Port Privatization: Concession - Essay Example

PORT PRIVATISATION: CONCESSION By Port Privatisation: Concession Introduction There exist different forms of port ownership in the modern shipping industry, which has been triggered the need for effectiveness, efficiency, control and better management (Haldea, n.d.). The use of concessions is one type of ownership structures, which has gained immense popularity through which governments are transferring ownership rights to private entities to build, own, operate and transfer (BOOT) the ports backs to the government after a specified period, which is often about fifteen years (Moretto and Dosi, n.d.). A concession, therefore, is a form of privatisation of ports by the governments or port authorities to private operators that provide specific port services, such as terminal operations, finance among others, which has become part of the reform process of governments to revamp or optimise the capacity and operations of their ports (Monios & Bergqvist, 2014). However, unlike in other forms of privatisation, in a concession agreement controls the operating rights transferred to the private entity and thus, its general activities (Rodrigue, 2015). This essay discusses the factors influencing concessions, their impact and risks associated with it. The use of concessions as a form of ownership structure has become a popular method for governments to privatise ports, even though, its faces a couple of challenges and risks. The most common concession types are lease contracts and concession contracts (“MODULE 3 Alternative”, 2015). Lease contracts are long-term agreements in which operators acquire leases on the port land, and they are commonly responsible for structure development and equipment (Smith, 2011). The concession contracts involve taking up of investment costs and all financial risks by the operators in the management, development and operation of the ports for the specified period of the concession (Smith, 2011 Factors Influencing Use of Concession as a Privatisation Tool Government policy and the need for control. The concessions are more attractive to governments since they do not have to surrender total control of their ports (Rodrigue, 2010). It provides an opportunity for the government to control what the new private owners of the ports can do or not do as well as allowing it to safeguard the interests of the public that it serves. Technology. Countries that are underdeveloped and have low levels of technology in their ports may prefer concession as their model of privatisation (Rodrigue, 2010). This is because by give up part of the control to the private operators, the governments still benefit from the developments and structures set up by the operators after the concession period. They can also include policies in their concession contracts that force the operators to share their knowledge of technology with the public operators. Economics-a country whose current state of the economy is struggling may prefer concession since the partial transfer of ownership can enable it to benefit from the investment and development of the private operators (Rodrigue, 2010). The concession is also more likely to pull a suffering economy out of recession and boost it tremendously because it improves port operations, thus increasing throughput efficiency and revenue turnover resulting in higher profits; hence, higher earnings contributions to the economy (Tongzon and Heng, 2005). Moreover, the increased automation and better labour management can result in higher productivity of the employees, which saves the government millions of pounds. The need for greater levels of development. A concession allows for increased terminalisation of ports (Rodrigue, 2010). This ensures that one port is controlled by more than one private operator. This ensures that the levels of development are higher since all those private operators inject funds into the development of the port and enact more highly sophisticated structures, which is beneficial to the government. The need for competition. The increased terminalisation and control of a port by multiple operators results in the development of a healthy competition between the operators (Rodrigue, 2010). This results in the players trying to outshine each other in terms of productivity, structure and overall development; hence, benefiting the economy. Finances and costs. The government may have diminished funds to run its port operations and thus to ease such burden of financing, the government can opt for a concession rather than surrendering the port entirely to private operators as means of privatisation to raise finance for upgrading port facilities (Rodrigue, 2010). Thus, this can relieve its funding obligations and thus allow it to concentrate on other national development projects. The need for global investors. Port liberalisation has resulted in the expansion of well-funded global players with particular expertise in the industry (Rodrigue, 2010). The global players are always seeking profitable ventures in which they can invest their capital and concessions are providing such opportunities of investment (Baird, 2002). For this reason, governments have resorted to concessions as a way of funding massive capital investments in ports; hence, attracting the global players (Baird, 2002). Impact of Concessions Benefits Concessions are a source of revenue and income for the national economy and the overall global ports sector. From the port authorities’ side, concessions are usually a primary revenue source, especially because increasing liberalisation forces port authorities to be more financially stable and self-sustaining as most of the other income sources are usually under pressure (Aronietis, Monteiro, Van de Voorde, & Vanelslander, 2010). Moreover, port authorities benefit from the better distribution of port charges and dues, especially in service ports as they are prone to undercharging a ship and overcharging its cargo. Their responsibility in infrastructure development is also reduced significantly since the private investors invest heavily on the development of infrastructure in their terminals (UNCTAD. Secretariat, & DeMonie, 1998). From the terminal operators’ perspective, they get the opportunity to bring in the country foreign management and expertise thus ensuring the quality of work is as they desire it to be. The concession also allows for full accountability in terms of achieving the set targets in operations and finances. The cost transparency of concession prevents cross-subsidisation. Port customers benefit from customer-tailored quality services (UNCTAD. Secretariat, & DeMonie, 1998). They also benefit from the reduction in prices of port services since each terminal operator tries to attract customers and direct their loyalty towards them by lowering prices. The world and national economy benefit from increased responsiveness to changes in market structures and demand. Both the national and global economy also become more flexible and adapt with ease to changes in maritime transport technology. The governments benefit from the reduction of financial and administrative costs. The concession also creates additional revenues from taxes paid by the private operators. Other benefits of port privatisation include enhanced and more efficient management of ports since private operators want the best from their investments in the ports (“MODULE 3 Alternative”, 2015). Thus, this increases the efficiency of ports and increases their throughput (Table 1). Drawbacks resulting from monopolies are eliminated through the addition of comprehensive concession conditions. The risks associated with construction, operation, and finance of the port facilities are transferred to the private operators. The concession also attracts foreign investment and technology that are of benefit to the development of the economy (“MODULE 3 Alternative”, 2015). Source from (Pallis, Notteboom, and De Langen, 2010) Shortcomings of Concession Concession results in increased risk of abandonment of important statutory public functions by the private operators. This is because the investors will work with the features that bring them more profits since they are more inclined to perform diligently in activities that result in profit maximisation and cutting of costs. If the former statutory public functions are not as rewarding as other activities, they are more likely to be neglected even though they may be beneficial economically. The sharing out of responsibilities between the government and the private operators may result in the lack of coordination in investments complementary transport systems such as roads and railways. For example, the roads and railways leading to the port facility can be out of sync because of different responsibilities on the transport systems to develop and when to develop them. Conversely, private operators are more inclined to favouring their business interests other than the interests of the public (Davis, 2007). This may lead to discrimination against outsiders and exclusivity of port facility use. Other shortcomings include: The government has to monitor continually and regulate the actions of the port. This may be quite a burden. Most winning bids are typically based on unrealistic forecasts. This could place the sustainability of the concession agreement at risk. There is also a risk that the private operator may not develop the facilities that are handed over to them. Instead, they may even return them to the government in a worse condition (Davis, 2007). Conflicts could also arise between the government and the private operators due to disagreements on the financial feasibility of individual projects. Another shortcoming is that the concession procedures may seem not to favour local operators. Due to the concentration of container shipping, terminal operators seek to expand internationally. The move to open and transparent procedures reduces the protection of the local operators by the government. Local operators who used to rely on the protection from local authorities now face competition from global operators and are most of the times taken over by the global operators. All these disadvantages can, however, be controlled by the government creating policies that govern the interests of the public in the operations of the port. Legal action could be taken if the terms of the concession contract are not adhered to completely (UNCTAD. Secretariat, & DeMonie, 1998). Risks of Concession Risks are inevitable in the concession model of privatisation. Both the public and private sector will face some risks of which may be different in each concession agreement. Various concession agreements may face different risks since they may be tailored in a different way. Risks involved in concession can be classified into pre-operative risks, development phase risks, operation phase risks, handover risks and other risks (“Risk – A Critical Focus”, n.d.). Pre-Operative Risks These are the risks involved before the concession takes place or before the facility is handed over to the private operator. Financing risks are the risks the winning bidder may not have adequate finances to facilitate the investment in the port due to sudden changes in the market conditions and the level of credit availability. This could result in delays in the effecting of the concession and if the operator fails completely in getting the required finances, the concession process may have to start all again which could result in extreme wastage of resources. External linkages risks are the risks that the complementary transport systems that allow access to the port facility, including roads and railways may not be in good condition. This would have the possibility of making access to the port site extremely difficult. Another risk is possible withdrawal from the concession agreement by the winning bidder even before the concession period starts. This may be because the concessionaire may perceive an uncontainable number of threats to his investment and since the goal of many investors is to protect business interests, they may abandon the whole project altogether. Pre-planning risks are risks faced by the concessionaire where the pre-concession studies of the particular port they wanted to invest in are insufficient resulting in different outcomes from those they expected. The port may be even in a worse condition than they expected resulting in the need to add capital to the predicted capital required on the investment (“Risk – A Critical Focus”, n.d.). Development Phase Risks Design risk is a probable risk that the proposed design of the newly developed port may not meet the performance and service requirements for the port’s activities. This may result in additional costs of redesign and modification of the port (Toolkit.pppinindia.com, n.d.). The development and investment risk is the risk that the development of structures, as stipulated in the concession contract, may not be completed in the required time, within the proposed budget and to specifications. This could lead to the need for additional raw materials in the development, increased financing costs and cost of maintaining infrastructure in the facility to prevent delay in provision of port services. Approvals risk are common in concession and refer to the risk that the approvals needed in order to set up a particular structure or development in the port may take time resulting in delays in the development process (“Risk – A Critical Focus”, n.d.). This may also result in overruns of costs. Additional site risks are the risks that the planned site will be inadequate for the approximated traffic at the port facilities being developed. In such a case, the port authority may be required to provide the additional site to the concessionaire in order to cater for the traffic at the facilities (“Risk – A Critical Focus”, n.d.). Operation Phase Risks Technology risk is one of the risks in the operation phase. It is the risk that the technology that is used in the design and also in the port services may become out of date and lose value. Over time, the technology used in the port services during the concession period may not be able to satisfy the requirements of the output specifications (“Risk – A Critical Focus”, n.d.). This may lead to increased costs of the replacement of the technology. Operations and maintenance risks are the risks associated with increased maintenance of the assets in the port facility over the period of the concession. Risks involved in the ports may include siltation risks which will lead to the increase in need for maintenance activities such as dredging and other operating costs such as paying for civil works for the maintenance of the port (“Risk – A Critical Focus”, n.d.). Traffic risks are also an operation risk that is the risk that the projected demand for the port services will vary significantly from the actual demand. This may result in the actual revenue being far below the expected revenue (“Risk – A Critical Focus”, n.d.). Tariff or payment risk is the risk that the tariffs for port services will not be collected in full or are set in a manner that will not result in the recovery of costs. This is a risk for private ports whose primary source of revenue is from tariffs. Tariffs tend to be regulated in cases where some form of monopoly exists. Where the government controls the tariffs, then mechanisms for change must be defined in order to reduce the impact of tariff related risks (Aronietis, Monteiro, Van de Voorde, & Vanelslander, 2010). In competitive environments, concessionaires may be allowed to regulate their tariffs (Monios & Bergqvist, 2014). Financial risks are faced by the concessionaires who may face too much financial stress due to using inappropriate commercial structures. This may also be due to the concessionaires underestimating the costs required to run the ports and thus can result in excessive refinancing that may lead to undue financial stress to the somewhat inept concessionaires. Handover Risks These are the risk that the concessionaire will default in the transfer of the asset at the end the concession period (“Risk – A Critical Focus”, n.d.). It is also the risk that the entire concession period will fail in the meeting of the required levels of development and also the value of the assets at the end of the concession period. The value of those assets after concession may be so little that they may be of insignificant to the public. The risk therefore is that the purpose of the concession that is to increase the level of development for the good of the public may not be met by the end of the life of the concession (“Risk – A Critical Focus”, n.d.). Other Risks Changes in the law may be a significant risk since the current legal framework at the time the concession was made bound to change (“Risk – A Critical Focus”, n.d.). This may have an adverse effect in the concession since some terms created in the contract may not apply in future periods. Sponsor risk is the risk that the sponsor of the concession may prove to be an unsuitable partner and may fail to adhere to the terms and conditions of the concession agreement. The concessionaire event of default is the risk that the concessionaire will not fulfil his obligations as stipulated in the concession contract and that the government will be unable to enforce obligations of the concessionaire for failing to meet the requirements (“Risk – A Critical Focus”, n.d.). The government may also be unable to acquire remedy for the default or any form of compensation for the loss because of the breach of the contract. The government event of default is also a risk faced by the concessionaire where the government may fail to fulfil its obligations as stipulated in the contract and that the private operator will be unable to enforce obligations of the government or recover in form of compensation or remedy for the breach of the contract (“Risk – A Critical Focus”, n.d.). Force Majeure includes the risks that events that are beyond the control of both parties may occur and impact the port negatively (“Risk – A Critical Focus”, n.d.). Such events affect the ability of either party to perform their obligations adversely under the concession agreement since they are inevitable and unforeseen e.g. civil disturbances, armed conflict, wars, blockades, sabotage, embargo, riots, earthquakes, fires, among others (“MODULE 3 Alternative”, 2015). In conclusion, the concession has become a standard global practice in the ports industry It facilitates global trade, improves port operations, turnover and throughput. The Privatisation of ports through concession is a profitable venture for both the national and global economy, even though, it faces a number of challenges and risks such as the handover, pre-emptive operational and development level risks among many others. However, these through effective stipulation of contract terms, these risks can be mitigated and controlled. Ultimately, it is evident concession, can achieve the greatest fulfilment, efficiency and effectiveness for governments in the operational ports. 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