Port privatization and competition in Colombia

Privatesector P U B L I C P O L I C Y F O R T H E Note No. 167 December 1998 Port Privatization and Competition in Colombia Juan Gaviria Most of Colombia’s general cargo trade has been handled by four public ports: Barranquilla, Cartagena, and Santa Marta on the Atlantic coast and Buenaventura on the Pacific coast.1 These four ports were concessioned in 1993 to regional port “societies” established under company law. These societies are responsible for contracting with port operators for the use of facilities and supervising the facilities’ use—they do not provide services directly. New laws abolished restrictive labor practices and have allowed stevedoring services to compete freely at each port. The liberalization of labor practices along with the privatization of port services has resulted in large and rapid improvements in productivity, lower fees for port users, and very attractive returns for the concessionaires. Productivity levels are higher than in most newly privatized ports in other Latin American countries—where in many cases the ports have been privatized with limited competition. The improvements have been realized with low initial investments, though recently the port societies have gone beyond investing in shoreside equipment and are starting to invest in infrastructure expansion. TABLE 1 OPERATING PERFORMANCE—BEFORE AND AFTER REFORM Indicator Before 1993 1996 Average vessel waiting time (days) 10 No wait or in hours, depending on the port Working days per year 280 365 Working hours per day 16 24 Tons per vessel per day ␣ ␣ Bulk cargo 500 2,500a ␣ ␣ General cargo 750 1,700 Containers per vessel per hour (gross) 16 25 a. Minimum. Source: Puertos (Colombia General Port Superintendent; July 1997). The World Bank Group ▪ Finance, Private Sector, and Infrastructure Network Port Privatization and Competition in Colombia Like most ports around the world, Colombia’s reforms were put in place and due diligence were inefficient and costly to run. Restrictive labor was conducted to assess the ports’ assets. A rules had led to inefficient operating practices, separate concession was offered for each port. costly delays, and unnecessary costs for cargo The concessionaires can set tariffs within guide- handling and storage. The port sector was lines established by the port regulator, and they fragmented and loosely regulated through the are obligated to work with the government on 1950s. There have been several attempts since to future investment plans. The concessions were improve efficiency. In the early 1960s man- awarded to the highest lease offer for twenty agement and operation of the main ports were years within an ownership structure that en- centralized under a new national monopoly port courages a 70/30 split between the private and authority, Colpuertos. But the absence of a clear public sectors, with the government retaining regulatory policy or incentives to increase invest- ownership of the port infrastructure. The pub- ments in the sector led to continuing problems, lic sector share was divided among the national particularly underinvestment. Starting in the 1970s government (3 percent), the state government the government allowed private firms to operate (12 percent), and the municipality (15 percent). terminals and berths in the major port districts alongside the public terminals managed by Uncertainty about the initial terms of the con- Colpuertos. These private berths handled mainly cession agreements and the role of Colpuertos liquid and solid bulk trades, which have dampened investor enthusiasm. The government accounted for about 70 to 80 percent of the total clarified the risks and the concession terms suf- traded volume in the country (64 million tons in ficiently to attract bids from local investors but 1996). Despite the successful opening of bulk not enough to attract foreign investors and ex- trade to the private sector, Colpuertos maintained perienced international operators. The winning its monopoly over general cargo movements. In concessionaires vary in structure from port to 1980 Colpuertos was commercialized as a state- port. In Cartagena a few local private investors owned enterprise, but its performance did not control 85 percent of the port society, with the improve. Inefficient and burdened by growing municipality having sold its share. In Buena- pension fund liabilities, Colpuertos slipped into ventura ownership is more fragmented, with financial crisis by the end of the 1980s as rising about 210 shareholders. And in Barranquilla and costs led to high tariffs for poor service. Santa Marta ownership is concentrated in a few companies, some of them the main users of the At the end of 1990 it was finally agreed that broad port, holding 70 percent of the shares. sector reforms were necessary. A law enacted in January 1991 defined private regional port societies The main role of the industry regulatory au- as concessionaires responsible for administration thority, the General Port Superintendent, is to and management of the general cargo ports, estab- set the guidelines for tariffs, to ensure that port lished the General Port Superintendent as regula- services are not too expensive, and to prevent tor of the concessions, and defined conditions of unfair competition. It also sets the minimum operation to ensure free and fair competition among rates of return for each port society. port societies and among port operators. New laws dismantled Colpuertos in a long, painful, and costly Lessons process involving the establishment of a new pen- sion fund to cover a substantial labor retrenchment The concessionaires quickly found that the affecting at least 8,500 staff. business can be very successful and have be- come quite competitive. Productivity has in- Concession terms and process creased dramatically (table 1). In 1993 alone the public ports registered a 45 percent increase Privatizing the general cargo port terminals took in general cargo throughput (although this three years (1991–93), during which the legal growth coincided with economic liberalization  TABLE 2 INVESTMENT IN NEW PORT INFRASTRUCTURE AND EQUIPMENT, 1993–2000 Millions of U.S. dollars Source of investment 1993–96 1997–2000 Private 199 270 ␣ ␣ Regional port societies 59 240 ␣ ␣ Berths 90 30 ␣ ␣ Stevedores 50 — Government (dredging) 17 12 — Not available. Source: Puertos (Colombia General Port Superintendent; July 1997). that boosted the country’s trade). The increases dropped from well over US$600 to less than in productivity have prompted many global US$150. shipping lines to begin including port calls in Colombia. And the concessionaires’ success has New investment by the private regional port ensured a steady flow of lease revenue for the societies was low in the initial years but has government, amounting to about US$25 mil- since increased substantially and is forecast to lion in 1996. continue to do so (table 2). The experience in Colombia suggests that new concessionaires The ports’ productivity increases in 1994–96 tend to focus first on improving the productiv- resulted mainly from increased competition ity of existing assets and only later consider among private stevedores at each port and from major new infrastructure investments. new investments in container handling equip- ment. The port operators started investing The returns to the four main port societies have heavily in container cranes, and stevedore com- been substantially higher than the government’s panies invested in shoreside equipment, includ- projection of 23 percent returns on the assets ing reach spreaders, top lifters, tractors and of the new companies (table 3). Even with re- chassis, and other yard equipment. Improved cent high levels of investment, the port societ- management of stevedore companies has also ies continue to enjoy strong investment returns, contributed to productivity increases every year higher than the average for transport service since privatization. companies in Colombia. As a result of the increases in productivity and But a lack of clarity about the roles of the dif- the competition among ports (Santa Marta, Ba- ferent parties in the sector has had two main rranquilla, and Cartagena are in a corridor of drawbacks. First, it deterred experienced inter- less than 150 miles) and among stevedores at national port operators from bidding, so the each port, shipping lines and importers and government’s lease revenue from the conces- exporters have enjoyed some of the lowest sions is probably less than it could have been. stevedoring and port services rates in South Second, ambiguity about the regulator’s role has America for the past several years. Between allowed the regulator to become more interven- 1994 and 1996 rates fell in real terms by more tionist over time; it has become involved in in- than 50 percent. And rates per container have tense efforts to design and monitor an allowable  Port Privatization and Competition in Colombia TABLE 3 RETURNS ON INVESTMENT FOR PRIVATE PORT SOCIETIES, 1995–96 Net returns (millions of pesos) Internal rate of return (percent) On total assets On capital of Port society 1995 1996 of concession new companies Barranquilla 2,106.8 2,631.9 7.99 214.1 Buenaventura 5,015.8 3,837.3 3.03 132.5 Cartagena 2,308.1 4,006.3 –9.03 155.1 Santa Marta 3,322.9 3,133.3 23.44 304.3 Source: Puertos (Colombia General Port Superintendent; July 1997). band for stevedoring and port tariffs before tar- ports—such as Altamira, Manzanillo, and iffs are fully deregulated. To establish such a Veracruz—have resulted in better management tariff band, the regulator insists that it must esti- and higher tariffs. But the single-concessionaire mate the cost of investments, their viability, structure—in which one concessionaire oper- aspects affecting competitiveness, and the need ates all ports—impedes competition and often for further investments. But the limited capaci- results in tariffs close to or equal to the ceiling ties of the regulator mean that it will be unable of the band authorized by the government. In a Viewpoint is an open to assess several of these factors adequately until more positive case in Brazil the container ter- forum intended to full deregulation occurs, further enhancing minal at Santos was privatized in 1997 and encourage dissemina- competition. In the medium term the end users awarded to a concessionaire that aims to reduce tion of and debate on ideas, innovations, and and shipping lines can put forward a clear case costs from US$500 to US$150 per twenty-foot- best practices for ex- for complete liberalization of port tariffs. The equivalent unit (teu) in two years. The container panding the private port societies with the most aggressive invest- terminal will compete with the terminal oper- sector. The views pub- lished are those of the ment plans would probably be the first to sup- ated by the Grupo Libra in the same port as authors and should not port such efforts as a way to ensure that their well as with others now being concessioned to be attributed to the throughput grows in accordance with the opti- private operators. In the long run the port of World Bank or any of its affiliated organiza- mistic expansion forecasts. Santos will adopt the model successfully devel- tions. Nor do any of the oped in Buenos Aires, where five international conclusions represent A problematic effect of the reforms has been terminal operators have taken over long-term official policy of the World Bank or of its some long-term unemployment. In Buena- concessions. But even after huge investments Executive Directors ventura the local economy depends heavily on productivity in Argentina is only about 25 teus or the countries they the port. The substantial cuts in port jobs— per vessel per hour (gross), reportedly the av- represent. from 2,000 in 1991 to 200 in the port society erage in Colombia after relatively modest in- To order additional today—have resulted in high unemployment vestments in shoreside equipment. copies please call in this Pacific coast port, one of the poorest in 202-458-1111 or contact 1 In 1997 the aggregate general cargo throughput of the four general Suzanne Smith, editor, the country. Local authorities have struggled cargo ports amounted to about 11 million tons, including about Room F11K-208, without much success to address the social 500,000 teus. The World Bank, problems that have been exacerbated by this 1818 H Street, NW, Washington, D.C. 20433, unemployment. These results suggest that la- Juan Gaviria (jgaviria@worldbank.org), Senior or Internet address bor redundancy packages need to go beyond Transport Specialist ssmith7@worldbank.org. severance pay to include some retraining and The series is also available on-line small business promotion. (www.worldbank.org/ html/fpd/notes/). Compared with the results of other port privati- Printed on recycled zations in Latin America, Colombia’s look very paper. good. In Mexico the concessions for major