28 to 30 April l998 Mombasa, Kenya

TABLE OF CONTENTS

I. INTRODUCTION

II. PORT FACILITIES SERVICES

III. PORT PROBLEMS AND REASONS FOR REFORM

1. The Global Environment
2. Reasons for Change
3. General Objectives of Port Commercialization

IV. COMMERCIALIZATION AS A MEASURE FOR REFORM IN PORTS SUB-SECTOR

V. ISSUES FOR CONSIDERATION IN PORT COMMERCIALIZATION

1. Control and Upgrading/Adjustment

VI. REPORT ON APPROACH TO COMMERCIALIZATION BY MOMBASA PORT AND OTHER COUNTRIES IN AFRICA

VII. CONCLUSION

BOXES AND TABLES

Box 1 Examples of Private Sector Participation in PMAESA Ports

Box 2 Privatization of some Aspects of Morocco Ports Operations

Box 3 Other African Countries Experiences in Port Commercialization

Box 4 Rationale behind Malaysia's approach to the privatization of Port Klang

AN OVERVIEW OF PORT COMMERCIALIZATION:THE AFRICAN EXPERIENCE

I. INTRODUCTION

1. A port represents a collection of physical facilities and services designed to serve as an interchange point between land and sea transport. The provision of services and maintenance of the facilities create a flow of costs for the port entity. The use of the facilities and services by the users of the ports creates for them a flow of benefits and it is to obtain these benefits that they make use of the port. The port authority, or any other port entity, through its operating policy, can tap some or all of the flow of benefits and so create a flow of revenue for the authority.

2. There are, then, three separate elements which are important in the pricing of port operations, namely the flow of costs, the flow of benefits and the flow of revenue. The costs are borne by the port authority or other parties providing facilities and services within the port, whereas the benefits accrue to the users of the port, namely cargo-owners and ship operators. The revenue which can be created by tapping the flow of benefits accrues to the port entity concerned and represents the income from which it can finance its operations.

3. A stricter definition of these three flows is needed important since principles of port commercialization will be based on them. First, the flow of costs is considered. There are two meanings of costs and each is relevant. The first is the real or economic cost, which is the cost of the resources used, such as capital, land and labour, which have alternative uses. In the absence of marked unemployment, labour can always be used in alternative ways and thus always has an economic cost. Land may, or may not, be capable of an alternative use, although in most ports situated in densely populated areas of great economic activity the value of the alternative use of land may be greater than that of its actual use in the port. Capital, on the other hand, frequently has no alternative use. Once a quay is built, it is useless for anything other than transferring goods between ships and inland; a breakwater can provide a sheltered haven and nothing else. Where there is no alternative use, there is no economic cost. Realistically, however, a port is concerned with its own costs in the sense of the annual cash outflow. Thus, while in principle, a port pricing system has only to deal with economic costs, in practice, it has to provide a cash flow to meet the payments which the port must make, whether for costs which are recognized as economic or for those which are not.

4. The benefit derived by port users also needs clarification. There are two main users: the cargo owner and the shipowner. The benefits become clear if the value of a product is considered at its point of production in relation to its value in the market. In many cases - and as far as raw materials are concerned, in most or even all cases - the intrinsic value of a product at the point of production is zero. It is the existence of a market, probably far removed, which gives it a positive value. The difference between the two values is the benefit which accrues from the ability to transfer the product from the point of production to the point of sale. Many interests are involved in this. So far as the port is concerned, the only relevant interests are those of the cargo owner and those of the ship operator. The cargo owner sends his cargo to the port because, by doing so, by putting it at the point where the land transport and distribution system of his own country connects with the means of ocean transport, his produce acquires a higher value that it would otherwise have. The ship operator sends his ships to the port because the product can have a higher value at the land/sea connecting point in the market area than it has in the production area. The benefit of each party is thus strictly measurable. For the cargo owner, it is the difference between the value at the point of shipment (the f.o.b. value) and the value at the point of production, minus the costs of transporting the product from one point to the other. For the shipowner, the benefit is that part of the difference in value between the point of loading and the point of unloading which he can appropriate to himself through freight rates, minus the costs involved in effecting the physical transfer. Any port authority needs to be fully aware of at least the approximate value of these two flows of benefits since they determine the limits of its capacity to raise revenue.

5. The revenue to the port authority is that part of the benefit created for cargo owners and shipowners which the port authority can tap. It cannot tap more than the benefits it creates. If it tries to charge cargo owners more than the benefits offered to them by the port, the flow of cargo will dry up (either by ceasing to be traded or by going to another port). If it tries to charge shipowners too much, the ships will not call. It is for the port to decide how much of the benefit it confers on ships and cargo is to be left with the ship and cargo interests and how much is to be converted into a flow of revenue to defray its own costs. If a port is operating economically, then the flow of benefits will exceed the flow of costs. The relationship between these two flows and the judgement of the extent to which the port is economical are independent of the actual flow of revenue to the port. The flow of revenue to the port entity is a consequence of the pricing system which is used and of the level of the various charges which are made. It is important that the matter is given special attention when commercialization is under consideration for a port.

6. The discussion under this introduction on objectives and of benefits, cost and revenue flows is obviously short and incomplete but is useful for all those who are not very familiar with ports as an entity. However, it was considered better to limit the initial introduction of theoretical issues and proceed to consider practical questions for the workshop. This view is in keeping with the function and objective by this report, namely, to introduce an overview of port commercialization in Africa. Thus the general discussions in the report begins with asking the question "What services are provided for users in ports that can be commercialized?" and "Who can provide such services?"

II. PORT FACILITIES AND SERVICES

8. The study found out that the distribution of functions in the supply of port services in developed countries differs widely from that in developing countries.

9. The diversity was summarized and shown as follows:

10. Broadly speaking, the ports of African countries may be said to be characterized by the existence of a port authority with far-reaching powers and by a public monopoly of the main services. In developed countries, the responsibilities of the port authority are generally less extensive, being limited to the construction and maintenance of facilities and sometimes the official or unofficial supervision of other services. Other port activities of a public service nature (policy, fire fighting, etc.) are often the responsibility of State enterprises, while commercial activities are mainly the province of the private sector and often give rise to competition.

11. As a general rule, it is desirable that the port services which are closely complementary should be within the competence - or at least under the control - of the same body, whatever its administrative status. Examples of these closely complementary port services are cargo-handling on quay and storage and delivery. If such services are performed by different bodies working independently, it will be difficult to achieve the best utilization of the port's assets. Similarly, there should be co-ordination/ of all the different organizations which operate in the port. It is desirable, for example, that the port authority, stevedoring companies, customs officials, etc. should have the same hours of work. Lack of such coordination invariably impairs the utilization of the port's assets. Furthermore, and even where some competition between ports in the same country is allowed, an over-all national coordination of port services is advisable. This co-ordination should normally apply also to other fields which, in fact, are closely linked with pricing: port investment, labour policy, etc. It is particularly important that developing countries should have such a national, and even in some cases a regional, port policy, in order to avoid unnecessary duplication of very costly investments and to keep transportation costs to a minimum.

12. The second guideline which an be suggested in the respect is that the optimum utilization of assets should be understood from a national point of view. This, of course, applies mainly to public assets, although private assets built in public ports should be subject to regulation, in order to take account of the national interest. When a public body is responsible for providing the public port facilities and services is should normally safeguard the national interest. But it may nevertheless happen that such a port entity has to take into account both local and national interests. When the two interests conflict, the national one should normally prevail.

13. Co-ordination and the priority of the national interest may be ensured in different ways. The two extremes are, on the one hand, administration by a single governmental body of the port as a whole, or on the other hand, operation by a private firm which has leased complementary port assets (e.g. quays, apron, transit sheds) and hence ensures good co-ordination of the services provided. In this latter case, the safeguarding of the national interest will normally be implicit in the leasing contract. Between these two extremes, other combinations are possible. The greater the number of separate firms, however, and the more the administrative status of a port differs from that of a public one, the greater should be the power given to the co-ordinating body and the greater should be the care taken by this body to ensure the defence of the national interest.

14. In the last decade, a number of countries have undertaken or considered institutional reform in the port sub-sector as a means to improve performance and to reduce the government's financial and administrative responsibility. Technological change has also helped to set the stage for reform because of the massive increases in labour productivity and in the increased capital requirements of the port sub-sector. Institutional reform offers the potential to improve the competitiveness of port services and thus strengthen trade capacities. Governments want safeguards to ensure that port facilities operate well, that labour and social problems are minimized, that charges are fair, that regulatory control is maintained and that an integrated transport system is developed at national and subregional levels.

15. Traditionally, the supply of port infrastructure in Africa has been the responsibility of governments. However, many governments have difficulties in allocating them adequate resources, and a large gap exists between infrastructure demand and available public sector financing resources. Additionally the poor performance of the public sector in supplying infrastructures services has compelled many African countries to look for alternative ways to develop infrastructure. It is now agreed that under appropriate circumstances the involvement of the private sector, with adequate support and control, can go some way towards satisfying the need for financial resources and greater efficiency.

16. Port institutional restructuring can range from modernization of management to complete privatization, but it should have a single overall objective - to make the port responsive to the market and thus satisfy clients needs. Reform will be successful as long as this objective is reached; otherwise, only partial objectives will be achieved, which will set the stage to take further measures to obtain the overall objective.

(ii) Reasons for Change

17. World wide, basic port activities may seem identical, namely: loading and discharging, receiving and delivering cargo, storage, service to ships, etc. However, when comparing the performance of various ports, differences are seen between ports, even within the same region.

18. High costs, poor services, low efficiency and productivity are symptoms of a problem rather than the causes. When there are problems in the port, the infrastructure and the cargo-handling equipment are often first considered to be at fault. However, a recent UNCTAD survey in four African countries (Côte d'Ivoire, Ethiopia, Kenya and Senegal) concluded that "Investment in modern port facilities in the four ports has been universally good, and although there have been some minor omissions, there are no cases of serious infrastructure defects." The UNCTAD study of the four African ports was disseminated through four subregional workshops conducted by ECA in 1992 where it was found that the real causes of the problem were institutional. The interface between the governments and the ports was too heavy and managers were unable to manage the ports commercially. The lengthy bureaucratic procedures and unnecessary state intervention prevented management from streamlining operations and reacting quickly to market needs, which often delayed the implementation of needed changes. When changes were made, they were often either not enough to satisfy market needs or they were too great to be cost effective to clients. Decision makers were often more responsive to a political or administrative hierarchy than to market requirements and thus were interested in non-commercial objectives.

19. If ports have the right infrastructure and necessary equipment, the cause of the problems may be the lack of appropriate management or of modern management know-how. Principles of modern port management/ require that each port organization, department, workshop, team and staff member should have clearly described objectives and areas of authority and responsibility and be accountable for its performance. Modern port management includes adequate rules and regulations, good statistical and information systems, analytical accounting and cost control and human resource development, etc. Today, in most cases, managers know these techniques well and many have been put in place. In industrialized countries, ports normally have modern management systems, but there are still differences in port performance. In fact, knowledge of modern port management has been disseminated in African countries through various training activities during the last decades.

20. When the market attempts to punish ports for not responding to its signals, the ports are not threatened because they benefit from government protection (by having a monopoly or financial subsidy). Thus, the cause of many port problems is that management has been separated from its clients and the market. In many cases, the relation between the ports and the market has been distorted or interrupted by their institutional structure. Therefore the solution is to modify that structure.

(iii) General Objectives of Port Commercialization

21. The general objective of port commercialization is to make port management market oriented and thus enable it to satisfy its clients' needs, subject to meeting its financial objectives. The objective may seem to be abstract, but it is important for the success of any port reform. The notion of the market is extremely important in the analysis as well as in the restructuring process. Throughout the world, there are both successful and unsuccessful ports with various kinds of structure and management style: the port can be big or small, landlord or operating, public or private. However, successful ports have one thing in common - they all are highly market-oriented, while unsuccessful ports are not.

22. Efficiency is too narrow a concept to be considered as a general objective of port restructuring. A port can provide efficient services that clients do not need, and not provide those they do need. While cost-effectiveness is a measure of efficiency, there are other services that the market requires. Awareness of actual and potential market possibilities and requirements, flexibility, responsiveness, reliability, friendliness, etc., to mention only a few, are nowadays important requirements of the market, but are not necessarily reflected in the concept of efficiency.

23. If public sector ports are not profitable, it may not be possible to commercialize them unless and until action has been taken to remove the causes of their losses. Thus, it may be necessary first to deregulate and commercialize ports, regardless of whether they are subsequently commercialized. If ports are profitable over the long term, it is not because they have been commercialized, but because they have satisfied the market. In other words, if ports cannot make money for their development it is often because they have failed to adapt their organization and management to the market's requirements.

24. Commercialization is not a single doctrine, but an amorphous concept that seems to defy definition until assigned a meaning. For purposes of this document, it represents any shift from governments providing port services and port facilities to private interests making them available/ It redefines the port authority's role by disengaging the public sector from activities which are best done by the private sector. Port commercialization is foremost a political decision, although it has to be carried out as an economic exercise. It depends on government policy rather than on the wishes of port managers.

25. Commercialization is a broad concept that embraces a large variety of practices - from a simple lease contract to a private company to a complete sell-off of port assets and capital to the private sector. Again the critical point is that the private sector is fully exposed to market rewards and penalties. Commercialization can also be undertaken through management contracts with an individual or a private or semi-public organization.

26. It is essential that there is a clear understanding of what the government intends to accomplish through its commercialization programmes. Some of the possible government objectives of private sector participation and commercialization in ports are:

27. There is now sufficient worldwide experience in commercialization to illustrate the numerous approaches which, under the right circumstances, can be successful in the achievement of national objectives. The optimal approach chosen will reflect the economic and social setting and unique characteristics of specific projects.

(iii) Options for Port Commercialization

28. A Subregional Ports Restructuring Seminar held in Tanzania in December 1995 discussed the overview of selected African ports' experience with commercialization, restructuring and privatization. It was noted that there were few examples as most ports initiatives were at the design stage or early implementation stages. Presentation by various participants indicated that the most common alternative approach for commercialization in African ports are as follows:

29. Summary of mini-presentations by representatives of some ports attending the PMAESA seminar illustrated some of the above options as indicated in Box 1 below.

30. The examples given above indicate that restructuring and private sector participation in the running of some aspects of port operation is not new in Africa. Seminar participants from the ports of Madagascar, Djibouti, Seychelles and Le Reunion gave similar examples, some going as for back of 1970s.

(i) General Issues

31. Monopoly, whether private or public, is the principal enemy of efficiency. Commercialization should not be started if the result is to turn a public monopoly into a private one. The promotion of competition is central to the success of commercialization. Port competition is found at the three levels: between ports, between companies in the same port or between different modes of transport. With containerization and improvement of inland transport, more and more ports in Africa are now competing for a common hinterland. The port of Mombasa and Dar-es-Salaam are typical case of common hinterland competition.

32. Commercialization is a complex operation that needs the support and cooperation of various government departments and professional organizations. Conflicts of interest are often inevitable, so it is necessary to strengthen government commitment by establishing effective implementation machinery with clear mandates, adequate power and technical/financial resources for preparing and managing the commercialization process. In Nigeria, for instance, the Government has set up a new body - the Technical Committee on Privatization and Commercialization - to help smooth the implementation of the public-sector reform. The chairman of the Committee reports directly to the president of the country, thus ensuring timely decision-making. Malaysia is another country with good machinery to smooth the implementation of privatization.

33. As port restructuring progresses, the port authority's role changes. In many countries, port restructuring is simply a transformation of the role of port authorities from operating port to landlord port (though between the two there are many intermediate forms). Landlord port authority can lease out facilities not only to private bodies, but also to the public (or mixed) entities. There are certain regulatory functions which should remain the responsibility of publicly owned port authorities, i.e. traffic management, harbour control, granting of concessions or leases, etc.

34. One issue is to decide what should be handed over to the private sector and what should remain at the port authority. The principle is a pragmatic approach, which means examining each of the port functions to determine which functions should be performed by the public sector and which ones by the private sector. This approach is called "privatization à la carte"./ An examination of the various port functions, as shown on table 1 below, for ships and cargo should be carried out considering the level of capital intensity, labour intensity, period of return on investment and maintenance required.

- Security35. This examination and selection of what to commercialize will differ from port to port since their commercial and technical features differ. On its completion, the port environmental assessment should be taken into account to determine whether the operational and financial capabilities of the private sector are good enough and whether a monopolistic situation can be avoided. It is best to act pragmatically in treating each case separately, spacing the process out over time to experiment, leaving the door open to future evolution and privatizing each function when it seems to be the best solution and according to the best formula./

(ii) Control and Upgrading/Adjustment

36. After the measures have been implemented for a certain period, three results are possible: large and lasting improvements, small and temporary improvements, or deterioration. Positive results can be expected within a year or two, and the port's performance will start to improve. This means that the measures are appropriate and, if the performance is sustainable, sufficient for an effective port reform. No notable improvement could mean that: either the measures were taken for creating necessary conditions for more radical reforms (such as management modernization, deregulation or commercialization adopted in many ports as preparatory steps for further reforms like commercialization or privatization), or the measures were inappropriate for the port and the conditions cannot be met. In both cases then, other restructuring measures are needed. Box 2 below is a summary of how Morocco has approached port privatization which is a typical of illustration of "privatization à la carte".

37. Reform can be carried out in stages over several years. Morocco ports privatization in Box 2 is a good example of staging a port privatization process.

(i) The Situation

38. The port of Mombasa was originally a port of the East African Railways and Harbours Authority. After Kenya's independence in 1963 it became a port of the East African Harbours Corporation within the East African Community with headquarters in Dar-es-Salaam. On the break-up of the Community in 1977, Kenya Ports Authority (KPA) was formed. In parallel there was a separate cargo-handling organization called Kenya Cargo Handling Services, (KCHS) but in 1986 KPA took over the whole function both of port authority and of operational body, and absorbed the whole staff and labour force of KCHS.

39. Until recently, and as the only marine body in Kenya, KPA has had other functions such as running ferry services and advising on maritime legislation. KPA also operates inland container deport in Nairobi, Kisumu and Eldoret.

40. Mombasa is a well-equipped port with 16 quay berths, 6 deep water lighterage points and modern container terminals and specialized facilities for handling bulk cargo, i.e. cement and soda ash. The port is the main sea outlet for Kenya. It also serves Burundi, Rwanda, Uganda, Southern Sudan, Northern Tanzania and Eastern Zaire.

41. The port handles an average of 8.5. million tones of cargo and about 200,000 TEUs of containers annually.

(ii) Restructuring Study for the Kenya Ports Authority

42. In 1995 the Department of Government Investment and Public Enterprises of the Ministry of Finance commissioned a Kenya Ports Authority restructuring study. The study was conducted by Hickling/ Corporation of Canada. The KPA restructuring is one component of the Government of Kenya (GoK) plan to restructure major transport corporation such as the Railways, Posts and Telecommunication, Kenya Pipeline, etc.

43. The study proposed a restructuring plan with emphasis on four broad elements as follows:

44. The study recommended that the GoK must set and review port objectives through a Performance Contract. Since the worldwide trend is towards commercialization, the study recommended that the KPA should retain the core fixed assets, but private companies should participate in the management of the day-to-day operations of some aspects of the port. In this regard, the port should accelerate its transformation into a land-lord port but retain ownership of major port assets and either lease facilities or license private sector operations through a transparent and competitive bidding process. The study also recommended that KPA should lease the Inland Container Depots and reintroduce private stevedores and privatise towing and mooring services. KPA is to take these steps in order to halt the decline in operations and revamp the port in key areas of maintenance and availability of equipment. For this to be achieved, the relationship between the KPA and GoK are defined including those of the KPA vis-a-vis that of the private sector in the movement of cargo through the port.

45. If all the recommendation of the study concerning operational activities of the port are implemented, the move would confine KPA's role to regulatory issues and to the role of landlord, in effect removing KPA from operational activities and functions which will be privatized. The GoK is not bound to implement all the Hicklings Report recommendations, therefore the Government and KPA are free to commercialize some aspects of KPA operations on privatization à la carte basis as was done in Morocco.

(ii) Implementation of one of the Recommendations of the Study

46. The GoK has reviewed recommendations of the study and the approach for implementing its proposals on privatization will probably be on a piecemeal basis. In this regard the management of the Mombasa ICD was already commercialized under a management contract to Flextow Port consultants of U.K. under the following terms:

47. The contract started on schedule and major port users consulted during the mission namely: Mekenzie Maritime Ltd., CMRT Lines, TRANSOCEAN Ltd. have welcomed the move taken by the GoK to have the Mombasa ICD operated by a private company under a management contract. However, it was too early to judge the impact of the contract since the operator had only been in Mombasa for two weeks when the mission visited Mombasa. Most important to many users was that the policy for privatization of some aspects of KPA operations was clear and that the GoK decision to privatise the ICD was under implementation.

48. Some port users were of the opinion that the agreed duration of the management contract was too short - most of them proposed 5 years phased to cover also the three ICDs in Nairobi, Kisumu and Eldoret. Some Freight Forwarding companies expressed concern on whether the railways would be able to cope with the enhanced performance of the Mombasa ICD once the management contract is fully operational in the port.

49. It is worth noting that the Mombasa Port experience in the commercialization of the ICDs is not new in sub-Saharan Africa (see Box No. 3 below), but is one of the latest examples of its kind. Therefore, results of the evaluation of the success of the management contract after 2 years will interest not only the GoK and the economic development sectors in the country but also port users and other relevant institutions in the subregion.

50. Malaysia is a pioneer in the port privatization sector. Conditions under which the country's premier port, Port Klang, was placed on a privatised footing and the port management was corporatised is highlighted in Box 4 below.

51. The suitability of various types of port reforms will depend on local conditions. Thus one type of reform will not necessarily have positive result in all situations. Furthermore, it is not relevant or wise that results achieved in one port after some aspects of its operations are commercialized will be the same in another; rather, it is important to consider the steps that can be taken and examine results in a number of countries. Each country needs to determine the commercial environment in which port users function, based on both micro-economic and macro-economic objectives, bearing in mind the country's economic situation and the national importance of its ports sector.

52. Offering a management contract for specific period of time, as already done by the Mombasa Port, is a form of commercial involvement. It is upon the Government and the Mombasa Port Management to decide which aspects of port operations should benefit from future management contracts. The Mombasa approach indicates that "privatization à la carte" may be the best form of private involvement for African ports.

Annex I

LIST OF REFERENCES