Necessity of Port Privatization - Case Study Example

Introduction Seaports are a major economic multiplier for the nation's prosperity (Alderton, 1999). All over the world, they have been continuously facing the threat of privatization for many years. As ports are the key centres in a country's supply chain system of import-export and distribution of goods, the issues of proper governance and scientific management of ports have gained importance through out the world. Underutilization of the port capacities, uncontrollable maintenance costs, corruption, labour issues, reduced profitability, and increasing operational difficulties were some of the strong reasons that had made most of the port authorities look towards privatization. Actually, the participation of private sector has already crept into some of the major ports in the world (Anon, 1996). The issue of privatization has gained more importance in the backdrop of globalization and liberalization moves sweeping across the world. However, the experience of the management of some ports like the Singapore port has clearly established that total privatization is not the panacea for the ills faced by several ports today. Systematic management of port operations with the public-private participation will go a long way in making them sustainable financially. Necessity of port privatization: A critical view There are three essential factors of a port which can be privatized; port land, port operations, and port regulations (Baird, 1999). The extent of privatization can differ within ports depending on which of these elements are transferred to private sector from public sector. We can get a wider concept from Table 1 shown below. In the private model I, port operations are transferred to private sector, and this type of arrangement is referred to as a 'landlord' port. When compared with private model I, private II model has two elements which are property and operations rights. Under the private III model, all three essential functions are controlled by private sector. At present, this kind of model is only accepted by ports in the UK, such as Liverpool, Manchester and Felixstowe. Table 1. Key Port Elements: Privatization Options Source: Baird A., 1999 International Association of Ports and Harbours (IAPH) did a survey of world's top-100 container ports to find out the organization type. Figure 1 presents ample statistics results which say that 71% of ports were managed by either public agencies or corporations, and 21% by Government departments. Only 7% of ports were private companies, and over two-thirds have a government shareholding varying from 60-100% (Baird, 2002). Figure 1. Port authority by organization type Source: IAPH, 2002 UK- Pioneer in Port privatisation Great Britain has pioneered port privatization showing the way for the rest of the world. Most countries have taken a cue from Great Britain's success in this direction. Until now, the UK is the only country which has totally privatized most of its major ports including the operational role of the port authority( ). The political leadership of the UK was very much practical in inviting private funding in port management. It always wanted to create favourable atmosphere to pave the way for private operators to jump in the fray. According to the House of Commons report, Port of London Authority strongly believed that private funding was the only alternative to refurbish the port industry and suitable and supporting atmosphere must be created to invite the private companies. It was very much worried that in the absence of a conductive atmosphere to private funding, investors might run away to some other countries ( ). The UK has obviously set a trend for other countries to follow. Most of the third world countries have also been looking for the British help in privatization of their ports ( ), such as India, Panama. Is the privatisation only solution Most of the third world countries plan to privatise their ports. But, is privatisation the only real solution Management of ports is very complex and involves several issues, such as national safety, workers welfare, and environmental problems etc. Privatisation provides for total transformation of the port management from the public sector to the private sector. In the present days of terrorism threat plaguing the entire world, it may not be entirely safe to leave the waterfront supply chain key centres to the care of private hands ( ). Besides, port privatisation has also its fatal drawbacks. About this question, IAPH specially did an investigation on world's top-100 container ports, and as the Figure 2 reveals, private sector would do downsizing measure for saving cost and expenditure paving the way for a conflict between labour and private managements. South African moves to privatize its ports had met with labour resistance in 2004 ( ). The Asian countries have also been facing resistance to privatization moves in this sector ( ). Figure 2. Main disadvantages of private sector investment in ports Source: IAPH, 2002 Privatization, a partial solution Privatization provides only partial solution to the ills plaguing the ports in most countries ( ). Instead of fully depending on the private sector for improving the operational efficiency of ports, introduction of public-private partnership, as seen in case of the Pusan port, is likely to yield the desired results ( ). Even Singapore port has attained new heights in operational efficiency without full private participation. A close study of the functioning of the PSA (Port of Singapore Authority) can teach excellent lessons for other ports which are on the verge of privatization. Case study- Singapore port Singapore port has become a trend setter in transformation of port management. Most of its business is in the container transhipment which constitutes 3-4 percent of the state's economy ( ). The port of Singapore is the busiest among the world's leading ports in terms of shipping tonnage and stands second in terms of containers handled. Serving all the shipping routes connected to the East and West, the Singapore port has become a major transhipment centre and attained a position to become the world's largest ship registry with the largest bunkering point ( ). Over a decade, the Singapore port has undergone major changes due to commercialization. In the 1990s, most of the countries were swept by the reforms and Singapore was no exception. Reforms made their presence in each and every sector and shipping sector was also targeted by the Singapore Government. To turn the port into a regional hub, the Government opted for commercialization turning it into a service port model as a first step. Under this model, the properties were transferred to the ownership of Port of Singapore Authority (PSA) which also held the maintenance responsibility. This organization worked and managed the port affairs autonomously without the interference of the Government. However, in 1996, the Government went ahead with some initial steps of reforms and split the PSA into two units known as the Maritime and Port Authority (MPA), land lord and regulator, and PSA Corporation, the port operator ( ). This was done to transform it into a landlord port model later. The Singapore model in port management is unique in itself. Though it was given the corporate look to eliminate the public sector appearance, the entire share holding is owned by the Government only. The Government wanted it to run on fully commercial basis and as a pure business entity. The corporation was authorized to take independent decisions to run the port as a profit oriented entity. One thing must be clearly understood that the final purpose of any private commercial unit or organization is earning good profits. In the private sector management, there would not be any government interference and the management would take appropriate decisions to develop it and increase its coffers. In the case of PSA Corporation too, affairs are run in a manner befitting a private firm, though it is not a private company. After becoming a commercial entity, the PSA has totally transformed the management of the port. To streamline the movement of goods and provide high quality of service to clients, the PSA has introduced most advanced and comprehensive system known as Trade Net and Order Link through which it could provide customs clearance in 30 minutes enabling faster movement of cargo as against of nearly 1 day clearance previously. Total productivity has increased by 20-30% resulting in saving of 50% in the utilization of non-value added manpower ( ). The MPA remained as a landlord and regulator of the port and was limited to issuing public licenses for providing port services and facilities, pilotage services, towage services and for selling desalinated water ( ). The PSA Corporation, along with Jurong Port Pte. Ltd, a private firm, was given licenses for looking after the port services and facilities. These two organizations have been together providing services of cargo terminal handling for containers including conventional and bulk cargoes. While the private stevedore contractors provide cargo handling operations, the quay and yard crane equipment operators are employees of licensees in the container terminals. PSA Corporation has entered into a joint venture agreement with COSCO Pacific to operate container berths in the port ( ). The MPA has further liberalized the towage licensing system without compromising on the quality of services to be provided. In December 2003, commercialization efforts went a step ahead with PSA International Pte Ltd, a fully owned company of Temasek Holdings, becoming a subsidiary of PSA Corporation for looking after its businesses in Singapore and around the world ( ). Singapore port example clearly shows that it was fully commercialized but not privatized. Yet, the running of the port is being managed in such a manner that it resembles privatization. And the results are amazing. The Singapore port registry recorded in 2004 a total of 3109 ships amounting to some 27.71 million GT, an increase of 8.37% over 2003. The following graph shows the yearly tonnage of cargo handled by the PSA beginning from the year 1994 till the end of 2003. Source: Compiled by ASEANSEC, data supplied by Singapore Shipping Association, Annual review, 2003. Conclusion: The UK has certainly succeeded in improving the performance of ports after privatization. Employee share ownership was the major highlight of port management after privatizing the ports in Great Britain ( ). However, the same experiment may not be suitable and applicable for other countries. According to a survey conducted by the Napier University, UK, private participation in port management is still limited up to some extent only (Baird, 2002). The study says that private participation at most of the ports has been providing value added services including pilotage and towage services. It also points out that public sector participation at most of the ports in the world is still dominant. These points must be thoroughly noted down by other countries, especially India and other third world countries. Privatization, on the face of it, can not be totally ruled out. However, it can not be the only solution to mitigate the sufferings of ports. The aim of privatization is to make the loss making seaports turn into profit-making ones by improving their operational efficiency in all departments. That involves running of these ports as pure commercial units, and for achieving this objective, innovative ways can be worked out and implemented without total privatization. Public sector managed ports can invite private participation to some extent as we have seen in case of Port of Singapore Authority Corporation. The Centre for Policy Studies says that privatization provides good results because private companies do not want to lose reputation. Read More