Ports and terminals today
Ports and terminals are vital to the global economy. In the United States and China, the world’s two largest economies, the vast majority of imported and exported cargo moves through commercial ports. For coastal states and islands such as those in the Caribbean or the Mediterranean that rely heavily on tourism, in particular the cruise industry, ports are the lifeblood of their economies. The rising demand of emerging markets, such as the BRIC countries of Brazil, Russia, India and China, have led to a significant increase in the use of containers, and to the emergence of large multi-terminal operators adept at designing, financing, constructing, operating and maintaining terminals capable of efficiently moving, storing and repairing huge numbers of containers. In addition, the commodities boom fuelled by this rising demand has contributed to increased investment in bulk cargo terminals (coal, iron ore, grain, etc), owned and operated by multinational agricultural and mining companies and commodities traders seeking to export their raw materials to the growing economies of the world.
A vast (and increasing) number of ports and terminals are globally in operation, and their operating structures, capabilities and objectives are diverse. Some ports have only a passenger or cruise terminal; others might also handle (or only handle) cargo; while others consist of one or more specialist terminals such as bulk, container, and liquid petroleum gas (LPG) or liquid natural gas (LNG) terminals. Terminals may then be further segmented into gateway terminals – that is, terminals used primarily for the importing of cargo – or transhipment terminals that move cargo from one vessel to another smaller or larger vessel.
Constructing or developing a port or terminal generally requires significant financial investment, and governments and port authorities are not always willing or able to make such an investment.
At the same time, corporatisation and privatisation of ports have been shown to lead to increased profitability and enhanced employment opportunities. There have, consequently, been major changes in the ownership and operating structure of many ports, driven by the increasingly prominent role of the private sector, both as a source of finance and as the provider of some (or in some cases all) of the services required for the successful operation of a modern port. This in turn has led to a diminished or altered role for the traditional owner and operator of a port, the port authority. Whatever the separation of roles between a port authority and a port operator or services provider, and whatever the type or location of the port, the most important party is ultimately the port customer. Without sufficient customers and volume, any ambitious new port is destined to be a white elephant, as indeed has happened in some countries. The shipping lines, which have grown in size and influence through the increase in cargo traffic, through consolidation and the resultant increased market share (sometimes as a result of strategic mergers and acquisitions (M&A) and sometimes as a result of the demise of competitors, such as Hanjin), and through the establishment of pacts such as the 2M Alliance, THE Alliance and the Ocean Alliance, are putting pressure on port operators to be more competitive and provide more efficient services. At the same time, the shipping lines are key drivers in the further development of ports; for example, the ever-increasing size of container ships being built on behalf of shipping lines (the first 20,000 TEU (20ft equivalent unit) vessel was delivered in 2017, and Mumbai Maersk recently set the world record for the largest load ever carried by a containership, when it loaded 19,038 TEU at Tanjung Pelepas Port in Malaysia in August 2018) means that many container terminals will need to continue to invest in their infrastructure and superstructures or equipment in order to be able to attract the volume from such vessels. The prohibitive cost of such investments is an important factor in the rise of the private sector in ports. This in turn has led to consolidation among port operators through M&A activity and an increased number of joint ventures in relation to specific greenfield or brownfield port projects between port operators that otherwise compete with one another in other ports.
Another key trend in recent years has been China’s One Belt, One Road initiative, which aims to strengthen China’s economic leadership and influence throughout China’s neighbouring regions through a vast programme of infrastructure projects. This programme includes approximately 60 significant infrastructure projects at ports spread across Africa, Eastern Europe, the Middle East, Central Asia, South Asia and South East Asia.
Getting a deal through – be it the development, the operation or the sale or purchase of a port or terminal – requires an understanding of the roles of all the key parties involved in a port or terminal project (port authority, port operator, shipping lines, any employee unions, etc) and the dynamics between them; the legislative and regulatory backgrounds; and the different services that need to be provided at a port (marine, cargo handling, safety, etc) and who needs to provide them.
Port authorities and operators
The port authority has traditionally been the governing body in most ports and is usually part of, or supervised by, a ministry (merchant ministry, ministry of transport, ministry of public works, etc) of the country’s government. The powers and duties of port authorities include:
- establishing the standards and codes to be observed by the providers and users of marine and port services and facilities;
- controlling the navigation within the perimeter of the port and the approaches to the port (including providing adequate navigational aids and disseminating navigational information);
- regulating the charges and fees payable by users of the port facilities;
- providing marine and port services and facilities such as towage, pilotage and berth scheduling (and, where applicable, exercising licensing and regulatory functions in respect thereof); and
- generally improving, developing and promoting the use of the port.
Where the port authority is established at a national level, it may additionally be tasked with exercising regulatory functions in respect of merchant shipping, particularly in respect of safety at sea, the manning of vessels and the prevention of pollution at sea. Its functions may also include:
- promoting and safeguarding a competitive, fair and efficient market (to the extent that this is not the prerogative of an over-arching national competition policy administered by a competition commission or similar);
- developing, promoting and regulating employment and training within the shipping and port industries;
- promoting the development of merchant shipping;
- advising the government on matters relating to marine and port services and facilities (and on sea transportation generally); and
- representing the country at an international level (eg, at the International Maritime Organization) in relation to marine and port matters generally.
In some countries, a port authority exercising the regulatory functions mentioned above may actually be a body called the ‘ports regulator’, with one or more separate port authorities supervising the operational aspects of the country’s ports.
Many countries have, in the past few decades, succumbed to pressure to devolve the responsibility for the improvement of ports and their performance to self-sustaining (incorporated) entities, and to eliminate the provision to them of governmental subsidies and other state aid. Stakeholders such as the shipping lines calling at ports, as well as terminal and logistics operators, have been clear about the need for a modernisation of port governance practices, with a view to improving performance and efficiency. This has in large part been achieved through corporatisation. This is the process by which a public port enterprise is transformed into a private corporation (although, unless the corporatisation is followed by some form of privatisation, all or some of the equity in such corporation remains in public hands following the corporatisation). Corporatisation leads to changes in the institutional structure of the port business, which in turn often leads to the increased involvement of the private sector in the exploitation and financing of port facilities, terminals and services. Port authorities have become more autonomous through the devolution of the decision-making from the government to the port company’s directors, who are accountable to the corporation’s shareholders (be they the state or private institutions or individuals). This has produced greater transparency in relation to port authority development and the prioritisation of business and customer satisfaction.
True privatisation of port authorities – in other words, the sale of shares in the entity that owns the port land or exercises regulatory functions – is relatively rare. For example, the privatisation of the Piraeus and Thessaloniki ports in Greece through initial public offerings (IPOs) in the early 2000s was actually an offering of shares in companies that had concessions (see below) to run the respective ports for a finite period of time. Similarly, the subsequent privatisation of those ports in the wake of the Greek debt crisis – that is, the sale of a majority stake in the Piraeus Port Authority to COSCO for €280.5 million and the sale of a majority stake in the Thessaloniki Port Authority to a consortium including Deutsche Invest Equity Partners GmbH, Terminal Link SAS and Belterra Investments for €232 million – is actually nothing more than the sale of shares in those two listed companies that were retained by the state at the time of the earlier IPOs. Of the larger developed countries, only the United Kingdom has implemented outright privatisation of some of its ports.
The rise of concessions
The term ‘privatisation’ is often used to describe something that is actually quite different from the United Kingdom’s model. It usually refers to the process of the port authority (or other relevant governmental body or entity with the relevant rights and powers) granting to a private party certain rights and obligations in relation to a port for a number of years under a ‘concession agreement’. This is in essence a public-private partnership (PPP). In these partnerships, governments (acting through the port authority) will retain, or rather create, the role of port regulator and also often act as the provider or licensor of marine services and sometimes land developers. The private party will assume responsibility for the financing of the port development and for the running of port operations, theoretically for a sufficiently long period of time to make a return on its investment. The appeal of concessions is that states can transfer a major part of the financial and operational risks in developing and operating terminals to the private sector, while permitting them to retain ultimate ownership of the port land and responsibility for licensing port operations and construction activities, and thereby safeguard public interests.
Concession agreements and leasehold agreements are quite similar, and in some jurisdictions they are considered to be more or less the same thing. In practice, a concession agreement typically goes further than a lease in that it governs the entire relationship between the government and the private sector regarding the right to exploit port land and facilities, as well as the obligation to construct port infrastructure and provide superstructure. A lease is sometimes entered into in addition to a concession agreement so that the leaseholder’s (concessionaire’s) interest in the land can be registered with the relevant land registry or cadastre.
How far a government will go in terms of transferring responsibilities for port development or operations to the private sector through concessions depends on a number of factors, including:
- political considerations and the underlying constitution or legal regime;
- financial investment capabilities and anticipated returns profile of the project;
- the extent of the port authority’s ability and desire to provide services in relation to the port; and
- the power of stevedores’ and other port employees’ unions.
Sometimes, a port authority will also, in addition to entering into a concession agreement, have an interest in the company that is granted the concession. By investing equity, the port authority participates in the economic success (or failure) of the concession and becomes more directly involved in port operations, but this is not always permitted. Such participation may be acceptable if there is a monopoly in the port (and there is therefore no existing or potential intra-port competition), but in other cases a conflict of interest may arise between the roles of the port authority as an investor and as the regulator of the monopoly (unless the two roles have been adequately separated from one another).
Port concession tenders
Not all countries have the necessary legal frameworks to grant concessions. In some cases, there is a general law dealing with concessions, which may cover ports, but if the country is implementing a wholesale privatisation of its ports, there may be a specific law in force. Sometimes a law needs to be passed specifically in order to enable the port authority to grant a concession or for the government to ratify the grant. Generally, these laws set out the extent of any concession in terms of its duration and the ports services for which the port operator may or may not take responsibility under the concession. They will sometimes also deal with the right of, or as the case may be, prohibition on, the state or port authority taking an interest in the company (usually via a special purpose vehicle) that will be awarded the concession.
Where the granting of a concession is permitted under such laws, the awarding authority usually runs an open tender and awards the concession to the tenderer offering the terms that are most beneficial to the state. These tenders are usually split into phases. In the first phase, tenderers typically evidence their technical qualifications and financial wherewithal to design, construct, finance, operate and maintain the port or terminal (or relevant services there). Subject to satisfying the technical and financial qualification criteria, tenderers then proceed to the next round, where they are given the opportunity to investigate the project further, comment on the concession terms and provide their binding offers. This round is sometimes followed by a further negotiation round with one or two of the tenderers.
The need for an open tender as opposed to a bilateral negotiation with a port operator is usually driven by the existence of national procurement rules designed to ensure that the state is achieving the best possible deal available to it at the time. A tender may also assist in countering claims that the terms of the concession constitute unlawful state aid, on the basis that the tender process will have served to ‘test’ the market and that the terms are therefore the best achievable on an arm’s-length basis. The need for a tender may also be driven by the involvement of international financing institutions such as the World Bank, International Finance Corporation or the European Bank for Reconstruction and Development, who may require a transparent process in order to provide finance for the project.
International financing institutions have shown increasing interest in the port sector, seeking ways to facilitate port reform by either providing expertise or direct financing through commercial loans or subscription for project bonds.
Some port category terminology
As a result of the changes in the way ports are organised, structured and managed following varying degrees of port reform, ports now tend to be categorised as either service ports, tool ports, landlord ports or fully privatised ports. Service and tool ports mainly focus on the realisation of public interests. Landlord ports have a mixed character and aim to strike a balance between public (port authority) and private (port industry) interests. Fully privatised ports focus on private (shareholder) interests.
In a service port the port owns, maintains and operates every available asset, whether fixed or mobile. Such ports are usually ultimately controlled by the relevant ministry (public works, transport, maritime, etc) with the director of the port being a civil servant appointed by the minister concerned. The number of service ports is declining, as many former service ports are gradually becoming landlord ports.
Tool ports are similar to service ports, but stevedoring is usually carried out by private firms.
The landlord port is characterised by its mixed public-private nature. Under this model, the port authority acts as the landlord and often as the regulatory body, while private companies carry out the port operations (especially stevedoring) pursuant to a concession, as mentioned earlier.
The private port operators provide and maintain their own superstructure, including buildings (offices, sheds, warehouses, container freight stations and workshops), and purchase and install their own equipment on the terminal as required by their business.
Fully privatised ports are, as also mentioned earlier, few in number and lead to the state no longer having any meaningful involvement or public policy interest in the port sector, although these ports are still subject to overriding laws affecting all infrastructure assets such as land planning, environmental and health and safety legislation.
The heightened global environmental awareness owing to climate change and health issues has not left the port sector unaffected. On the legislative side there are obligations – for example, those in the European Union requiring ships to burn fuel of 0.1 per cent sulphur content when within a Sulphur Emission Control Area and 3.5 per cent (moving to 0.5 per cent after 1 January 2020) elsewhere within the EU. At the same time, when awarding concessions port authorities are increasingly examining port operators’ ‘green port’ credentials, and proposals such as the following are often required:
- use of cold ironing or shore power;
- zero emissions technology for port equipment and vehicles;
- sustainable power generation (wind and solar);
- reducing or managing water run-off;
- effective dust suppression systems for dry bulk cargo (dry fog, etc); and
- the use of recycled concrete and other green construction materials.
In addition, some ports, such as the Port of Rotterdam, Port of London, Port of Amsterdam, Port of Gothenburg and Hamburg Port, provide discounts on port dues to sustainable seagoing vessels – that is, vessels that score highly on the Environmental Simulations International (an international benchmark for emissions from seagoing vessels). A growing move towards the introduction of similar discounts is evident throughout the EU, and this development is sure to continue and affect the way in which ports are constructed and operated. This is particularly prevalent following the agreement signed at the COP21 United Nations climate change conference in Paris on 12 December 2015, despite the agreement not including a specific reference to ports and the withdrawal from the agreement by the US on 1 June 2017.
If the ports industry does not proactively address environmental issues, lawmakers will no doubt eventually step in to do so.