Private Ownership

B. Private Ownership

Private ownership of port assets most commonly refers to equipment and facilities. Much less common is private ownership of land and basic infrastructure. The sale of public port land to the private sector is difficult for a number of reasons. The first is a legal question regarding the right of private ownership of land, especially foreshore. Some countries prohibit the sale of public land or at least the coastal land, especially the foreshore. Others prohibit the freehold ownership of all land. The problem of transfer of land can generally be overcome through longterm leases, i.e., 50+ years, which effectively transfer ownership and allow the private sector to use the land as security for raising capital.

Many countries are reluctant to transfer port land because of the strategic concern that there are only a limited number of sites available for developing deepwater port facilities. Advances in civil works have considerably increased the number of developable ports sites, albeit at significant cost. The difficulty is that the commercial value of developable coastal land is usually far in excess of the economic value of port land. Public ownership of port land and the restricted use of that land for port purposes has allowed ports to limit the charges for cargohandling

services. 53 Private ports and special-purpose terminals have avoided the problem of

53 For example, the commercial value of the land in Bombay port is far in excess of the value of port assets or the port business.

costly shore front land by limiting their land area or locating in greenfield sites far from developed areas.

Private ownership of public port infrastructure including channels, breakwaters and quay walls has been limited because of the difficulty in creating a viable business activity. Not only are the assets long-lived but it is also difficult to earn the kind of returns expected in the private sector. There are similar constraints on private ownership of the transport infrastructure serving the port. Road and rail links generally handle a limited volume of traffic so that the financial returns are low. The private sector will finance only short linkages because of the long payback period associated with these investments. Specific tariff items such as port dues, wharfage or dockage exist to recover the cost of these assets, but the period of recovery is generally 20-50 years, with a discount rate of only 6-12 percent in real terms. Frequently, the national or state government subsidizes the cost of this infrastructure so that only part of the costs are covered through port charges.

It is possible to attract private sector investment for these types of investments through a build-lease-transfer arrangement where the private sector constructs the infrastructure and then leases it to the port. In effect, the port pays the private sector cost of capital. A variation is for the port to issue debentures which are purchased by major port users or other private investors. In both situations, the port assumes the commercial risk and carries the liability on its balance sheet.

The transfer of public port facilities and equipment to the private sector is relatively easy by comparison. The preferred mechanism is a long-term lease or concession since it avoids the complication of a transfer of land. The sale of existing equipment is relatively easy for mobile equipment but more difficult for fixed equipment. The latter tends to be leased as part of the facility. Where the private party constructs the facilities and procures the equipment, they retain ownership through the period of the agreement. Where the period of the lease/concession extends beyond the period of depreciation, the assets are owned free and clear. For shorter period leases, the ownership of superstructure and fixed equipment is generally transferred back to the port at the conclusion of the lease and the private sector is compensated according to an agreed formula (typically, the depreciated value of the assets).

Private ownership of facilities and equipment offers three distinct advantages in addition to mobilizing private financial resources for an investment which is off the port’s balance sheet. The first is the lower price that the private sector pays for these facilities and equipment through negotiation rather than public tender. The second is the higher quality that can be obtained by procuring without a lowest cost criteria. The third is the lower level of investment as a result of private sector concern for maximizing utilization of existing assets rather than procuring new ones.

The disadvantage of private ownership of facilities and equipment is that it can represent

a considerable barrier to entry for potential competitors. New entrants must be prepared to quickly capture market share by providing better service at comparable or lower prices. This is difficult to accomplish when the established service provider is operating a partially-depreciated facility with lower debt service and a strong positive cash flow. The situation is aggravated where the cost of new facilities is greater than previous facilities because the sites for expansion are more difficult to develop. In these situations, public investment in facilities may be required to promote competition.

Best practice supports private control of facilities and equipment through leasing and concession arrangements. Ownership of fixed equipment and facilities within public ports would be arranged through long-term concessions. Outright ownership of land and facilities would be limited to private ports and terminals. Ownership of public port land and infrastructure should remain with the public sector but long-term leases can be used to simulate private ownership. Construction should be undertaken by the private sector. Financing should be arranged through the private sector but with the long-term liability assumed by the public port.