Port developments in Asia Pacific

This article provides an overview of the various approaches to procuring port infrastructure and port services across Asia Pacific (for both government-owned and private ports). We consider both whole-of-port and specific infrastructure (both land and marine), in the context of some of the more notable examples from Indonesia, Malaysia, Myanmar, Singapore, Sri-Lanka and Australia.

Background

Global sea-borne trade flows have slowed. In Asia Pacific the growth of some sea-borne trades has flattened, and in some areas declined slightly. At a macro-level, this reflects the Chinese slowdown, including at Chinese gateway ports. Nevertheless medium term growth is projected to be positive, with this growth to underpin and contribute to the increasing GDP of countries within the Asia Pacific region.

Ports are an enabler of trade, as around 90 per cent of global trade is sea-borne. Where ports are capacity-constrained, trade is inhibited and for this reason we continue to see focus by governments on “unlocking” the capacity constraints at and associated with ports. In many cases, the sea bed and land in ports is government owned. Theoretically, government ownership enables better facilitation of trade and policy implementation for the wider economic benefits of a region, state or country. This theory is challenged by fiscal reality. Competing calls on government capital increasingly mean that governments do not have the cash to spend, or the inclination to commit available funds, to unlock capacity constraints and to improve efficiency.

Unlocking capacity constraints and improving efficiency at ports can be achieved through increased port capacity and associated landside logistics (through infrastructure enhancement or development) and increased efficiency of marine and landside operations (through infrastructure enhancement and service innovation). In addition, competition between ports (and between terminals within ports) facilitates price competitiveness which itself drives efficiency. Furthermore, competition in the shipping industry has an impact on port development: the shipping industry exerts pressure on ports to invest to enable use of larger vessels. The response of ports to this pressure can affect decisions as to choice of trans-shipment port.

Ports are valuable,¹ and port capacity, of itself, is valuable.² The private sector is prepared to pay for and invest in this value proposition; indeed the development of trans-shipment ports around the world (including the world’s largest, Singapore) demonstrates the value of trans-shipment port capacity to the shipping industry. Increasingly new ports and new port infrastructure are developed with the involvement of the private sector – a private sector comprising some of the world’s most admired and best run companies. Best practice leads to increased service levels, improved efficiency of operations and appropriate allocation of public spending.

Port models

Key to the consideration of how best to address port capacity constraints is an understanding of port models and port activities. Port models: In general terms, there are four port models:

• private service model: the whole port is owned and operated entirely by the private sector;³
• public service model (public service port): the port is owned and operated entirely by the host government or a government entity;⁴
• service port model or labour model (tool port): the port (equipment and land) is owned by the host government or a government entity, and is either operated by government, or the government contracts with the private sector to operate all or part of the port; and
• landlord model: the port (whether publicly or privately owned) leases land within the precincts of the port to the private sector to undertake activities within the port, and the private sector invests capital to allow it to undertake those activities (effectively each private sector party is granted a concession, which may or may not be exclusive).

The structure of any port procurement depends largely on the port model and the activity being procured. In each port model, it is convenient to allocate activities into the broad categories of Governance, Infrastructure and Operations. These categories lend themselves to different approaches. In our view:

• Governance activities such as security and quarantine matters are most appropriately and best undertaken by the relevant host government entities, who have the necessary expertise and resources to undertake them, recovering the cost of these Governance services through charges levied direct on the shippers. Other governance functions such as the harbour master role, vessel scheduling and berth allocation can be performed either by government or (with certain controls) the private sector. Maintenance of certain infrastructure – such as navigation aids – also falls within the Governance category, and may be undertaken by the government or likely more efficiently by the private sector under a services agreement;
• Infrastructure is best built by the private sector, and there is certain infrastructure (in particular Terminals and Ship Loading Facilities) that is appropriately designed, built, financed, operated and maintained (DBFOM) by the private sector entirely or a consortium comprising government and the private sector on a concession basis (typically in the form of a long term lease) to undertake activities for the period of the concession. On the grant of any concession on a DBFOM basis, once the infrastructure is developed and operational, it becomes integrated into the port operations, with the holder of the concession entitled to charge for use of the facilities for the term of the lease, sometimes on a regulated basis, sometimes not; and
• Operations within ports have long been undertaken by the private sector (whatever port model is used), with private sector stevedores either providing stevedoring services across the port or within an area leased to the stevedore (often in the context of a container terminal or other specific terminal such as a Ro-Ro) and in many ports towage services have long been provided by world class and world scale companies. Also pilotage and other local services (such as bunkering) are typically provided by the private sector.

Landlord model and mixed ownership

The landlord model and mixed ownership and operatorship of ports and ports infrastructure is increasingly becoming the prevalent model.

Where government remains the landlord, the landlord model and the mixed ownership and operatorship models allows government to maintain the ability to invest itself (for the benefit of the wider economy) while at the same time allowing the private sector to fund the development of the port infrastructure.

We are increasingly seeing wholesale private sector participation in landlord model ports owned by government – through privatisations of existing ports and development of new ports. On a port privatisation the private sector generally becomes the lessee of the whole port, and landlord of facilities and terminals within the port (with government remaining the owner of the sea bed and the underlying land on which the port is built or is to be built). As the private sector becomes the lessee of the whole port and landlord of facilities and terminals within the port, there is likely to be alignment between the promotion of trade and the commercial drivers of the private sector lessee of the port – critically realising the value of valuable port capacity. Also, to the extent that the government landlord is concerned to ensure the promotion of trade, the regulatory regime will typically require the port lessee to develop and implement a development programme that recognises promotion of trade. On a port development, the same underlying principles hold true.

Examples of Landlord models and mixed ownership and operatorship in Asia Pacific

Port development is not new, and it is fair to say that in many ways the Asia Pacific region has led the way for some time.

In Malaysia the key container and bulk ports are Port Klang and Port of Tanjung Pelepas. Port Klang is the world’s 12th busiest container port. It is administered and regulated by the Port of Klang Authority (POKA). POKA is the landlord. At Port Klang there are two distinct ports – Northport (privatised) and Westport (developed), both privately operated. Northport is privately owned and operated by Northport Malaysia Bhd, which is part of the MMC Corporation Berhad Group. Westport is owned by Westport Malaysia Bhd (part of the Westport Holdings Malaysia Bhd Group).⁵ Port of Tanjung Pelepas has been developed (and continues to be developed) by MMC Corporation Berhad Group as a trans-shipment hub, providing competition to Singapore. Port Tanjung Pelepas is one of the 20 busiest ports in the world, with a current container capacity of 10.5m TEUs.⁶

In Indonesia the key container ports are Port of Tanjung Priok (Jakarta), administered by PT Pelabuhan Indonesia II (Persero) (IPC), and Tanjung Perak (Surabaya) administered by PT Pelabuhan Indonesia III, both top 50 world ports in terms of scale. In terms of the development of capacity in Indonesia to address increased trade, IPC has the mandate to develop the New Priok Port, involving the development of capacity at Tanjung Priok from 5m TEU to 18m TEU. As part of the development of the New Priok Port, IPC has brought together a consortium of world class and world scale companies (Mitsui & Co. Ltd; Nippon Yusen Kabushiki Kaisha; and PSA International Pte Ltd) to participate in the construction and the operation of a new container terminal at the New Priok Port. This new terminal is being developed by, and will be operated by, PT New Priok Container Terminal One, and will provide 1.5m TEUs of new container capacity.

In Sri Lanka, Colombo Port is the largest port, and, again, a world scale one. The Sri Lanka Port Authority (SLPA) is progressing the development of facilities at Colombo Port to improve the value of Colombo Port to global shipping lines and to increase its share of the trans-shipment market. It would appear likely that the SLPA, as the landlord, will seek private sector investment to develop a new container terminal applying a DBFOM model, with the grant of a lease to the private sector to design, build, finance, operate and maintain the new container terminal under a 35-year lease. This illustrates the value of port capacity both for the purposes of the entry and exit points for imports and exports from Sri Lanka, but also the value to the Sri Lankan economy of trans-shipment. As we noted above, Singapore is the largest trans-shipment hub in the world, and the vast majority of the traffic that passes through Singapore is trans-shipment traffic: Singapore’s achievements stand as one of the best advertisements for how the multiplier effect of port capacity can add to, and benefit, economic activity.

In Myanmar, the Myanmar Port Authority is progressing the development of new port facilities (at existing ports and new ports). The challenge in developing new coastal ports in Myanmar underlines the fundamental development need for any port: the need to be as close as possible to the “in country” users of port services (in the case of bulk ports) and to be as close as possible to the markets using imported goods and the industries producing export goods (in the case of container terminals). Which came first: the port or the demand for services provided by the port? The involvement of major Chinese players in the development of special economic zone developments (and the attendant port developments) assists in answering the question and illustrates that these Chinese companies see the prospective trade flows that will be serviced by the development of ports in Myanmar, and around the Bay of Bengal generally: the development of ports will service trade flows from China and into China through the ports, as well as exports from, and imports to, Myanmar.

Australia,⁷ has in some ways been catching up with trends in the rest of the Asia Pacific region. Over the last four years or so, the Ports of Darwin, Brisbane, Botany, Newcastle and Kembla have been privatised using the grant of a long term lease to the lessee of each port (Port Lessee) with Port Lessee collecting rental income from the facilities and terminals leased with the port, and port charges (including from use of navigation channels and wharfage). The Port of Melbourne is in the process of being privatised, and Fremantle Port has been prepared for privatisation, applying the same long term lease model. While port privatisation in Australia is not new (The Port of Geelong was privatised in 1996), the privatisation of the largest container and general cargo ports and one of the busiest bulk ports (Port of Newcastle) is new. In addition, in recent years ports in Australia have rediscovered the benefit of the DBFOM model, and a number of new key port facilities have been developed using this model.

Realising the value of port capacity

Port capacity is valuable and critical to the promotion of trade. Any procurement structure should be structured in a way that ensures port capacity is optimised, and the value of it maximised.

To achieve optimisation, there is a move towards “performance based” arrangements (PBAs) to incentivise the efficient port operation outcomes. Procurement documents provide for measurable outputs reflecting those outcomes.

In the context of container terminals, for example, PBAs can range from measurement metrics for the efficiency of time alongside (the amount of time a vessel spends adjacent to the quayside) versus time worked (the discharge of cargoes); crane rates (in effect the number of lifts in a given period of time); dwell times (the period of time a container spends in the stacking yard before being discharged from the terminal); and in some cases, greater modal share of rail (but this largely depends on the existing and planned future distribution networks). Given that container terminals are not “set-and-forget” infrastructure, sustained inability to comply with any PBAs will impact on port efficiency and revenues.

Accordingly, procurement documents containing PBAs include remedies designed to ensure that the required outcomes are achieved. We have seen whole-of-port landlords strive for the container terminal operators (CTO) to maintain a stated share of overall container trade within a port (and provide termination rights if the threshold is not met over a period of time) or a minimum TEU throughput by reference to overall trade. The theory behind this risk allocation structure is the desire to ensure that the use of the terminal asset is maximised and that the CTO does not “sit” on a valuable asset without maximising the opportunity, and is incentivised at the same time to achieve optimal efficiency. For private sector participants to accept PBAs of this kind, they will need to be satisfied that they will be provided with a level playing field so that existing or new CTOs will not be favoured in a way that might hinder their ability to achieve PBAs.

Governance of the port and competition

Given that port capacity is valuable, the private sector is prepared to buy existing port assets and fund the development of new infrastructure (typically on a DBFMO basis) and to pay the port landlord for a concession if it is satisfied as to the trade flows (and any risk to trade flows). However, just as the port landlord will seek to incentivise optimisation of efficient port operations, the private sector will be concerned to address risks of governance of the port and competition (within the port or within country) affecting the ability of the private sector to perform under the procurement documents.

Governance of the port – Vessel scheduling and berth allocation: The control of vessel movements in port is likely to be a critical factor in the efficiency of terminal operations and therefore the ability to achieve throughput commitments under procurement documents is an issue which the private sector will want to consider closely. Different ports operate different systems. Vessel traffic management within the port will affect the value of port capacity. As we note above, these activities are governance activities, and they may be undertaken by government or a government entity or, possibly, by the private sector.

Competition: Competing terminals, both within the port and within country, will affect the value of port capacity. This covers for instance, the installation of further capacity within the port (through another terminal or by promoting expansion of the currently existing terminals) or the development of a new port at some point into the future. Government and government entities are concerned to promote competition to drive efficiency and to achieve optimisation. The private sector is most concerned to ensure that there is a level playing field on which it can compete.

Conclusion

Sea-borne trade will continue to dominate global trade flows. The Asian economies will continue to provide a platform for growth and global trade. For these reasons alone, Asia Pacific ports will continue to provide opportunities for investment and development capital. In fact, domestic regional economies such as Indonesia will be “hot spots” (in their own right) as governments seek to enable domestic trade throughout the archipelago. As a firm, we continue to assist our clients to maximise these opportunities in the ports sector across the Asia Pacific region.