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Port privatization policy

and practice
Kevin Cullinane & Dong-Wook Song
Published online: 26 Nov 2010.

To cite this article: Kevin Cullinane & Dong-Wook Song (2002) Port privatization
policy and practice, Transport Reviews: A Transnational Transdisciplinary
Journal, 22:1, 55-75, DOI: 10.1080/01441640110042138

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 TRANSPORT REVIEWS, 2002, VOL. 22, NO. 1, 55±75

Port privatization policy and practice

K EVIN CULLINANE* and DONG-WOOK SONG
Department of Shipping and Transport Logistics, The Hong Kong Polytechnic University,
Hung Hom, Kowloon, Hong Kong

(Received 26 November 1999; accepted 23 January 2001)

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In recent years a signi®cant number of countries have implemented policies

aimed at reforming their port industry. In the belief that it will improve e ciency
and reduce the heavy ®nancial burden placed upon governments that attempt to
support such a capital-intensive industry, privatization has often formed an
important strand of such policies. A key claim in favour of privatization is that
the transfer of ownership from public to private hands will ultimately lead to an
improvement in economic e ciency and, hence, ®nancial and operational
performance. This paper investigates the theoretical underpinnings and practical
validity of this claim and concludes that privatization is only a partial cure for
what ails the world’s ports and that, if implemented in isolation, it simply cannot
deliver the much-needed panacea for the industry’s woes.

1. Introduction
In the past decade a number of countries have undertaken or considered
institutional reform of their port industry. While in other industries many signi®cant
organizationa l and contextual changes have been introduced through measures such
as commercialization and deregulation, it is privatization that has underpinned the
changes witnessed in the ports sector.
Port privatization has been motivated primarily by the expected economic bene®t
to be derived from improved e ciency and performance and also by the political
desire to reduce the government’s long-term ®nancial and administrative responsi-
bility for what is an extremely expensive industry to support. Other motives for
privatization, such as those enumerated by Brittan (1986), have not been so
pertinent. These include, for example:

. Resolving the di culties in the relationship between government and

nationalized industries.
. Short-term raising of revenue.
. Reducing the power of public sector unions.
. Promoting popular capitalism through wider share ownership.

The participation of the private sector in port management and operation has
become the norm rather than the exception (Anon. 1996). Indeed, the expansion of
the private sector’s role in the ownership, management and operation of ports is one

*Author for correspondence; e-mail: stlkcull@polyu.edu.hk

Transport Reviews ISSN 0144-1647 print/ISSN 1464-5327 online # 2002 Taylor & Francis Ltd
http://www.tandf.co.uk/journals
DOI: 10.1080/01441640110042138
 56 K. Cullinane and D.-W. Song

of the burning issues facing today’s port industry. In a Port Development

International report (Anon. 1993a), 31 countries were surveyed where some form
of port privatization had already taken place. Those countries that still maintain a
state-controlled port sector are facing a new tide of change which will virtually
revolutionize port administration and operations and which, potentially, yields
major bene®ts to a national economy because of:

. Greater e ciency in the ports sector.

. Lower total transportatio n costs of imports and exports.
. Stimulation of international trade.
. Greater competitiveness in the international trade arena.
. More consumer choice.
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. Lower or even zero government subsidies to the ports sector.

. Promotion of investment.
. Potentially improved employment opportunities.
. Greater potential for exploiting economies of scale.

With this context in mind, this paper aims to delineate (1) the underlying
rationale for privatization in any industry sector, (2) the arguments for and against
port privatization, (3) the privatization policy options applicable to the port
industry, (4) the port authority role under this changing environment, and (5) the
characteristics of port privatization as experienced in countries which have already
implemented the policy.

2. Concept of privatization
2.1. De®nition of privatization
Wiltshire (1988) points out that there are no clear concepts or de®nitions of
privatization. In support of this view, Roman (1993) points out that the
implementation of privatization policies world-wide is often ad hoc and without a
clear de®nition of the objectives to be achieved. He goes on to suggest that the
requirement that privatization should lead to e ciency gains is often subsumed
beneath a shroud of political justi®cation for the policies. In a similar vein, Kelly
(1996) remarks that while it would be comforting to know that important policy
decisions on privatization are based on social cost ± bene®t analysis and on a
comparison of the net present value of the targeted organizations under private and
public ownership, in practice political motivations predominate. Despite actually
conducting a social cost ± bene®t analysis using data from three enterprises in the
Honduras and ®nding a net gain from privatization, Andic (1990) freely admits that
the implemented policy of privatization was probably prompted by political
expediency rather than by such a formal evaluation. Ferdousi (1996) points to a
similar absence of a comprehensive privatization policy, strategy and action plans in
Bangladesh.
From the above, it can be inferred that even during or after the process of policy
implementation, o cial and/or informed sources do not provide a rigorous
de®nition of privatization. Instead, they rely upon a comparatively loose description
of its aims, scope, methods of application and results. The following four separate
elements can, however, be deduced from these sources. Together they provide an all-
encompassing de®nition of privatization in its various guises: (1) the `privatization’
of the ®nancing of a service that continues to be produced by the public sector, (2)
 Port privatization policy and practice 57

the `privatization’ of the production of a service that continues to be ®nanced by the

public sector (usually through taxation), (3) `liberalization’; referring to the
relaxation of any statutory monopolies or licensing arrangements that prevent
private sector parties from entering markets previously exclusively supplied by the
public sector, and (4) `denationalization ’ and `load-shedding’; respectively referring
to the selling of public enterprises and the transfer of state functions to the private
sector. Thiemeyer (1986), in fact, enumerates 15 diVerent concepts of `privatization’.
Within the context of economics, however, the term is generally taken to mean the
sale of publicly owned assets such that there is a transfer of ownership from public to
private sectors. De®nitions of the other two associated terms `deregulation’ and
`liberalization’, however, are inconsistently used. For example, Yarrow (1986)
de®nes the former as a removal of market restrictions and the latter as a measure to
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increase competition. Bishop and Kay (1988) , however, de®ne both to mean the
same, i.e. a removal of statutory restrictions on competition. For Parker (1991),
privatization programmes have two main components: the sale of state assets
(denationalization ) and the introduction of competition into areas previously
monopolized by state-owned suppliers (liberalization).

2.2. Rationale for privatization

In the Wealth of Nations, Smith (1776) asserts that private ownership improves
productivity and e ciency, hence enhancing economic performance. While advocat-
ing only a limited role for government, he attempted to show how competition and
the pro®t motive would lead individuals, in pursuing their own private interests, to
serve the public interest. The pro®t motive would lead individuals to supply the goods
other individuals wanted. By competing against one another, only ®rms that
produced what was wanted and at the lowest price possible would survive. In this
way, argued Smith, the economy would be led, as if by an invisible hand, to produce
what was desired and through the best possible means. As was intimated earlier, it is
this logic that provides the fundamental rationale for privatization (i.e. that
privatization will lead directly to improvements in e ciency) and, as re¯ected in
the ensuing paragraph, has been the subject of considerable academic and political
debate.
Proponents of privatization policies argue that improved management will create
greater operational e ciency and engender entrepreneurial dynamism and innova-
tion. Its opponents argue, however, that the private pro®t motive will lead to the
exploitation of the consumer, employees and the environment (i.e. that public costs
will increase as private pro®ts are pursued). The implementation of a privatization
policy will mean, therefore, that a trade-oV will potentially exist in that although
private objectives may be less socially desirable, they will, however, be pursued with
greater e ciency. Thus, although privatization may lead to greater cost e ciency
through better management, this is likely to be coupled with a simultaneous reduction
in allocative e ciency through the exploitation of market power (Jones et al. 1990).
Bos (1986) suggests that this paradox is embodied in the perspective that whereas
private shareholders will vote to maximize pro®ts, public shareholders will vote to
maximize welfare. It is precisely because of this potential that Beesley (1997) argues
that regulatory policies have to be put in place to ensure a net gain from privatization.
Vickers and Yarrow (1988) maintain that it is erroneous to conclude that the
issue of ownership has occupied a central place in the development of economic
analysis and that, in fact, the historical development of a body of accepted economic
 58 K. Cullinane and D.-W. Song

theory has tended to bypass the issue. In other words, they suggest that there has
been little or no discussion of positive theories of public enterprises. As evidenced
earlier, this tendency may have resulted from the idea that public policy on this
particular issue is in¯uenced much more by political philosophy and convenience
than by the rigours of economic analysis.
What limited theoretical analysis and empirical evidence which exists, however,
supports the contention that private ownership is most e cient when actual or
potential competition occurs in the market in which the ®rm to be privatized will
operate. There appears to be a positive correlation between instances where this is
indeed the case and where e ciency gains have been reaped pursuant to
privatization. The case weakens greatly where the ®rm to be privatized enjoys
considerable market power. In such circumstances, privatization must be accom-
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panied with regulatory measures to curtail the exercise of that power. The corollary
of this is that allocative and productive e ciency are compromised where economies
of scale and scope, barriers to entry and externalities prevail.
Because of this interrelationshi p with the competitive environment, the conclusions
drawn from empirical assessments of the e ciency increases due to privatization have
been rather inconclusive. For example, while Hutchinson (1991) found some weakly
positive and inconsistent evidence for the assertion that private sector ®rms are more
e cient than their public sector counterparts, Parker and Hartley (1991) did not ®nd
any evidence to support the existence of such a relationship. Vickers and Yarrow (1988)
claim that in many contexts public management will do better in terms of economic
e ciency than its private counterpart. Similarly, in a survey of empirical analyses of the
comparative e ciency of private and public sector enterprises, Kay and Thompson
(1986) conclude that there is nothing intrinsically superior about the performance of
private sector ®rms as opposed to their public sector counterparts. Rather, it is the
interaction of ownership and competition that promotes e ciency. Interestingly,
however, they ®nd that market forces have a signi®cantly greater impact upon the
performance of private sector enterprises than on those in the public sector. In the
speci®c case of the ports sector, Liu (1995b) failed to identify ownership as a signi®cant
factor of production and concluded that the evidence did not imply any clear-cut
e ciency advantag e for any particular form of ownership.
As acknowledged by Brittan (1986) and Vickers and Yarrow (1988), the early
privatizations of public sector organizations in the UK succeeded in improving
e ciency because the organizations concerned already operated in very competitive
environments. Many of the later UK privatizations, they attest, exhibited some
inadequacy in assuring the competitiveness of the market in which the newly
privatized ®rm would operate. In many of these cases, therefore, the hoped for
improvements in e ciency simply did not materialize. In the Canadian context,
JoÈrgensen (1990) points to the tendency for privatization to lead to greater industry
concentration. This is evidence that, in accordance with contestable markets theory
(Baumol et al. 1982), any e ciency bene®ts from privatization can only be reaped
where a market is actually or potentially contestable.
In their study of competitive tendering in UK refuse collection, Domberger et al.
(1986) provide further evidence of the pivotal importance of competition. They
found that even the local councils’ publicly owned in-house service providers had
made cost-savings averaging 20%, simply because of the need for them to match the
e ciency levels of, and compete against, private sector providers. While the work of
Hartley (1990) supports these ®ndings, Bishop and Thompson (1992) go so far as to
 Port privatization policy and practice 59

conclude that the competition that has been engendered through deregulation has
been generally found to be the most signi®cant in¯uence on enhanced productive
e ciency.
In many countries in the world, the transport sector has proven to be a prime
target for privatization. In most of the empirical studies already referred to (e.g. Kay
and Thompson 1986, Vickers and Yarrow 1988, Hutchinson 1991, Parker and
Hartley 1991) some of the analysis related to the comparative pre- and post-
privatization performanc e of transport organizations. As can be seen in table 1, the
conclusions drawn from focusing on the transport sector do not diVer from those
which have been drawn at a more aggregate level.
Table 1 shows, however, that the inconsistency of conclusions that plagues
comparative analyses of this sort is also prevalent in empirical studies of the
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transport sector. Davies (1971) and Abdel-Fattah et al. (1999) attest to the e ciency
improvements brought about through the combined impact of privatization and
deregulation policies in the Australian airline and UK road haulage industries
respectively. Yamamoto (1993), in contrast, points unequivocally to the signi®cant
improvement in the labour productivity of the Japan National Railway Corporation
once it had been privatized. While studying the privatization of Chile’s national
airline, Paredes-Molina and Ramamurti (1996) found evidence to contradict the
usual hypothesis (proposed by such writers as Vickers and Yarrow 1988) that the
degree of market competitiveness faced by a ®rm is a more important determinant of
e ciency than ownership per se. They conclude that a deregulated `open skies’ policy
resulted in no e ciency gains in the short to medium term because the newly
deregulated market had no impact on the ®rm’s management. E ciency improve-
ments only came with organizationa l restructuring and privatization.

3. Port privatization context

Ports constitute a critical link in the overall logistics or supply chain. Thus, their
level of e ciency and performance in¯uences, to a large extent, a country’s
competitiveness . To achieve and maintain a competitive edge in international
markets, nations need to both understand the factors underlying port competitive-
ness and to continually assess the performanc e of their own port sector in
comparison with other ports in the world.

Table 1. Previous empirical results on the relative e ciency of public and private
enterprises. {
Public company No diVerence or Private company
Sectors more e cient ambiguous results more e cient
Electric utilities 3 5 6
Refuse collection 1 3 5
Water supply 2 1 4
Health-related services ± 1 11
Airlines ± 3 2
Railroads ± 2 ±
Financial institutions ± 1 1
Fire services ± ± 1
Nonrail transit ± ± 3
Total number 6 16 33
{
Figures indicate the number of empirical results available in each industry sector.
Source: Boardman and Vining (1989: 6).
 60 K. Cullinane and D.-W. Song

Tongzon (1995) identi®es the single most signi®cant contributor to port

performance as terminal e ciency and provides support for the view that port
and terminal e ciency has a considerable bearing on the success achieved by a
country engaged in international trade. Greater port e ciency is likely to result in
lower export prices which, in turn, help to ensure a nation’s products are more
competitive in international markets. As a means of improving port and terminal
e ciency and, thereby, increasing overall economic performance, a number of
countries world-wide have implemented and considered, amongst other measures,
the policy of port privatization.

3.1. Port administration, ownership and privatization

The administration of a port is of crucial importance to all aspects of
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organization and the appropriate form of port administration is a matter of port

policy. The basic system of port administration, whether it is to be autonomous or
centrally controlled, should be determined by the public or national port authority
(UNCTAD 1985).
The main duty of port administration is to organize, in as proper and e cient a
manner as possible, the complicated and diverse ¯ow of tra c through the port
(Nagorski 1972). Stehli (1978) and Goss (1986) note that although most of the
physical methods used within ports (e.g. loading and discharging) vary little between
ports, the systems of administration and ownership vary considerably; while some
countries have port systems which are managed and operated under the control of
their central governments, others have a more decentralized system such as those
where ports are under the control of regional governments or municipal bodies. Still
others have mixed systems with no clear pattern. No standard model exists for the
best possible form of ownership and organizationa l structure; a situation re¯ected in
the adoption of a variety of diVerent administrative, management and operational
systems and styles.
This diversity is hardly surprising given the fact that ports have developed in
diVerent ways with social, political, cultural, geographical, commercial and military
in¯uences all having played a signi®cant part (Thomas 1994b). Suykens (1985)
advocates ¯exibility in selecting an appropriate port administration system,
suggesting that e ciency should be the ultimate goal and pointing out that very
e cient ports have been found to have many diVerent systems of administration.
Not only is there no single optimum approach to the management, operation or
administration of ports, but also port ownership structures do not establish which
activities are undertaken by the private or public sector within ports. Prior to
presenting any taxonomy of port types based on the ownership of port activities,
table 2 provides an inventory of the facilities and services which ports provide for
ships and cargo.
In accordance with who owns and provides the facilities and services listed in
table 2 (i.e. private, public or joint), ports can be classi®ed into two distinct
categories: the comprehensive and the landlord port. Some maritime economists,
e.g. Baudelaire (1997), Liu (1995a) and Baird (1995a,b), apply a diVerent
terminology and divide ports into the three categories of service ports, tool ports
and landlord ports. In general, however, ports are grouped into two types as
suggested by the majority of maritime economists such as Goss (1986, 1990a),
Thomas (1994b), Heaver (1995) and De Monie (1996). By de®nition, service ports
have the same functions as comprehensiv e ports. Tool ports exist somewhere
 Port privatization policy and practice 61
Table 2. List of port facilities and services.
Infrastructure approach channel, breakwater, locks and berths
Superstructure surfacing, storage (transit sheds, silos, warehouses), workshops, o ces
Equipment ®xed (ship-to-shore crane, conveyor belts, etc.)
mobile (straddle carriers, forklifts, tractors, etc.)
Services to ships harbour master’s o ce (radio, vessel tra c system etc.), navigational
aids, pilotage, towage, berthing/unberthing, supplies, waste reception
and disposal, security
Services to cargo handling, storage, delivery/reception, cargo processing, security

Source: UNCTAD (1995: 27).

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between comprehensive and landlord ports, and can be regarded as a variant of the
landlord ports.)
In a comprehensive port, the public port authority provides and maintains direct
responsibility for the management and operation of all port services and facilities.
Independent (private) operators are prohibited from undertaking any port activity.
For this kind of port, therefore, total integration exists across the full range of its
activities. In contrast, the activities of the port authority in a landlord port are limited
simply to providing and maintaining the basic infrastructure and essential services
(e.g. ®re service, security etc.), while all the other facilities and services (e.g. the
superstructure and stevedoring labour) are provided by independent private (or
public) companies.
Although it is not di cult to ®nd examples of the above extreme positions, most
ports lie somewhere on a continuum between these de®nitions and represent,
therefore, a diverse range of diVerent types of port organization which vary not only
from country to country but also sometimes even within the same country (Goss
1990a). This results in a somewhat confused picture of port ownership though, in
simple terms, it can be de®ned in terms of who provides the various port facilities
and services. The term port privatization, therefore, can either be de®ned as the actual
transfer of ownership of port properties from the public to the private sector or as
the application of private capital to fund investment in port development and
maintenance as well as in certain port activities (Cass 1996).

3.2. Objectives of port privatization

During the last decade, there has been a global trend towards the institutional
restructuring of the public sector. Whereas in the past political decision-makers have
transferred economic activities to the public sector, increasingly markets are
becoming the driving force behind national economies.
In line with the recent global trend away from a situation where the public sector
plays a pivotal role, institutional and organizational reforms in ports have been
instigated in a number of countries. Eyre (1990) suggests, in fact, that the
privatization of a port is a philosophical cousin to the concepts of deregulation, free
trade, laissez-faire and user pays.
In addition, the economic characteristics of the port industry have recently
altered, with Heaver (1995) pointing to an underlying change in technologies as the
main factor in¯uencing the industry’s structure and competitiveness. In developing
these new technologies, the private sector has actively and increasingly supplemented
and then supplanted their public sector counterparts. By so doing, the industry has
 62 K. Cullinane and D.-W. Song

moved away from a situation where public capital is predominantly used to provide
common user facilities to one where private funds have been utilized to develop and
maintain ports and terminals designed to serve the logistics requirements of a more
narrowly de®ned group of shippers.
Frankel (1992) adds weight to this perspective by arguing that many cargo
owners as well as ship and/or transport operators have become involved in port and
terminal ownership/operation as the direct result of increasing capital intensity in
shipping and port facilities, the higher levels of concentration in the international
transport industry and the greater integration of shipping, port and inland feeder
transport.
Several studies, notably those of Nagorski (1972), Heggie (1974) and Eyre (1990),
argue that ports operated directly by governments or public agencies and owned by
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the public sector are more expensive and less e cient, thus leading to less
satisfactory results. Also, it has been suggested that, in general, public ports appear
to set rates on a basis which fails to cover full costs, thus subsidies are common
(Wilder and Pender 1979).
A variety of forces can in¯uence decisions to privatize public ports. Frankel
(1992), Sherman (1995) and UNCTAD (1995) delineate some of the principal
objectives for port reforms (including privatization) as being:

. To enhance the e ciency of port services; an objective supported by Haarymeyer

and Yorke (1993), for example, who regard `private sector participation’ as a
solution to the many problems faced by US public ports. It is suggested these
problems include a lack of exposure to full commercial competitive pressures,
ine cient operation and working under undue political interference.
. To ®nd new ®nancial resources for development and maintenance.
. To strengthen entrepreneurial and managerial capacity.
. To relieve government’s ®nancial and administrative burden.
. To eliminate and/or minimize bureaucratic and political in¯uence over port
management and operation.
. To derive economic bene®ts from introducing more competition into port
operations.

3.3. Arguments for and against port privatization

Bassett (1993) and Baird (1995a) suggest various reasons in support of port
privatization. Of particular import is the fact that since public ports cannot pledge
their assets to raise capital, they are somewhat constrained in any plans they may
have for expansion or development. The privatization of ports, it is argued, may
enable them to broaden their capital base and that this then provides them with the
opportunity to seek and obtain capital from the most appropriate source. In
addition, removing the public status of ports could allow them to diversify their
activities and increase the level of competition in the industry.
In contrast, there are a number of drawbacks related to port privatization
programmes. De Monie (1996) points out four:

1. Privatization greatly increases the risk of a port administration disregarding

its statutory `public service’ functions that has been entrusted to it. Private
investors and/or operators tend to favour pro®t maximization and cost
minimization. As a result, they may be inclined to abandon facilities and
 Port privatization policy and practice 63

services which, although socially or environmentally essential, are less

rewarding or incur expenditure rather than earn revenues.
2. Where there is no, or only limited, competition (e.g. because of the narrow
tra c base, the limited scale of operations, the port’s geographical location, or
the lack of an adequate inland transport network), there is a strong
probability that a public monopoly will be turned into a private one.
3. A division of responsibilities between a public port authority and private
sector operators may well result in poor coordination of investments, services
and operations, leading ultimately to reduced e ciency of operations at sea-
to-land and land-to-land interfaces.
4. Private operators may give greater priority to the business interests of their
bene®cial owners. Thus, privatization could lead to discriminatory treatment
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of a port’s clientele, with common users ®nding themselves in a relatively

weaker negotiating position than those users who are controlled by, associated
with, or part of, the bene®cial owners of the private operating company.

Because of the widely recognized potential problems associated with port

privatization, however, such policies have invariably been implemented in tandem
with a range of regulatory measures aimed at preventing such problems arising. This
is a common characteristic across many industries.
Of the four shortcomings outlined above, the ®rst relates to the debate on
whether services provided by ports are public or private. Public goods (and services)
are de®ned as those that are non-excludabl e and have a zero marginal cost of
consumption. They are characterized by the fact that they are unlikely to be
provided su ciently, satisfactorily or even at all, by competitive industries; in other
words, there is a market failure (Goss 1990b). Clearly, some of the services oVered by
ports fall within this de®nition of a public good. There are other port services which
do not fall so neatly into this de®nition, however, but which often add to public
welfare without having any potential to generate a private pro®t. In both cases, it is
di cult to contemplate a private company willing to provide goods or services if it
cannot earn a ®nancial return from them. On the basis of this logic, Evans (1969)
argues that, as a public utility and because of its importance to the economy, it is in
the common interest that a port is economically protected.
In counter-argumen t to this view, a port can be considered as part public
service and part commercial activity. Hershman (1988) attests that ports are
`public’ in that the government often owns them, statutes set them up and dictate
their objectives, and public subsidies are often provided to support them.
Simultaneously, they are `private’ in that often their management operates
independently, money can be raised from private sources, revenues can be
retained and reinvested, and there is no dependence on tax revenues. This private
character of public ports stems from the competitive nature of the marketplace in
which they operate.
In a similar vein, Thomas (1994b) has argued that changing the management
culture of a port authority can be achieved by modifying the organization within the
existing institutional framework and that the key to reform lies in changing people’s
beliefs and values and ensuring that these are compatible and in harmony with the
objectives the port has set for itself. This falls very much into line with the underlying
philosophy of both property rights theory (as expounded by Coase 1937, De Alessi
1980 and Demsetz 1983) and public choice theory (Downs 1967, Tullock 1976), both
 64 K. Cullinane and D.-W. Song

of which have been proposed as possible explanations for any success achieved in
improving e ciency through privatization.

4. Port privatization options

Although ports are fundamentally owned and operated by either the public or
the private sector or even as a joint venture between both sectors, and can be
classi®ed as being either comprehensive or landlord ports, there are few completely
private ports or even fully public ones (Goss 1981, De Monie 1996). Furthermore,
there is great variation in the jurisdictional forms between the two diVerent types of
port. This makes it di cult to identify the extent of involvement of both the public
and private sectors in any port. This situation does, however, make it necessary to
distinguish between the alternative approaches to port privatization.
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4.1. Three key functions of ports

Baird (1995b, 1997) proposes a port function matrix, as a model for port
administration. The starting point of this framework is that, regardless of whether
the ownership of a port lies mainly in private or public hands, within the port area
there will generally be three essential functions the port must ful®l and provide:

. A regulatory function. A port can involve substantial powers being given to the
port’s management (which may be public or private), the majority of which will
be of a statutory nature. This function, in general, may be regarded as the
primary role of a port authority and includes such activities as maintaining the
conservancy function, providing vessel tra c management, enforcing applicable
laws and regulations, licensing port works and safeguarding port users’ interests
against the risk of monopoly formation.
. A landowner function. Ports control signi®cant land areas. Irrespective of
whether the land area of a port is large or small, however, the essential tasks of a
port landowner are to manage and develop the port estate, to implement port
policies and development strategies, to coordinate port marketing and
promotion activities, and to provide and maintain port infrastructure such as
channels, breakwaters, and road and rail access to the port facilities.
. An operator function. This is concerned with the physical transfer of goods and
passengers between sea and land. In a comprehensive port, the cargo-handling
activity will be controlled by state-owned organizations while in a landlord port,
either private companies alone or a mix of private and public companies will
undertake this activity.

According to which of these three functions are the responsibility of public or

private organizations , the matrix presented in table 3 makes it possible to ascertain
the in¯uence exercised within any given port by the public and private sector. The
matrix also suggests the four main patterns (in terms of port administration,
ownership, management and operation) into which a government is able to organize
its port industry.

4.2. Port administration models

The models are divided into four types of port administration: the PUBLIC port,
the PUBLIC/private port with the public sector dominant, the PRIVATE/public port
with the private sector dominant, and the PRIVATE port.
 Port privatization policy and practice 65
Table 3. Port function matrix.
Port functions

Port models Regulator Landowner Operator

PUBLIC public public public

PUBLIC/private public public private
PRIVATE/public public private private
PRIVATE private private private
Source: Baird (1995b, 1997).
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4.2.1. Public port

This is a port in which all three functions are controlled by the government or
public authority and is synonymous with a comprehensive port. Advocates of port
privatization would claim that the Public port model is the most ine cient of the
alternatives. As exempli®ed by the port of Singapore in the past, quite paradoxically,
this model has proven itself to be one of the most e cient in practice. While still
preferred by some countries, the Public port model is no longer regarded as a
realistic option by most governments, particularly where major new capital
investment projects are under consideration. Despite its success as a PUBLIC port,
the organizationa l restructuring (incorporation) of the Port of Singapore Authority
in October 1997 provides a vivid illustration of this and is just the sort of reform of
port administration which often constitutes the ®rst step towards privatization
(Anon. 1997, 1998, SingaPort 1998).

4.2.2. PUBLIC/private port

Under this model, the operator function is controlled by the private sector, with
both the regulatory and landowner functions remaining in the hands of the
government. This type of port, therefore, can be regarded as a variant of the landlord
port and is common in Continental Europe and North America. The port of
Rotterdam , where terminals are leased out to private terminal operators, is a typical
example. Similarly, Pusan’s Shinsundae container terminal falls into this type of port
administration structure. The popularity of PUBLIC/private (or landlord) ports is
likely to continue to grow because of their ability to allow the bene®ts of private
sector management (particularly the e cient handling of cargo) to be combined with
public and common user interests (Saundry and Turnbull 1997). In Far East Asia,
several private companies (e.g. International Container Terminal Services, Inc.,
which manages and operates the Manila international container terminal under a 25-
year contract) have obtained concessions for terminal operations (Anon. 1996). This
arrangement means that the port in question is still in public ownership, but
individual terminals are leased to independent private companies.

4.2.3. PRIVATE/public port

Here, both landowner and operator functions are in private hands, while the
regulatory function remains in the public sector. A classic example of this type is the
port of Hong Kong, where private companies build their own terminals but the
government retains responsibility for vessel tra c management and other regulatory
policies, as well as the planning of new port and terminal development.
 66 K. Cullinane and D.-W. Song

4.2.4. PRIVATE port

In this case, all three essential functions are controlled by the private sector.
There are currently many PRIVATE ports in the UK, including all 23 ports owned
by Associated British Ports, as well as the ports of Liverpool, Manchester and
Felixstowe.
In the second and third models (i.e. the PUBLIC/private and PRIVATE/
public), a port can be viewed as a public enterprise (Olson 1988). The public
enterprise generally represents a mix of government agency and private
enterprise involvement. The public aspect of this coalition involves the three
primary features of (1) its creation by the government, (2) the statutory
assignment of powers, and (3) ownership by the public. The enterprise character
provides its market orientation and includes the four features of (1) expectations
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of market e ciencies in operations, (2) commercially de®ned performance goals,

(3) reliance upon user fees for operating revenue and capital markets for
construction funds rather than upon general government appropriations, and (4)
the absence of partisan intervention in its operations. Each of these
characteristics necessitates structural independence and autonomy from govern-
ment.
Although it is certainly the case that the role of the private sector in the port
industry has consistently increased in recent years, there are still many instances in
which a signi®cant role for the public sector is still required. As shown in table 4, of
the four models mentioned in this section, the second alternative (the PUBLIC/
private port or the landlord port) is extensively preferred throughout the countries of
North America, Europe and Asia.
Baird (1997) asserts that the UK approach to port privatization can be
considered the only true privatization, with other options, such as PUBLIC/private
ports, representing merely private sector participation in the industry. Similarly,
Everett and Robinson (1998) suggest that the privatization of ports should be viewed
not simply in terms of the transfer of ownership, but rather as involving the
transformation of a Port Authority from a statutory body which provides a public
service to a corporation which seeks to achieve a high level of competitiveness in
unconstrained competitive markets.

5. Role of the port authority in a new era

Juhel (1998) refers to the functions that are required to be undertaken by public
authorities or bodies as: (1) the catalyst mission; ®nancing facilities where gaining
access to private or alternative sources of funds is unlikely but where the completion
of such facilities appears on the critical path of national or regional development
programmes, (2) the statutory mission; dealing with navigational safety, environ-
mental protection and fostering common development policies between ports and
adjacent cities, and (3) the facilitator mission; strengthening public governance
(improving the institutional ability to monitor new public and private partnerships
and oversee operations without interfering in commercial activities) and spearhead-
ing initiatives conducive to trade integration (assisting the design and implementa-
tion of development initiatives to induce value added activities to settle in port
areas).
Port privatization fundamentally alters several missions and functions of the
traditional port authority. Instead of acting as a body responsible for everything, a
modern port authority is required to take a role in which it is required to act in close
 Port privatization policy and practice 67
Table 4. Ownership status of the world’s top container ports.
PUBLIC/ PRIVATE/
Port PUBLIC private public PRIVATE
1. Hong Kong .
2. Singapore .
3. Kaohsiung .
4. Rotterdam .
5. Pusan .
6. Hamburg .
7. Long Beach .
8. Yokohama .
9. Los Angeles .
10. Antwerp .
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11. New York/New Jersey .

12. Keelung .
13. Dubai .
14. Felixstowe .
15. Tokyo .
16. San Juan .
17. Bremen .
18. Oakland .
19. Shanghai .
20. Seattle .
21. Nagoya .
22. Bangkok .
23. Kobe .
24. Tanjung Priok .
25. Algeciras .
26. Klang .
27. Hawaii .
28. Tacoma .
29. Osaka .
30. La Spezia .
Classi®ed as de®ned by the port function matrix due to Baird (1995b, 1997).
Source: Cass (1996: 167).

cooperation with private sectors and, as De Monie (1994) suggests, to concentrate

e ciently its eVorts on the performance of a number of basic functions:

. Landlord and performance monitoring function.

. Policy-making, planning and development function.
. Tra c control, regulatory and surveillance function.
. Marketing, public relations and promotion function.
. Human resources development function.

Sherman (1995) recommends that when deciding on the privatization of port

activities, a determination must be made as to what, if any, role should be retained
by the public sector or public port authority, what restrictions or limits should be
placed on private operators, and what safeguards are needed to prevent abuses.
In recent years, changes in the economic and technological environment have
undermined the power of port authorities. This is due especially to the
signi®cant increase in the competitiveness of the marketplace (Slack 1993). In
 68 K. Cullinane and D.-W. Song

particular, as privatization gains world-wide impetus, questions have been

seriously raised as to whether public port authorities are still necessary in this
changing environment.
At one end of the spectrum, some private sector entities argue that public
organizations, such as port authorities, constitute an additional layer of port
management and operation which itself causes problems of bureaucracy and,
ultimately, ine ciency. The counter-argumen t supports the comprehensive role of a
port authority even in conditions where the actual operational activities such as
cargo and ship handling, towage and mooring have been entrusted to private hands.
This lobby asserts that, in general, management and operations that relate to port
development still require a certain element of command as well as control. This,
together with the long-term planning role, justi®es the continued existence of the
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public port authority. While the former argument implies that port authorities
should be replaced by landlord companies, driven by the pro®t motive and coupled
with limited liability status, the latter view holds that increasing private sector
involvement in ports should not spell the death knell for port authorities. The work
of Goss (1990b) provides a particularly interesting and stimulating analysis of the
merits of these divergent views.
Arguing from a conceptual perspective, Goss (1990b) addresses this issue of
whether or not port authorities are necessary. Property rights, the need for planning,
the signi®cance of public goods, dealing with externalities and the promotion of
e ciency are presented as points in their favour. In contrast, the existence of
bureaucratic systems, the lack of responsiveness to market forces and other problems
generally associated with public organizations are regarded as distinct disadvan-
tages. Goss (1990b) concludes that while market failure is often cited as anathema,
government failure has been an even more signi®cant detractor from e cient port
operations.

6. Port privatization in practice: the UK experience

The policy of port privatization was initiated in the UK and its eVects are more
advanced there than anywhere else in the world. In consequence, the UK port
industry exhibits a great richness of ownership structures (including private ports)
which are hardly found anywhere else in the world.

6.1. Port administratio n and ownership in the UK

Owing to geographi c characteristics such as an extensive coastline and several
navigable rivers and waterways, the UK has a large number of ports that play a
crucial role in the national economy, especially in foreign trade. In the mid-1970s the
UK had over 250 port authorities or public operators and approximatel y 1400 other
entities engaged in various activities such as stevedoring, towage and warehousing
(HMSO 1974).
In the UK, there have been two contrasting approache s towards port
administration and ownership (Liu 1992). One is the historically in¯uential
`interventionist approach’ which points to the de®ciencies of port markets and
insists on some form of public ownership with a certain degree of central control
over port development. The other is the `market approach’ which was until recently
very much the central theme of UK government policy, and maintains that the
e cient provision of port facilities and services should rely on the market
mechanism.
 Port privatization policy and practice 69

The National Ports Council (1973) and Thomas (1994a) categorize four diVerent
major types of port ownership in the UK. The importance of each type has changed
signi®cantly in recent years, with the ®rst of them having been eradicated completely
in the UK. They are (1) public or nationalized ports, (2) trust ports, (3) municipal
ports and (4) company ports. (Adams (1973) adds one more type: ports that are
subsidiaries of other companies [parent companies] and that are run privately for the
purpose of dealing with the specialized cargoes of a particular company or group,
though occasionally dealing with the cargoes of others.) The de®ning characteristics
of each of these types of port ownership are discussed at length in Wild et al (1995),
Douglas and Geen (1993) and Thomas (1994a), but are presented in shortened form
in table 5.
Liu (1992) points out one striking characteristic in the British port administra-
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tion; unlike their counterparts in the rest of the world, `public ports’ are ®nancially
independent and are required to cover costs with no ®nancial assistance or subsidies
from the government. UK public ports, therefore, are free to set their own
operational objectives such as port charges, subject only to the right of appeal of
port customers. Thus, in this way they operate as commercial undertakings in a
similar fashion to private company ports.

6.2. Two phases of port privatization

Poor ®nancial performance was the main motivation for implementing a policy
of port privatization in the UK. In the early 1980s, as intermodalism and
specialization became an integral part of the shipping and port industries, it was
expected that the problems faced by UK ports would become worse. This situation
stimulated the government to force the discipline of market forces onto its port
industry by withdrawing from any control over port development and operations
and by cutting oV ®nancial support for the industry.

Table 5. Main features of port administration and ownership in the UK.

Company port Trust port Municipal port

Ownership shareholders public trusts local authorities

Management elected by appointed by the appointed by local
shareholders ministry authorities
Objectives pro®t making public interests local interests
Managerial shareholders, take managerial managerial changes and
constraints overs and changes intervention by local
bankruptcy authorities
Pricing no restriction no restriction no restriction
Financing share issuing and ®xed-interest loans1 ®xed-interest loans2
borrowing from
markets
Activity area free to diversify legislatively restricted legislatively restricted
to port activity3 to port activity
Taxation national and regional national and regional national and regional
tax tax tax
1
A borrowing limit is imposed by government; 2 a borrowing limit is imposed by local
authorities and it tighter than the borrowing limit imposed on trust ports; 3 recently,
restrictions on a trust ports’ ability to diversify have been removed.
Source: Liu (1992: 20 ± 1).
 70 K. Cullinane and D.-W. Song

The port privatization programme in the UK was carried out in two diVerent
phases. The ®rst phase actually commenced in 1982 under the provisions of the
Transport Act 1981, which established the framework for the privatization of the
British Transport Docks Board (BTDB). Under this legislation, Associated British
Ports (ABP) was set up to manage and operate the 19 BTDB ports. In substantiall y
the same way as if it were a wholly owned subsidiary, ABP was controlled by another
company called Associated British Ports Holdings, formed by the government and
registered under the Companies Act 1948 (Douglas and Geen 1993). In 1983, the
government publicly oVered 49% of the shares in this holding company for sale to
investors, at which point it became known as Associated British Ports PLC. A year
later the rest of its shares were sold to become a public company ¯oated on the stock
market. In particular, the directors of ABP are appointed by Associated British Ports
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PLC for such a period as that company may determine. Associated British Ports
PLC, however, has no authority over the directors of ABP with respect to the
exercising of their statutory powers and duties as a port authority. Most ensuing port
privatizations followed this basic model.
In 1989, a further step was taken to increase competition in the port industry
when the National Dock Labour Scheme (NDLS) was abolished. Initially designed
to end the use of casual dock labour, the NDLS dated back to the Dockworkers
(Regulation of Employment) Act 1946. Port employers had long campaigned for its
abolition claiming that it was an unsatisfactory arrangement that failed to allow the
e cient use of labour or to foster viable industrial relations.
Early analyses of the eVects of the abolition of the NDLS have pointed to a
combination of job losses, increasing labour market ¯exibility, rapid restructuring of
working practices as well as increased productivity and pro®ts (Turnbull 1991). ABP
is reported to have largely withdrawn from its stevedoring role, trimming a fully
unionized workforce of 9000 in 1989 down to 2000 in 1993, with no union
recognition (Anon. 1993b). In spite of enthusiasm on the part of port owners and
managers, Bassett (1993) points out that it is not yet clear whether these changes will
solve the more fundamental problems of over-capacity and lack of competitiveness
compared with the ports of other countries, particularly in respect of investment and
service quality.
The second phase of port privatization was initiated under the Ports Act 1991,
which provides for the transfer of trust ports to companies limited by shares and
registered under the Companies Act 1985 (HMSO 1991). There were over 100 trust
ports in 1991, administered and controlled by various constitutions. Since a trust
port is an ad hoc body created by, or operated under, a statute for the purpose of
managing a port and not having share capital (Douglas and Geen 1993), it has no
equity but is still subject to public borrowing limits. This unusual position meant
that they were neither strictly public nor private bodies and were clearly not
accountable to either central government or the local community.
The trust ports do not trade for pro®t (Adams 1973) and have no shareholders
claiming payment of dividends from pro®ts. As they are partly ®nanced by public
subscription bonds, however, they have a duty to pay interest to the people or
organizations who have lent them money. A large proportion of their total debt is in
fact owed to the government. Baird (1995a) notes two main functions of the trust
ports, both as publicly owned ports and as navigation authorities. In the former,
ports provide cargo and passenger handling facilities within designated port areas,
and constitute the maritime regulatory body for a large area within and around their
 Port privatization policy and practice 71

ports. In the latter, the ports hold responsibility for estuarial safety, pilotage and
conservancy and are in overall control of de®ned areas of jurisdiction.
The Ports Act 1991 was not a compulsory measure for most trust ports. If a port
had a turnover of more than £5 million per annum at 1991 prices, the government
could require the port trust to come forward with a plan for privatization within two
years. This aVected 14 ports. Other ports could bring forward privatization
proposals voluntarily if they so wished. Section 5(3) of the Act stated that any sale
should pay particular regard to the desirability of encouraging the disposal of all or
part of the equity to managers and staV. The Act, therefore, provided for the
privatization of trust ports, and applied to the majority of port authorities. Port
authorities were given the power to form a limited company which could assume all
property rights, liabilities and functions previously held by the recognized authority
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(Comptroller and Auditor General 1993).

6.3. Lessons from the UK experience

In terms of improved e ciency and productivity after privatization, the bene®ts
are di cult to identify and quantify, particularly in the case of the ports which have
recently been privatized and whose pre- and post-privatizatio n performance has been
in¯uenced by various factors such as:

. Changes in national and regional economic activity.

. Changes in the structure of trade and in the nature of throughput therefore.
. Strength and impact of unionization.
. Changes in transport infrastructure and logistical connections.
. Impact of prior investment.
. Changes in the competitive environment.
. Changes in national, economic, trade and port policies.
. Market structure.
. Extent and impact of regulation.

Thomas (1994a) notes that it is too early to measure the commercial and
operating bene®ts of privatization although there is considerable evidence to suggest
that the programme is proving successful. These bene®ts have occurred not directly
from privatization, however, but from other measures such as the abolition of the
NDLS in 1989. Furthermore, John (1995) asserts that the change in port
productivity between pre- and post-privatizatio n has not been as signi®cant as the
changes that took place after the abolition of the NDLS. The overall evidence points,
however, to a signi®cant improvement in the performance of the UK ports in recent
years and to a turnaround in the industry’s fortunes (Thomas 1994a).
On the other hand, in terms of the turnover of major British ports from 1980 to
1990, Bassett (1993) highlights substantial growth in the ports mainly located on the
east and south coasts, thanks to increasing trade with Continental Europe. This is
signi®cant in that Liu (1995a,b) argues that, after measuring the productive e ciency
of major ports from 1985 to 1990, port e ciency can be explained by locational
diVerences rather than diversity in the forms of port ownership. In other words,
suitable geographical and economic conditions favour the development of trade and
ports at particular sites. Similarly, Saundry and Turnbull (1997) proclaim that the
®nancial and economic performance of UK private ports has failed to achieve what
was expected: higher e ciency relative to public ports.
 72 K. Cullinane and D.-W. Song

7. Conclusions
In the case of UK ports at least, it is extremely di cult to conclude that
ownership constitutes a signi®cant factor in port performance and e ciency.
Instead, factors such as geographical location and deregulation seem to have a
greater in¯uence on e ciency. There remains, however, a problem of controlling for
intervening variables when empirical tests of these relationships are conducted. The
question of whether or not privatization improves e ciency, therefore, remains
unresolved in the case of UK ports but appears (at best) to provide only a partial
cure for what ails the port industry.
Irrespective of any conclusions drawn from an analysis of UK port privatization,
the implementation of such a policy in a context other than the UK may have a
diVerent eVect, if any, on e ciency. While the impact of the policy may diVer
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between countries, there exists a recommended generic approach to implementing

the policy. Possible risks should be completely understood and controlled in order to
avoid an unnecessary waste of economic resources. What this involves is giving
greater consideration to the possible variations in port administration and ownership
forms and to look at these in the holistic context of the country where it is proposed
that port privatization should be implemented. This context includes the cultural,
constitutional and historical circumstances of the country concerned, as well as the
peculiarities of outside pressures. Taking into consideration the special character-
istics of ports, as Goss (1998) points out, a speci®cally tailored port privatization
policy should be implemented, rather than merely directly employing policies that
have been applied within other industries. Finally, more important than ownership,
as Nagorski (1972) mentions, is the fact that a port is a vital instrument of national
economic policy. Close cooperation between port and the national economic
planning department is essential, with the entire port system being ¯exible enough to
permit modi®cations in response to a changing business environment.

Acknowledgements
The authors are grateful to Alf Baird of Napier University for comments on an
earlier draft of the paper.

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