory remedies include tariff filing and set-ting of tariffs and rate-of-return thresholds.

To help design an economic regulatory policyfor the port sector, the following principlesshould be considered:

• Government should clearly understandthe competitive environment of the portsector.

• The regulator should clearly define whatform of economic regulation (for exam-ple, rate of return or tariff setting) is tobe applied and under what circum-stances.

• Responsibilities for port operational andcompetition regulation should be formal-ly separated. Because of the risk ofagency capture and the potential conflictof interest between the two forms of reg-ulation, they should be assigned to twodifferent entities.

• Policy and case deliberations shouldinclude the opportunity for affected par-ties to present their views.

• Decisions made by the regulator shouldbe enforceable with recourse for appeal.


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ANNEX A. PORT TARIFFS:GENERAL STRUCTURE, ITEMS,AND FLOW OF CHARGES As mentioned earlier in this module, tariff con-trol is the most commonly used method for eco-nomic regulation of ports. Tariffs differ fromport to port as they tend to be a reflection ofthe services offered (for example, container han-dling, tug assist, and pilotage), the facilitiesbeing provided (for example, gantry cranes,storage yard, or sheds), the party that incurs thetariff charge (for example, the carrier or ship’sagent, or the shipper), and the basis on which atariff item is calculated (for example, pilotagecharges based on the vessel’s gross registeredtons or vessel draught). Because of these differ-ences, tariffs may seem highly fragmented andcomplex, but there is a core set of essential serv-ices required for handling ships and cargoesthat all ports typically offer. These can bereferred to as basic services. Regulators tend tofocus on these services because they representthe bulk of the total charges and are commonlyoffered by all ports. Box A-1 shows the rangesof the percentages of total port charges repre-sented by a core set of services.

Such services can be broken down into two cat-egories:

• Services to vessels: Basic ship servicesencompass the activities and relatedcharges for ships entering and exiting theharbor and for berthing and deberthing.These include: pilotage, pilot boat, tugassist (berthing and deberthing), line han-dling, and use of channel and navigationaids (harbor fee). The basic ship servicesalso include the use of the related portfacilities (for example, dockage and berthoccupancy) and of the general port infra-structure, usually covered by the portdues.

• Services to cargo: The basic cargo servic-es include three related activities: (1)transfer of cargo between ship and dockor storage; (2) transfer of cargo between

storage and outside the gate; and (3)intermediate storage in the yard (in thecase of containers) between the ship andyard transfers for a specified number ofwork days (“free time”). The relatedcharges are for the use of labor, shorehandling equipment, yard machines(“rental”), and port facilities (“use ofinstallations” and “wharfage”). Box A-2shows the relationship of these chargeswithin the typical container terminal.

In determining if tariff regulation is necessary,the regulator first has to identify the specificservice and the service provider. In the traditionalport, the public port authority was typically anoperating port, meaning that the public entityprovided virtually all of the basic services notedabove. From a regulator’s point of view, thiswas a simple matter because of the public enti-ty’s monopoly position over all basic services.Generally, one service provider would beregulated.

Today, many ports have evolved into a landlordport authority where facilities are leased by pri-vate operators, who in turn directly providetheir services to carriers and shippers. In thissituation, private operators may provide servicespreviously under the domain of the public portauthority, such as pilotage, tug assist, vesselstevedoring, storage, and yard services. Becauseof this shift in service provider responsibility,the entire tariff system as well as the transactionprocess has changed. The port authority (orother government entity) will likely continuecollecting a navigation charge or port dues, and


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Box A-1: Relative Weights of Different PortCharges

Port tariffs on the use of infrastructure 5–15

Berthing services 2–5

Cargo handling 70–90

Freight Forwarding 3–6

Item Percent of total charges

may also charge for dockage and gate servicefees, depending on the structure of the leasewith the operator as well as the port’s facilityconfiguration.33 The port authority will alsohave a lease arrangement with the operator,who generally charges fees for the range of serv-ices provided from berth to gate (for example,vessel stevedoring, yard handling, or storage).

Thus, the regulator has gone from single-entityregulation to potentially regulating a full rangeof services provided by a number of operators.34

Box A-3 shows the evolving complexity thatprivatization has introduced from a transactionpoint of view. Under the public operating port,the transaction process was quite clear, as ports


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Box A-2: Relationship between Port Charges and the Location Where the Charge is Incurred

Source: Author.

ActivityCharges:

ActivityCharges:

PortDues

PilotageTowage

VesselHandling

Stevedoring

WharfageBerth Dues Storage

YardHandling

GateProces-

sing

GateDues

GateContainerYard

ApronBerthHarbor

Box A-3: Transaction Complexities Pre- and Postprivatization

Source: Author.

Public Operating Port

Privatized Port

Port

Line

Line

Shipper

Line

Shipper

OperatorPort

assessed charges to only two parties—shippinglines and shippers. Under a privatized portarrangement, the port authority applies chargesto operators, lines, and shippers. In potentialantitrust settings, therefore, the regulator needsto be concerned not only with the port authori-ty’s charges, but also the many private opera-tors providing basic services, dramaticallyincreasing the potentially regulated population.

Box A-4 shows an actual case of the interrela-tionships of port charges in the Port of Miamifor containerized cargoes. The port is estab-lished as a landlord authority under local gov-ernment jurisdiction (Miami/Dade County). Atthe time of writing, ship charges in Miami, likein most U.S. ports, include a special fee calledthe Harbor Maintenance Fee, collected by theU.S. federal government to cover dredging andaids to navigation. The charge is 0.125 percentof the cargo value, or about $63 per averagebox of $50,000 value. There is, however, a sec-ond charge called a harbor fee applied by thelocal port authority, which is based on theship’s gross registered tons (GRT).

Dockage in Miami is also charged on the basis ofGRT at a rate of $0.24 per GRT for every 24-hour stay. Cargo charges in Miami includewharfage, at $1.60 per ton, or the equivalent of$22.40 per 14-ton box, which has declined almost6 percent since 1998. Cargo wharfage is billeddirectly to the line (carrier), which in turn incorpo-rates the wharfage charge with the freight bill.

There are two separate handling charges, shiphandling (stevedoring) and terminal or gate han-dling. Ship handling is performed by privatestevedores, collecting a range from $35–50 percontainer, excluding crane services. Terminalhandling is performed by POMTOC, a privatesector joint venture of local stevedores and P&OPorts. POMTOC charges approximately $45–55per move, for any type of container, includingempties. The charge for gantry cranes is basedon an hourly rate of $450 per hour (straighttime). The cranes are owned by the port authori-ty, but operated by the private stevedores andmaintained by a private company.

The port has no direct charging relationshipwith shippers, only with shipping lines (carriers)


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Box A-4: Port Charges in Miami, Florida

Source: Author.

Transship Wfg.

PortAuthority

ShippingLine

OtherProviders

Federal Gov.

Ship Stevedore ($66)

Pilot/Tug ($52)

Gate/yardHandling ($61)

Cranage ($23)

PortOperator

POMTOC

Stevedore

Terminal Handling ($234)

Fed.harborFee ($63)

Shippers$234 + $297 Total Charges

Legend: Charges for Basic Services Terminal Handling-All port charges excluding charges directly billed to shippersCharges for Auxiliary Services

Note: Amounts in parentheses represent average charges per full domestic move for and Apl ship.

Harbor Fee ($3)Cargo Wfg ($25)Dockage ($27)

and operators. Shippers pay directly only thefederal Harbor Maintenance Fee.

Box A-5 shows how the flow of charges may dif-fer from port to port. The figure also illustratesthe flow of port charges for the Port Society ofCartagena, whose tariff reflects the operatingarrangement in that port. In Miami, the facilitiesare administered by the local port authority. InCartagena, as elsewhere in Colombia, the facili-ties are administered by a private sector companyreferred to in Colombian law as a port society.The port society’s primary responsibility is tooperate the backup area (the area behind theberth), while private stevedoring companies han-dle the loading and discharging operation.35 Inaddition, other private operators provide pilotageand tug services. These operators, along with thestevedoring companies, are charged an installa-tion user charge by the port society. Unlike the

Miami case, the port society has a direct charg-ing relationship with the shippers and alsocharges the port operators (stevedoring compa-nies) directly for berth and yard wharfage. InColumbia, shippers are also charged directly foryard handling by the stevedoring companies.

The emerging complexities in privatized set-tings suggest that regulators will need to bemore cognizant of how port services are pro-vided and what party is charged by whom. It isconceivable that one country can have a varietyof charge flow configurations depending on theoperating arrangements in a particular port. Asis shown in figures A-3 and A-4, depending onthe extent of competition, it is possible thatregulators will need to monitor the pricingpractices of not only the port authorities, butalso the various private parties engaged in portoperations.


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Box A-5: Port Charges in Cartagena, Colombia

Source: Author.

Empties Storage

PortAuthority

ShippingLine

OtherProviders

Pilot/Tug ($47)

Other Services ($21)

Cranage ($46)

Berth Wfg. ($16)

Wharfage

Ship Stevedone ($128)

Yard Handling ($20)Cargo Wharfage/

Fulls ($83)

Yard Wharfage ($2)

PortOperator

Terminal Handling ($220)

Shippers$83 + $20 + $220 = $323 Total Charges

Legend: –charges for Basic Services Terminal Handling-All port charges excluding charges directly billed to shippers

–charges for Auxiliary Services

Note: Amounts in parentheses represent average charges per full domestic move for and APLship.

Stuffing/DestuffingTransshipment Wharfage

Cargo Wharfage/Empties ($5)Dockage ($19)

ENDNOTES

1 World Bank. 1997. Toolkits for PrivateParticipation in Water and Sanitation,Module 1: Selecting an Option for PrivateSector Participation, p. 20. Washington,DC: World Bank.

2 Return on equity (ROE) = net income/share-holders equity; return on assets (ROA) = netincome/total assets.

3 Trujillo, L., and G. Nombela. 1998.“Privatization and Regulation of the SeaportIndustry.” December, p. 21.

4 Perfect competition is a noble goal, butrarely achievable. While there are cases ofmarkets with large numbers of sellers andbuyers, these sellers and buyers are seldomfully informed about their alternatives. Theinformation available to them may be ofquestionable reliability or costly to acquire,while at the same time there may be artifi-cial restraints (for example, governmentregulation of prices or resource mobility)that affect the competitive environment.Many might argue that the U.S. port sectorrepresents a perfectly competitive marketgiven excess capacity and a plethora ofintermodal and port options. Many of theseassets, however, either directly (for example,construction grants) or indirectly (for exam-ple, tax-exempt status on the interest ofbonds issued to finance construction) aresubsidized, thereby distorting the marketsupply in response to demand.

5 But there are a number of cases where themere presence of a private owner changedthe efficiency of the port or the terminalbecause a very different company culturewas introduced (for example, KlangContainer Terminal in Malaysia).

6 World Bank. 1997. Toolkits for Private SectorParticipation in Water and Sanitation, Toolkit1: Selecting an Option for Private SectorParticipation, Annex 1. Washington, DC:World Bank.

7 World Bank. 1996. Infrastructure Delivery:Private Initiative and the Public Good, ppxxi–xxii and pp. 54–61. Washington, DC:World Bank Economic Development Institute.

8 In many ports, load-bearing capacities maybe different at each berth. For example, oneberth may be designed to handle the weightof gantry cranes on the berth’s apron, whileother berths are designed to handle lowerweight breakbulk cargoes. There are, ofcourse, engineering solutions to expandingan apron’s capacity, which require substan-tial investment. This investment may be jus-tified with anticipated cargo volumes.

9 Regulators differentiate between tariff filingand tariff monitoring. Tariff filing normally isrequired each time a service provider adjustsits tariff. The filing is a means of informingport users about generally available prices forservices. This allows port customers to detectany abnormalities in pricing behavior (forexample, unjustified pricing discrimination)and, in the event such abnormalities exist, toregister a complaint with the regulator. In theevent a complaint is received, usually foralleged discriminatory, collusive, or predatorypricing practices, the tariff filing requirementgives the regulator a pricing history to supportits investigative efforts. Where the regulatorperceives a relatively high risk of anticompeti-tive behavior, or if there is a history of viola-tions on the part of one or more operators,then the regulator may monitor the tariffs thatare filed, assessing for itself the anticompeti-tive impact of the new tariff at each filing.

10 In some countries, setting the tariffs is distinctfrom approving tariffs. For example, inNicaragua the operator (or cargo handlingcompany) submits a tariff for approvalthrough the Empresa Nacional de Puertos(EPN, the national ports authority), whichreviews the tariff and forwards it for finalapproval to the Ministry of Transport andInfrastructure. EPN may attach commentsregarding its assessment of the fairness andreasonableness of the tariff, but its role is not


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to assess the proposed tariff’s relationship oreffect on industry competitiveness (thisresponsibility does not yet exist for any sectorin Nicaragua). In Colombia, prior to its tariffliberalization in 1995, the SuperintendenteGeneral de Puertos (SGP, the General PortSuperintendent) set the tariffs, initially bothminimum and maximum charges and eventu-ally only maximum tariffs. In practice, theeffect is the same, as the regulator sets the tar-iff by either dictating one or approving one.

11 World Bank. 1996. Sustainable Transport:Priorities for Policy Reform, p. 104.Washington, DC: World Bank.

12 World Bank. 1996. Sustainable Transport:Priorities for Policy Reform, pp. 86–87.Washington, DC: World Bank.

13 Many port authorities, as part of their pub-lished tariffs, will impose operational regula-tions relevant to both carriers and terminaloperators. Operational regulations can referto a variety of topics, such as vessel reportingrequirements, navigation rules within theport’s jurisdiction, invoicing rules for portdues, information access rules (for example,anchorage, vessel lighting, speed, and soforth), port working hours, reporting proce-dures for environmental incidents within theport area, detainment rights for vessel damageto facilities, or other rules.

14 This is an important point. There are basi-cally only two ways for determining thebasis on which tariffs should be set. Thefirst is tariff benchmarking with other ports(or their operators) that operate in similarconditions. The second is to require theoperator to provide audited financial datawith careful consideration of the debt serv-ice obligations from investments. In thissense, the regulator would have to makecertain assumptions about what the rate ofreturn is and what rate is considered“reasonable.” What the regulator considersreasonable may not adequately consider theinitial investment risk that the operatormade. A complicating factor concerns those

operators that may offer bundled services,only one of which the regulator intends toregulate. The complexity here is derivedfrom the ability to assign costs to each ofthese bundled services. Finally, operatorsalways have a monopoly on their financialinformation. What they report will not nec-essarily be an accurate reflection of reality.Indeed, some operators may keep separateaccounting books, one for reporting purpos-es and one for proprietary purposes.Because of the uncertainty and questions ofdata reliability, regulators will often estab-lish a mini-max or maximum tariff thatreflects the range of uncertainties associatedwith defining an operator’s cost structure.

15 The steps, while presented in a logical order,do not necessarily need to be implementedin the sequence presented.

16 Guislain, Pierre. 1997. The PrivatizationChallenge: A Strategic, Legal, and InstitutionalAnalysis of International Experience, p. 258.Washington, DC: World Bank.


18 Eustache, Antonio. 1999. Privatization andRegulation of Transport Infrastructure inthe 1990s: Successes...and Bugs to Fix forthe Next Millennium, p. 28. Washington,DC: World Bank.

19 See in this respect Module C.63 of theInternational Labour Organization’sPortworker Development Program (PDP).

20 Guislain, Pierre. 1997. The PrivatizationChallenge: A Strategic, Legal, and InstitutionalAnalysis of International Experience,pp. 280–81. Washington, DC: World Bank.

21 Smith, Warrick. 1997. “Utility Regulators—The Independence Debate.” In The PrivateSector on Infrastructure: Strategy,Regulation, and Risk, September, p. 22.Washington, DC: World Bank.


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22 Eustache, Antonio. 1999. Privatization andRegulation of Transport Infrastructure inthe 1990s: Successes...and Bugs to Fix forthe Next Millennium, pp. 24–25.Washington, DC: World Bank.

23 Burns, Phil, and Antonio Eustache. 1999.Infrastructure Concessions, InformationFlows, and Regulatory Risk. Washington,DC: The World Bank Group.


25 Green, Richard, and Martin Rodriguez Pardina.1999. Resetting Price Controls for PrivatizedUtilities: Manual for Regulators, pp. 11–12.Economic Development Institute, World Bank,Washington, DC.

26 Green, Richard, and Martin RodriguezPardina. 1999. Resetting Price Controls forPrivatized Utilities: Manual for Regulators,p. 64. Economic Development Institute,World Bank, Washington, DC.

27 The operator, itself, may also be affected byfactors outside its control, such as ship size,number of moves for loading or discharging,type and number of hatch covers, vesseldimensions (width and depth determine thepath of the container’s movement), andstowage plan.

28 Berth performance is a reflection of bothefficiency at the berth as well as efficiencyfor the operations behind it. Yard conges-tion itself can cause delays in vessel loadingand discharge.

29 Operators, on the other hand, should beconcerned with these incremental measuresbecause they point to underlying causes foroverall productivity performance.

30 Guislain, Pierre. 1997. The PrivatizationChallenge: A Strategic, Legal, andInstitutional Analysis of International

Experience, p. 280. Washington, DC: WorldBank.

31 World Bank. 1997. Toolkits for PrivateSector Participation in Water andSanitation, Toolkit 1: Selecting an Optionfor Private Sector Participation, Annex 2,p. 33. Washington, DC: World Bank.

32 Eustache, Antonio. 1999. Privatization andRegulation of Transport Infrastructure inthe 1990s: Successes...and Bugs to Fix forthe Next Millennium, p. 29. Washington,DC: World Bank.

33 For example, the port authority may have ageneral perimeter gate in which initial accessis cleared by port authority personnel. An“interior” terminal gate is under the controlof the operator that leases the facility.

34 The extent to which regulation is necessary,of course, is dependent on the risk ofmonopolistic or oligopolistic behavior onthe part of both the port authority as well asthe firms. Even in a post privatization envi-ronment, the port authority may still beconsidered a monopoly by virtue of facilityownership (for example, the landlord modelin an environment where there is no inter-port competition) and in terms of its chargesfor navigation, wharfage, and dockage(assuming it charges these). In addition,even in nonmonopolistic settings there maystill be a need for antitrust concerns forspecific services in light of the highlyconcentrated markets that have resultedpost privatization.

35 This arrangement is changing, however, asthe society is now providing vessel stevedor-ing services for vessels calling to berthswhere the society’s gantry cranes are located.

REFERENCESAlexander, Ian, and Timothy Irwin. 1997. “Price Caps,

Rate-of-Return Regulation, Risk and the Cost ofCapital.” In The Private Sector on Infrastructure:Strategy, Regulation, and Risk, pp. 33–34.Washington, DC: The World Bank Group.

Burns, Phil, and Antonio Eustache. 1999.Infrastructure Concessions, Information Flows, andRegulatory Risk. Washington, DC: The WorldBank Group.

Eustache, Antonio. 1999. Privatization andRegulation of Transport Infrastructure in the1990s: Successes...and Bugs to Fix for the NextMillennium, p. 28. Washington, DC: World Bank.

Green, Richard, and Martin Rodriguez Pardina. 1999.“Resetting Price Controls for Privatized Utilities:Manual for Regulators.” Economic DevelopmentInstitute, World Bank, Washington, DC.

Guislain, Pierre. 1997. The Privatization Challenge:A Strategic, Legal, and Institutional Analysis ofInternational Experience. Washington, DC:World Bank.

Kent, P. E., and A. Hochstein. 1998. “Port Reformand Privatization in Conditions of LimitedCompetition: The Experience in Columbia, CostaRica, and Nicaragua.” Journal of Maritime Policyand Management 25 (4): 313–333.

Kerf, Michel, and Warrick Smith. 1996. “PrivatizingAfrica’s Infrastructure: Promise and Challenge.”Technical Paper No. 337, World Bank,Washington, DC.

McCallum, Elizabeth. 1999. “Privatising Ports: ALegal Perspective.” Privatisation InternationalNovember, pp. 53–55.

Smith, Warrick. 1997. “Utility Regulators—TheIndependence Debate” In The Private Sector onInfrastructure: Strategy, Regulation, and Risk,September, Washington, DC: World Bank.

.1997. “Terminal velocity.” ContainerizationInternational June, p. 95.

Trujillo, Lourdes, and Gustavo Nombela. 1999.“Privatization and Regulation of the SeaportIndustry.” Universidad de Las Palmas de GranCanaria Dpto. AnÁlisis Econ—mico Aplicado 35017Las Palmas de Gran Canaria (Spain), December, p. 21.

UNCTAD (United Nations Conference on Trade andDevelopment). 1998. Review of Maritime Transport.UNCTAD RMT 98/1: New York and Geneva.

UNCTAD. 2005. Review of Maritime Transport.UNCTAD/RMT: New York and Geneva, 2005,

World Bank. 1996. Infrastructure Delivery: PrivateInitiative and the Public Good, Washington,DC: World Bank Economic DevelopmentInstitute.

World Bank. 1996. Sustainable Transport: Prioritiesfor Policy Reform. Washington, DC: World Bank.

World Bank. 1997. Toolkits for Private Participationin Water and Sanitation, Module 1: Selecting anOption for Private Sector Participation.Washington, DC: World Bank.


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