Port Reform - to Improve Productivity, to Become More Competitive, to Attract Private Capital - Essay Example

PORT REFORM Table of Contents Abstract…………………………………………………………………………. 2 Introduction……………………………………………………………………… 3 Overview of Port Business Environment………………………………………… 4 To Improve Productivity…………………………………………………………. 4 To Become More Competitive…………………………………………………… 5 To Attract Private Capital………………………………………………………… 7 Analysis…………………………………………………………………………… 8 Conclusion………………………………………………………………………… 9 Reference List…………………………………………………………………….. 10 Abstract To ensure that trade transactions remain efficient and effective over time, ports resort to reforms and restructuring for the following reasons: to improve productivity, to obtain financial autonomy, to minimize bureaucratic intervention, to deregulate the labour market, to become more competitive, and to attract private capital, among others. Developments in global markets due to technological advancement, increase in competition and enhanced bargaining power of port service users and providers, made it inevitable to consider port reforms. It is in this regard that this essay is written to outline and evaluate three of the above reasons for port reform. Specifically, this paper would assess the following rationales: to improve productivity, to become more competitive, and to attract private capital. Specific and actual examples of ports that have or are in the process of reform would be identified to expound on the rationales. Different ports would be utilized for each of the areas being evaluated and assessed. Introduction About 75% of the world is covered with water. No wonder people have long discovered ways and means to traverse this natural resource. As a consequence, the need for facilities and loading docks and ports have been given due importance. In California, McLaurin (2009, par. 4), President of the Pacific Merchant Shipping Association reported that “ports create hundreds of thousands of trade related jobs throughout the state – and with that billions of dollars in tax revenue”. The Port of Los Angeles is the number one port by container volume and cargo value in the United States, handling a record-breaking 8.4 million TEUs (twenty-foot equivalent units) in calendar year 2007. (The Port of Los Angeles 2008, par. 11) On the other hand, the port of Long Beach reported a “trade valued annually at more than $100 billion moves through Long Beach, making it the second-busiest seaport in the United States” (The Port of Long Beach 2007, par.2) Not to be outdated is the Port of South Louisiana which boasts of being the “largest tonnage port district in the western hemisphere”. (Port of South Louisiana 2009, par. 1) Other seaports all over the world recognize that despite their success in performance and productivity, a host of diverse factors such as developments in global markets due to technological advancement, increase in competition and enhanced bargaining power of port service users and providers, make it inevitable to consider port reforms. From among those identified ports which undertook port reforms are the Port of Palm Beach, the Port of Buenos Aires in Argentina, the ports in New Zealand, and Far Eastern and Southeast Asian ports, among others. To ensure that trade transactions remain efficient and effective over time, ports resort to reforms and restructuring for the following reasons: to improve productivity, to obtain financial autonomy, to minimize bureaucratic intervention, to deregulate the labour market, to become more competitive, and to attract private capital, among others. It is in this regard that this essay is written to outline and evaluate three of the above reasons for port reform. Specifically, this paper would assess the following rationales: to improve productivity, to become more competitive, and to attract private capital. Each would be presented with specific and actual examples of ports that have or are in the process of reform to expound on the rationales. Overview of Port Business Environment As world trade activity progressed due to developments in global markets, the nature of competition among port users and port service providers has become complex. According to The World Bank Group (2009, par. 4), “drivers for this increased competition include: rivalry among existing competitors; the threat of new competition; the potential for global substitutes; the bargaining power of port users and the bargaining power of port service providers”. The same study identified several key trends which influenced the competitive environment in the global port business, to wit: (1) products being manufactured and produced globally, (2) developments in technology, (3) bargaining power being consolidated among ocean carriers and operators of terminals, (4) movements in world distribution patterns, and (5) emergence of increased environmental safety and precautions. Qualitatively, port reforms take the following direction: “modernization, liberalization/de-regulation, commercialization, corporatization, and privatization (comprehensive or partial)” (The World Bank Group 2009, par.10). Whatever the strategies undertaken to implement reforms, the rationale would still be among the rationales mentioned above. To Improve Productivity The business definition of productivity is “a measurement of the efficiency of production, taking the form of a ratio of the output of goods and services to the input of factors of production. Labor productivity takes account of inputs of employee hours worked; capital productivity takes account of inputs of machines or land; and marginal productivity measures the additional output gained from an additional unit of input. Techniques to improve productivity include greater use of new technology, altered working practices, and improved training of the workforce.” (CBS Interactive, Inc. 2009, par. 1) Due to increase competition in the global port business, Active Communications International (ACI 2007, par. 1) has been organizing a two day conference on September 23 and 24, 2009 with the specific agenda of discovering “the hottest developments and future developments for optimizing port productivity: Attracting New Customers to Increase Business Performance, Exploring Short and Long Term Port Investment Options, Developing Appropriate Strategies for both Port Over and Under Capacity, Streamlining Internal Processes to Improve Operational Efficiency, Using Technology to Increase Productivity, and Implementing Long-Term Business Strategies that Benefit your Port in the Short, Medium and Long Term”. (ACI 2007, par. 2) It was clearly identified that current economic climate in conjunction with the global financial crisis makes it inevitable for the port industries all over the world to be updated on strategies and practices which would ensure their improved productivity. According to an article written by Leclaire (2006, par.5), Kurt Nagel, the president of the American Association of Port Authorities, have identified the Port of Palm Beach as one of the ports which underwent reform to increase productivity. "The Port of Palm Beach, like other ports, is challenged to accommodate increasing traffic," Nagel explains. "Ports are facing security issues, personnel issues and infrastructure issues and looking for ways to change processes to increase productivity." (Leclaire 2006, par. 5) The strategy that the Port of Palm Beach utilized was creating an inland port which would facilitate the flow of goods from the seaport to the trucks and trains which transport the goods to their final destination. This inland port model was successfully patterned after ports such as Norfolk, Va., Charleston, S.C. and Savannah, Ga. (Leclaire 2006 par. 9) The program required a collaboration with the railroad. Thomas Capozzi, senior managing director of marketing services for the Virginia Port Authority, says “considering the growth of containerized cargo, land availability issues, and congested highways, the port has got to look for alternative ways to move cargo--and rail is ideal." (Leclaire 2006, par. 11) Another example was the reform instituted by the Port of Buenos Aires in Argentina. Trujillo and Serebrisky (2003, p.1) averred that “the restructuring of the Port of Buenos Aires, which accounts for more than 90 percent of container traffic in Argentina, has led to a notable increase in productivity”. The reform also contributed to increased competition which is discussed below. To Become More Competitive BusinessDictionary.com (2009) defines competitiveness as “ability of a firm or a nation to offer products and services that meet the quality standards of the local and world markets at prices that are competitive and provide adequate returns on the resources employed or consumed in producing them”. With reference to ports management, Huybrechts (2002, p.11) provided a conceptual definition of seaport competition, to wit: “seaport competition refers to competition between port undertakings, or as the case may be, terminal operators (the competing players involved in the organization of entire transport chains) in relation to specific transactions (the object, taking into account the origin and destination of the traffic flows).” He identified several factors which contribute to port competition such as: (1) consumers’ demands, (2) production factors, (3) operators’ affiliation with specific industries, and (4) competencies of port service operators and competitors. Accordingly, three distinct classifications of port competition were presented: “(1) intra-port competition at operator level (competition between port undertakings within a single port), (2) external port competition at the operator level (competition between port undertakings from different ports) and finally, (3) inter-port competition at the port authority level” (Huybrechts 2002, pp. 13 - 14). The port reform in Argentina took the form of restructuring with privatization. According to Trujillo and Serebrisky (2003, p.1), “as part of this process the government transferred ports to the provinces, which could choose to operate, concession, or close them. The Port of Buenos Aires was divided into two ports: Dock Sud, which was transferred to the province of Buenos Aires, and Puerto Nuevo, which remained under national jurisdiction”. The six terminals in Puerto Nuevo were offered to private concessionaires and opened it to international investors. This encouraged competition by designing a competitive market structure through vertical and horizontal mergers. The ports in New Zealand underwent different stages of reforms which enabled them to decrease trade barriers and facilitate the access and flow of goods. The first port reform was in the form of containerization which was prevalent in the 1960s. Hawke (1981, p. 386) showed that in New Zealand, “containerization proved an expensive technological upgrade, but one that accommodated trading partners in Europe and North America who were also improving and rationalizing facilities”. These activities enhanced increase competition in the global port environment. Waite (2000, p.11) averred that “the Fourth Labour government pushed the commercialization of ports, and urged labor reforms to provide more flexible working hours while preserving jobs”. Flexible hours invited the participation of other countries which operate in different time zones. These strategies enabled ports service providers to reduce costs and consequently generating higher productivity. The reforms paved the way for free trade opening New Zealand’s ports to all countries to compete on a greater scale. By determining the factors that influence port competition and the players or port service operators at various levels, other port participants who wish to compete in new and expanding global port environment need to assess the interplay of factors and determine the status of the economic, political and financial environment. Specific strategies must be made in view of the participants’ mission and vision, as well as their short term and long term goals. To Attract Private Capital Privatization of ports are strategic developments that paved the way for increased financial investments, expansion of the ports’ normal capacity and modernization of port services through the government’s sale to private enterprises for management and control. In article written by Peters (2005, p. 1), he averred that “more than US$ 8 billion of private capital has been pledged for capacity expansion and service modernization in Far Eastern and Southeast Asian ports (specifically in Hong Kong and Japan). The contractual arrangements vary but in most cases the private financiers remain involved in port operations and management upon completion of the investments.” His report identified that the first country which realized that privatization is more beneficial to increase ports productivity is Malaysia in 1986 and followed by the Philippines in 1988. Malaysia decided to lease the “the container terminal in Port Kelang to a consortium of local and foreign interests” (Peters 2005, p. 1); while Manila’s International Container Terminal was endorsed to a private group. As reported, both experiences proved successful with port productivity increasing to about 15% to 20%. Other Asian countries followed suit. Accordingly, China, Korea, Indonesia, Taiwan, Thailand and Vietnam, all recognized the value of privatization and opted to apply the same strategy to increase productivity. By attracting private capital, ports were able to undertake modernization schemes with the financial assistance of mostly foreign investors which allowed them to eventually lower their costs and prevent port delays. The specific ports that opted to go on privatization are as follows: (1) “The Shanghai Port Authority (SPA) and Hutchison Whampoa Ltd. (HWL) formed a joint venture between their subsidiaries, Shanghai Port Container Comprehensive Development Company (SPCCDC) and Hutchison Ports Shanghai Ltd. (HPSL), to own and operate all of Shanghai's container port facilities.” (Peters 2005, p.2), (2) “Citra Lamtorong Persada (CLP), an Indonesian holding group, has been awarded the contract to build the US$270 million terminal at Tanjung Perak in Surabaya, Indonesia” (Peters 2005, p.5), (3) “Maersk Line of Denmark, one of the largest international container carrier, plans to invest more than US$70 million in a container terminal at the Port of Kaohsiung, Taiwan” (Peters 2005, p.7), and (4) “Tredia Investment, a Singapore-based property and investment firm, Mitsui, and Mitsubishi have secured a US$950 million contract to develop the coastal port of Vung Tau in cooperation with the local holding group Intradex. The two-stage project, 120 km south-west of Ho Chi Minh City, will enable Vung Tau to overtake Saigon River Port as the country's busiest port in Vietnam” (Peters 2005, p.8). Analysis In these times of financial crisis affecting the global market, the ports are not exempt from being affected by the turmoil. However, despite this global financial difficulty, the revenues and jobs that ports all over the world still generate continue to accord each and every nation with the much needed economic benefits. If business operations and activities within these ports show significant declines, it would be high time to encourage policymakers to review current legislations and tax measures to regain competitiveness of each port in international trade. The ports in each country serve many uses including consumers, passengers, business cargoes and enterprises. Some ports even provide recreational facilities which are utilized for strolling, swimming, and whale watching. In addition, several ports contain cargo facilities, intermodal rail yards, warehousing, and the like. With billions of dollars that ports generate in terms of revenues, different governments from all over the world remain to give premium importance to them. These revenues translate into local employment and billions of dollars in wages and taxes. It is in this regard that port reforms are regularly instituted to keep abreast to the changing demands of the times. The reform process is actually tedious and long with various steps to follow to ensure its success. The World Bank (2007, pp. 361-362) prepared a port reform toolkit which identifies specific steps of the whole process, to wit: “strategic preparation, redefinition of authorities and powers, legal adaptation, transactions preparation, and transaction implementation”. This would be a guide for various private enterprises and government agencies who plan to engage in reforms of various sorts. Conclusion As presented, ports implement reforms to increase productivity, be more competitive and to attract private investors, among a host of other rationales. Based on the experiences of various ports world wide, it was properly identified that structured reforms enabled ports to increase performance enabling them to generate higher productivity. Increased competitiveness, likewise, contribute to more efficiency and effectiveness in ports operations and management. By recognizing the factors that affect and influence port competitiveness, port users, operators and service providers were accorded with appropriate resources to utilize the needed strategy for reform. Finally, reforms utilizing private enterprises to manage and control various ports enabled governments to realize improved performance through the generation of increased financial investments and expansion of port capacities. The experiences provided by ports in the Southeast and Far Eastern nations all support the benefits that privatization accords. The essay was able to accomplish its objective of assessing and evaluating the following rationales for port reform: to improve productivity, to become more competitive, and to attract private capital. Each was presented with specific and actual examples of ports that have undergone the process of reform to exemplify that these rationales were indeed attained. Ports reflecting on undertaking strategic reforms need to realize that it is an aspect of corporate strategy which in many ways is inseparable from the structure, behavior and culture of the country in which it takes place. Reforms should incorporate strategic planning which is long range in perspective and should be comprehensive in breadth of scope. By assessing the environment and the rest of the factors that influence the ports’ activities and operations, reforms could be instituted to serve the rationales identified herein. Total Word Count 2,734 Reference List Active Communications International (ACI) 2007, 2nd Optimizing Port Productivity. Viewed August 19, 2009, BusinessDictionary.com 2009, Definition of Competitiveness, Viewed August 20, 2009 from CBS Interactive, Inc. 2009, Business Definition of Productivity, Viewed August 19, 2009, < http://dictionary.bnet.com/definition/Productivity.html> Hawke, G 1981, “The Growth of the Economy.” In The Oxford History of New Zealand, Ed. W.H. Oliver, Wellington, New Zealand: Oxford University Press. Huybrechts, M 2002, Port competitiveness: an economic and legal analysis of the factors determining the competitiveness of seaports, Uitgeverij De Boeck. Leclaire, J 2006, Headed inland: the Port of Palm Beach is planning an inland port that would open up new opportunities in a growing cargo niche, Viewed August 19, 2009, McLaurin, J. 2009 Feb 2, Situation Bleak for California’s Ports, Fox & Hounds Daily. Viewed August 19, 2009, Peters, HJ 2005, Private Sector Involvement in East and Southeast Asian Ports An Overview of Contractual Arrangements, TRANSPORTATION, WATER AND URBAN DEVELOPMENT DEPARTMENT THE WORLD BANK, Viewed August 20, 2009, Port of South Louisiana 2009, Overview of the Port, Viewed August 19, 2009, The Port of Long Beach 2007, About Us, Viewed August 19, 2009, The Port of Los Angeles 2008, History, Viewed August 19, 2009, The World Bank Group 2009, Port Reform, Viewed August 19, 2009, The World Bank 2007, PORT REFORM TOOLKIT, Viewed August 20, 2009, < http://siteresources.worldbank.org/INTPRAL/Resources/338897-1164990391106/08_TOOLKIT_Module8.pdf> Trujillo, L & Serebrisky, T 2003, Market Power: Ports – A Case Study of Postprivatization Mergers, Viewed August 19, 2009, Waite, J 2004, Reducing the Cost of Distance: Technological Change and the Globalization of New Zealand, 1960-2000, Global Economy Journal, Vol. 4 [2004], Iss. 1, Art. 5. Read More