Private Sector Objectives

D. Private Sector Objectives

The objectives of the private sector in participating in port services are to: • Generate an acceptable rate of return.

• Provide vertically or horizontally integrated logistic services to the market. • Increase the reliability of the services. • Reduce the costs of transport.

The first objective is not to maximize profit but rather to earn an acceptable rate of return. 35 Included in this rate of return are the funds for replacement and renewal of existing facilities and equipment, as well as the seed money needed to finance the expansion of capacity to meet growth in demand. This objective can be achieved with each strategy but the measurement of the return varies. Return on expertise is important for outsourcing and capital leases, whereas return on investment is more important for partial or complete divestiture. Return on entrepreneurship is important for all four.

34 An extreme example has occurred in Karachi and other ports where the shipping lines hired private cargo-handling companies to 35 increase berth productivity while continuing to pay the port cargo-handling labor but not using their services. The acceptable level depends on the alternative businesses which the operator is involved in and the relationship between risk and return which these activities generate.

The second objective is important for shipping lines, logistics companies, and cargo-handling companies that are seeking to integrate the terminal operations with upstream and downstream activities. It is also important for international terminal operators that are seeking to establish a number of terminals serving the major ports of a region or circling the globe.

The objectives of increasing reliability and reducing transport costs are important for shipping lines, logistics companies, and cargo owners. A reduction in the cost of transport and storage translates into profits for their core businesses. This objective can be met through partial and complete divestiture. Outsourcing can also be effective for port activities that create considerable delay and expense for the shipping lines, e.g., postage and towage.

Other objectives that the private sector will pursue include: • Optimizing the amount of investment - it is often easier for government to increase the

amount of productive assets than to increase the productivity of existing assets, whereas the private sector maximizes productivity and utilization of existing assets in preference to investing in new capacity.

• Reducing the cost of management personnel - Because good managers are a scarce resource and represent a fixed cost, the private sector will seek to minimize the size of the management committed to a project.

• Reducing the extent of commercial regulation - in order to operate efficiently and to generate sufficient returns, the private sector needs to price on a commercial basis. This is generally in opposition to regulated pricing structures, which focus on costs rather than value to the customer.

• Reducing the level of competition - The private sector is concerned with minimizing its risk. Thus, it will seek protection from competition when it is entering a new or high-risk business.

• Maximizing the potential period of the contractual agreement. These objectives must be considered both in choosing a strategy for increased PSP and in

negotiating the terms and conditions of the contract with the private sector. Where there is considerable private sector interest in taking over the port activities and services, alternative contractual agreements should be considered. Where the level of interest is low or uncertain, more attention needs to be given to the selection of an agreement that will be attractive to the private sector.

These objectives help to explain why the private sector: • Seeks to avoid up-front investments or fixed investment schedules.

• Prefers capital leases and concessions to subcontracts and management contracts. • Prefers a negotiated pricing structure but is willing to accept indexed tariffs if the starting

levels are reasonable. • Wants an exclusive franchise or an initial period of time during which the port will not

introduce new competitors. • Negotiates for 30+ years agreements.

It wants total control, not only over operations but over all aspects of the business in which it is involved. It will look for situations with peaceful labor relations, stable political and economic conditions and established traffic. In general, the private sector is interested in longer term agreements which allow it to benefit if the business is good and which do not bind it to businesses if it goes bad.