Competing private ports - Lessons from Argentina

Privatesector P U B L I C P O L I C Y F O R T H E The World Bank Group December 1996 Note No. 100 Competing Private Ports—Lessons from Argentina Antonio Estache Before Argentina began reforming port opera- Port charges and shipping tariffs have declined and José Carbajo tions in 1990, its ports were costly and ineffi- sharply, and labor productivity has nearly qua- cient. Restrictive labor regulations led to high drupled. Cargo volumes are up 50 percent— labor costs. Most ports were open rather than though this is considerably less than the 110 terminal-based, leading to inefficient operat- percent new private operators had predicted. ing practices and unnecessary costs for cargo handling and storage. They were overregulated Two broad lessons have emerged from by multiple agencies with overlapping respon- Argentina’s port reform. First, competition can sibilities. As a result of all these problems, the be effective—competition introduced not only ports were losing market share to the road sec- among ports, but also by inviting operators to tor and to the more efficient Chilean ports. bid for a concession to operate a port and by dividing large ports into terminals and offering To reduce costs and increase productivity, the each as a separate concession. Second, to suc- reform strategy sought to deregulate, decen- cessfully pull out of the sector, the government tralize, and concession the sector and organize has to show strong commitment even after the competition within it. As performance indica- port services have been privatized, applying tors for the port of Buenos Aires show, the clear and coherent rules of the game. Almost improvements have been dramatic (table 1). seven years after the beginning of the reform, Argentina still lacks an independent port regu- lator. To date, the integrity of the reforms has TABLE 1 SELECTED PERFORMANCE INDICATORS FOR THE PORT very much depended on the personal author- OF BUENOS AIRES ity of the undersecretary of ports, the “father” of the reforms. Indicator 1991 1995 Strategy Cargo (thousands of tons) 4,000 6,000 Between 1990 and 1993, the government abol- a Containers (thousands of teu’s) 300 540 ished most of the restrictive regulations gov- Capacity (thousands of containers per year) 400 1,000 erning working practices at ports and on Operational area (hectares) 65 95 vessels. Argentine shipowners were allowed to Productivity (tons per worker per year) 800 3,000 temporarily register their ships under foreign Average stay for full containers (days) 2.5 1.5 flags and thus benefit from lower requirements on crew size. Contracting arrangements with Cost for container imports (US$ per ton) 450 120 stevedore companies were freed up, and pi- Port tariff for exports (US$ per ton) 6.7 3.0 lotage and towage services were deregulated Port tariff for imports (US$ per ton) 2.1 1.5 and operators allowed to establish their own tariffs. Foreign ships were allowed to practice a. Teu’s are twenty-foot-equivalent units. cabotage. And other labor agreements and Source: Administración General de Puertos. norms that were hampering productivity in port operations were abolished. Private Sector Development Department ▪ Vice Presidency for Finance and Private Sector Development Competing Private Ports—Lessons from Argentina The decentralization occurred in two stages. be unrealistic. The concession terms for the six In the first stage, the major ports—Dock Sud terminals range from eighteen to twenty-five at the port of Buenos Aires, Bahia Blanca, years (table 2). During the term, the conces- Quequén, Rosario, and Santa Fe—were trans- sionaire has exclusivity over all loading and ferred to the provinces, subject to the creation unloading services at the terminal, but must of port administration entities. Conceived as guarantee service to anyone demanding it. nonprofit organizations charged with owning and maintaining the port’s infrastructure and The government set maximum cargo charges common use areas, including waterways and in the bidding documents, and concessionaires access areas, these entities are governed by ship- had to specify their tariffs in the contract sub- pers and representatives of provincial and local ject to this cap. In cases of major demand and governments. They are required to lease the port supply imbalances, concessionaires can apply terminals as concessions and will receive fees to the port authority to adjust these tariffs. The from the concessionaires for the use of the infra- adjustment rule in the contracts is a rather loose structure. Any profits have to be invested in the one, simply stating that tariffs should be made port. In the second stage, the sixty small ports, public and that they must be just and reason- half of which had not been operational for many able while allowing a reasonable return to in- years, were transferred directly to the provinces, vestors. The concession contract also includes which may operate them, lease them to private explicit annual investment targets and requires firms, or abandon operation. the port authority to contribute a specified amount of the financing. The organization of competition started in the largest and busiest port, the port of Buenos The outcome Aires, which handles most of the containers bound to or from Argentina. The port was di- The combination of deregulation, competition, vided into three areas with different functions and privatization has led to dramatic reductions and administrations. Dock Sud was transferred in port charges and in barge and ocean ship- to the province of Buenos Aires as a port spe- ping tariffs. Charges for shipping containers cialized in bulk liquids. Puerto Nuevo, which between Argentina and Northern Europe de- remained under national jurisdiction, was split clined by 30 to 70 percent in less than two years, into six terminals that would compete against and charges for shipping grain and other bulk one another after being concessioned to the goods by about 10 percent. Decentralization has private sector. Puerto Sur, still to be developed, led to the closure of the small, unprofitable ports will be concessioned to the private sector. transferred to the provinces, with large net sav- ings. Most of the savings have come from im- By 1995, the new authority for Puerto Nuevo proved labor productivity, however. At the port had awarded its six terminals to concessionaires, of Buenos Aires, total employment fell from and a similar process of concessioning was un- about 8,000 just before the reforms to 2,500 in der way at the other major ports. The Puerto 1994 and has remained around that level. The Nuevo concessions were auctioned to the high- liberalization of operating rules drastically re- est bidder—the bidder offering the highest an- duced the requirements for stevedores in the nual canon (based on expected traffic) to the port of Buenos Aires, leading to higher labor government.1 Although bidders were allowed productivity: the amount of cargo per non-ad- to bid for more than one terminal, they could ministrative worker rose from 800 tons in 1991 be awarded only one (terminals 1 and 2, how- to 3,000 in 1995. Tariffs for port services have ever, were awarded jointly). The winning bid- also declined by varying amounts, depending ders offered annual canon for the six terminals on the port, ship size, and type of service. In totaling US$32.5 million—based on projections the port of Buenos Aires, for example, towage of cargo volume that have since turned out to tariffs fell by about 40 percent following flag  TABLE 2 SUMMARY FEATURES OF THE PORT TERMINAL CONCESSIONS AT PUERTO NUEVO, BUENOS AIRES Length Twenty-five years for terminals 1, 2, and 3; twenty-four years for terminals 4 and 6; and eighteen years for terminal 5. Ownership The state remains the owner. Concessionaires acquire only the right to maintain and use infrastruc- ture and equipment received from the state, for which they pay a usage “fee” to the government. Labor Concessionaires must employ 1,350 people from the public agencies previously operating at the port or present an equivalent number of redundancy agreements. Operation and maintenance All commercial operations are performed by the concessionaires. Pricing The government sets a price cap on cargo charges. Concessionaires had to specify their tariffs in the contract subject to this cap. The port authority can authorize adjustments to the tariffs. Capital investments Each concessionaire is to undertake annual investments as specified in the terms of the concession. The port administration will contribute a fixed sum for the infrastructure rehabilitation works and will supervise these works, which must be done in specific stages according to a set timetable. Financial performance Each concessionaire bids on the basis of a business plan and annual financial results. changes and the introduction of increased com- cies involved in the business of ports—includ- petition. Pilotage tariffs have decreased, with ing the police and customs. This integrated the size of reductions depending on the port policy approach has meant significantly lower and the area of service. Stevedore tariffs report- transaction costs than occurred under the un- edly have also declined and are expected to coordinated monitoring and policing by mul- decline even more when privatization is com- tiple agencies before the reform. Much of the plete. Maritime tariffs have fallen by up to 40 to credit for this approach goes to the strong re- 50 percent for cargo movements that were pre- form team of the undersecretary of ports. The viously reserved for Argentine flag ships. three port authorities in Buenos Aires and the two in Santa Fe are now governed jointly by The deregulation and privatization of port and representatives of all the main players. They maritime transport, combined with the other still have monitoring responsibilities, but their major economic reforms, have had a consider- regulatory responsibilities have been greatly re- able impact on external trade. The decline in duced by the substantial deregulation of port Argentine ports’ market share was quickly halted. operations and maritime cargo reservation, thus Maritime transport regained its historical share facilitating competition. in Argentine external trade, accounting for more than 90 percent of exports by volume and about A flaw in the reforms has been the failure to 75 percent of imports. The average shipping tariff fully take into account other transport modes. for both exports and imports fell between 1991 For example, at the port of Buenos Aires, con- and 1995. Overall, the cost savings resulting from cessionaires are planning large increases in ca- port deregulation and privatization total about pacity that will lead to a big increase in city US$156 million a year, according to a 1994 gov- traffic. If urban road use were properly priced, ernment estimate. concessionaires would have considered the full social costs of their actions. But because urban Lessons and challenges roads are subsidized, a likely outcome will be traffic congestion and pollution. These results suggest that effective competition can be introduced in port services. But they also Still pending is the organization of an indepen- reveal important lessons about the need for in- dent national port authority to act as regulator stitutional reform and efficient contracting. and as monitor of the concessions. The national authority’s functions and obligations should be Institutional issues structured around transparent procedures for in- forming users about the cost and quality of ser- Most of the benefits achieved would not have vices. Similarly, to put all the ports on the same been realized without coordinating all the agen- competitive footing, the transfer of the ports re-  Competing Private Ports—Lessons from Argentina maining under the control of the old port au- Looking ahead, there is a risk that some con- thority needs to be completed; this entity can cessionaires will not comply with the terms of then be liquidated. Finally, further concession their contracts. Bidders were too optimistic arrangements and institutional changes are re- about market growth potential: the combined quired so that the activities associated with the bids at the port of Buenos Aires of US$32.5 dredging and signaling of navigation channels million a year reflected expectations that cargo can be fully privatized. volume would grow to 8.1 million tons, an unrealistic 110 percent increase. There has al- Playing by the rules ready been a casualty. The concessionaire for terminal 6 went into bankruptcy in late 1995, The concessioning of terminals 1 and 2 offers and the terminal was closed. Given the strong an important lesson about maintaining credibil- competition among the terminals, the risks are ity in the concessioning process. The bidding, serious. Any new crisis could lead to requests governed by a published set of rules, resulted for major contract renegotiations. The authori- in the award of the two terminals to an interna- ties should use a flexible, transparent, by-the- tional consortium headed by P&O Australia, in rules approach in any renegotiations—as they partnership with a local stevedore company and did in some minor renegotiations that cut port a local shipping line. The consortium’s winning tariffs by 25 percent. bid was US$13.5 million. The second highest The Note series is an bid, for US$9.6 million, came from an Argentine Bankruptcy and employees’ rights open forum intended to encourage dissemina- consortium, Murchison and Roman Maritima. tion of and debate on After the Argentine consortium protested that Bankruptcy is a normal risk of privatization, ideas, innovations, and the Argentine partner of the winning consor- and the government is preparing a new bid for best practices for expanding the private tium did not have enough equity, the govern- terminal 6. But the workers are unhappy be- sector. The views ment disqualified the winner and awarded the cause they have not been paid by the bank- published are those of bid to the Argentine consortium. Later, a court rupt operator. They want the government to the authors and should not be attributed to the judgment cleared P&O’s partner of any wrong- pay their wages, arguing that they are still civil World Bank or any of its doing or misrepresentation. servants. The government does not feel obli- affiliated organizations. gated to pay them, and the matter has been in Nor do any of the con- clusions represent Recognizing the potential damage to the con- the courts for almost a year. Unless the issue is official policy of the cession process, the government urged the two resolved, any new bid is unlikely to meet the World Bank or of its parties to work out an agreement. Eventually, government’s expectations. Establishing clearer Executive Directors or the countries they the P&O consortium acquired 49 percent of rules of the game for the workers might have represent. the Argentine consortium and created a new prevented the problem, but no one foresaw company. This outcome may have benefited that it would happen. Now it is a serious pre- To order additional copies please call the each of the consortia more than winning the cedent-setting challenge for the government— FPD Note line to leave a bid would have. If the government had for- and a valuable lesson for other countries message (202-458-1111) mally awarded the P&O consortium terminals considering privatizing their ports. or contact Suzanne Smith, editor, Room 1 and 2, Murchison, then a major port contrac- G8105, The World Bank, tor, probably would have pulled out with all 1 Canon is the rental fee for infrastructure owned by the public 1818 H Street, NW, its equipment as well as its large client base, sector. Washington, D.C. 20433, or Internet address including 50 percent of all container traffic. In- ssmith7@worldbank.org. stead, Murchison can benefit from the interna- Antonio Estache, Latin America and the Previous issues are also tional expertise of P&O. But the lesson is available on-line (http:// Caribbean, Country Department I (aestache@ www.worldbank.org/ simple. In awarding concessions, there is no worldbank.org), and José Carbajo, European html/fpd/notes/ substitute for sticking to the rules and apply- Bank for Reconstruction and Development notelist.html). ing straightforward criteria. This case had a (carbajo@ebrd10.ebrd.com) 9Printed on recycled positive outcome, but only thanks to an un- paper. usually skilled government negotiator.