PORT OF POTI – GATEWAY TO THE CAUCUSES AND CENTRAL ASIA

SOPHIKO SICHINAVA

When the Port of Poti completes its concession program, it will assist Georgia better position itself as a vital trade hub between the Caucuses, Central Asia, the United States, and other global markets.

In the year 2000, the Georgian government saw restructuring of the Port of Poti, Georgia’s largest port, as a way to be more efficient and competitive. Restructuring of the port has moved swiftly, but judiciously, under the watchful eye of General Manager Mr. Jemal Inaishivilli. Supporting President Schevardnaze’s vision for economic growth in Georgia and the region, Mr. Inaishvili has been the driving force behind the port’s concession program. The Port of Poti Tender Commission was set up in 2000 to oversee the port’s restructuring with Mr. Inaishvilli at the helm.
Port of Poti Gets Advice from Top Port Specialist.
In the international maritime arena, when you think of port restructuring , you think of Dr. Paul Kent, Managing Director of Infrastructure at Nathan Associates?a leading U.S. international economic consulting firm offering advisory services in transportation, international trade, and macroeconomic policy. A leading authority on port reform, Dr. Kent’s 25-year career in port and water transport has spanned the globe, taking him to Latin America, Asia, Eastern Europe, East and Southern Africa, and the Newly Independent States. He has advised ports and inland waterway organizations on institutional and regulatory reform, private sector participation, and strategic assessments and analyzed finances, operations, and management. And he has designed port restructuring programs for ports from South Africa to Colombia and Bulgaria to China.
A formidable lecturer, Dr. Kent is on the faculty of the International Program for Port Planning and Management, a rigorous two-week seminar for port executives from around the world. He gets high marks from the executives, usually being ranked as the top lecturer each year. Although he enjoys lecturing, his main interests are port restructuring and regulation. He shared his knowledge of these subjects in the regulatory module of the World Bank’s Port Reform Toolkit, much of it drawn from his doctoral dissertation at the Central Scientific Institute for Water Transport Economics and Operations in Moscow.
In April 2002, the Port of Poti invited Dr. Kent to assist in developing the port’s and to serve on the Tender Commission. With the program well under way, we talked to Dr. Kent about port restructuring and the Port of Poti.
Your firm, Nathan Associates, has worked in transportation since shortly after it was founded in 1946 and has carried out a number of port assignments around the world. Can you tell us about some of these assignments? What other activities is the firm engaged in?
Much of Nathan’s work in the transportation field has been devoted to the port sector. We have been engaged in more than 40 port projects in recent years, and I would say that today we are the leading U.S. firm engaged in port restructuring assignments, ranging from developing new institutional and regulatory frameworks to designing bid documents, executing the tender process, and closing concession transactions. In Ecuador, for example, we recently designed a restructuring strategy and bid documents and were recently selected to promote a concession program for that country’s leading port. In South Africa, we are currently assisting in the development of the new port law with a view towards private sector participation in port services and competition regulation. In Indonesia, we developed a restructuring strategy within a framework for enhancing competition. And in Bulgaria we established the guidelines for enhancing the competitiveness of the port sector through port sector restructuring.
In addition to port sector analysis, we have in-depth capabilities in road and aviation sectors. We have just completed an economic assessment of an important road corridor connecting China, Laos, and Thailand, and we were just awarded an aviation sector reform project in Mongolia. Nathan also has perhaps the largest trade policy practice in the United States, and assists governments undertake trade liberalization and prepare for multilateral trade negotiations and for WTO memberships. We are also very much engaged in assisting countries in macroeconomic policy development and economic cluster competitiveness.
What trends have characterized port reform efforts?
As my company has been around for more than 50 years, much of our work has followed changes in the way governments conduct their business. We have seen governments change from centralized command and control economies to economies featuring de-regulation, liberalization, and re-regulation. The same is true with ports. Ports traditionally were run by governments; to escape the bureaucratic burden, and at the urging of international finance institutions such as the World Bank, port organizations became independent port authorities with operating responsibility. But then port authorities became the bureaucratic creatures they fled, so we saw a new reform effort that enabled ports to acquire some private sector-like characteristics: independence in operating and capital budget planning, tariff setting, capital investment planning, and strategy development, and in some countries we saw for the first time that private operators were allowed to compete with public port authorities in providing cargo handling services. This was how ports responded to their government’s liberalization policies.
As more and more opportunities for the private sector emerged, private operators still felt an onerous burden of regulation imposed on them: some governments still held a certain degree of mistrust of the private sector. Eventually, countries began to buy into the Chicago school of economic thinking that efficiency gains can be achieved through competition: the “invisible hands” that economist Adam Smith claimed to exist would “perfect” the market as long as monopolies ceased to exist and competition was introduced. De-regulation would become the fashion of the day as long as there was sufficient competition. Port organizations responded by changing from operating entities (that is, port organizations that actually provide the cargo handling services) to landlord entities.
What is the landlord form of port administration?
As landlord organizations, ports own the lland and maybe even the cargo handling installations, while the private sector leases these installations from the port to provide port services. Landlord ports, however, continue to play a stewardship role over what many countries consider their most strategic asset. Landlord ports are responsible for navigation access and safety, assure that private sector operators are abiding by port operations standards and adhere to performance requirements imposed on them through their concession agreements, promote the port to the international shipping community, induce investments in port improvements and expansion, and plan for future expansion as market conditions change.
Conversion to the landlord model in my view is the best and only way for the Port of Poti to be restructured. In fact, the landlord form of port management is the most common form sought by countries undertaking reform. And there is good reason: with very few exceptions, the conversion to landlord forms has resulted in efficiency gains and lower port costs to users. We measure port efficiency by calculating performance indicators such as vessel turnaround time and vessel loading or discharge rates, such as the number of containers moved from the vessel to the quay per hour. In situations where the private sector provides the service in a fiercely competitive environment, we have seen improvements in port productivity (as measured by number of moves per hour) in excess of 200 percent, we have seen vessel turnaround time cut as much as 80 percent, and we have seen costs decrease by as much as 65 percent.
These efficiency and cost improvements are compelling reasons supporting the landlord model. About 90 percent of the world’s 100 largest container ports are landlord ports. So it’s logical that Poti should pursue the same approach and to some degree this is unique in countries of the former Soviet Union. Many countries of the former Soviet Union chose to create joint stock companies that were in turn permitted to hold an ownership stake in companies that provide cargo handling services. Original shareholders sold their shares, and these in turn were accumulated by financial interests that had no experience in port administration. With joint stock companies retaining the monopoly control of their predecessors over some port services, and having ownership interests in companies that operate in their ports, it is hard to imagine how competition could be optimized under these circumstances. In general, absent competition, the operational performance of many such companies does not achieve the same level displayed by landlord ports. If such companies do not make improvements acceptable to their port customers, they will eventually see the emergence of new ports or terminals that will compete, assuming there are sufficient cargo volumes that justify the investment. When competition emerges, you will see an improvement in port performance.
How does Poti fit into these reform trends that you describe? What are some of the pitfalls that countries make in their concession programs? What is unique about your approach to designing a concession program?
Well, Georgia is on a course to becoming a landlord organization, which is why we are involved in a concession program now. I should note that Mr. Inaishvili deserves special recognition for his careful planning of the transition to a landlord organization. The port reform experience of Russia and some other countries of the former Soviet Union in the 1990s is characterized as a sprint to achieve port restructuring based on some misconceptions of market economies and the importance of introducing market forces. In some countries, it was viewed that the joint stock company approach would to some degree mitigate the impact of restructuring on the labor force. Most pre-reform ports are characterized as bloated bureaucracies with excessive workforce levels. With the slower but prudent pace that Mr. Inaishvili has chosen, improvements in facilities, and careful attention to transparency in the concession process, a concession in Poti is much more attractive to the private sector. Mr. Inaishvili also addresses labor mitigation by incorporating specifications in the bid documents that encourage concession bidders to make employment commitments to Poti’s incumbent workforce. So Mr. Inaishvili has in place the necessary formula for a successful concession program.
Regarding your question about pitfalls, I would say one of the biggest problems is that some countries “think” like pre-reform port authorities in designing a restructuring program. Many pre-reform port organizations held monopoly positions and received capital subsidies. So decisions about facility construction or expansion tended to be made on the port’s perception of what was needed without regard for the businessman’s point of view. So even today, in fact an example lies in a port that lies across the Black Sea from here, is the design of investment requirements that go far beyond what the customer requires. Private operators want to provide only what is necessary to satisfy and retain the customer. I recall being involved in a concession planning program in Ecuador in which government authorities envisioned a $150 million investment program; so this was incorporated as an investment requirement to be imposed on the concessionaire. When I became involved, we spoke to the port’s current and potential customers and assessed the markets; to serve the expected market, we identified a much lower investment requirement of $20 million over a twenty year period. Obviously, this generated a much more interesting business proposition to potential concessionaires.
I would say that this approach, that is, incorporating the private sector’s view of what is needed to serve the customer, should be reflected in all concession transaction designs and is one in which we constantly apply. Otherwise, like in one of your Black Sea sister ports in which a $200 million investment is envisioned there, there will likely not be any interested firms if the investment requirement is seen as not being rationalized in accord with market demands. It’s just too big a risk for the private sector to undertake.
This is not to say that the private sector would not be interested in undertaking such huge investments. I am working on a program in South Africa that involves about a million containers of business volume a year. This equates to about a $150 million cash flow for the operation, more than what is necessary to cover operating and investment costs plus reasonable profit.
Has the world port sector finished its transitions?
Well, a review of the history of government will show that government approaches to doing business are constantly changing. So I would say that port sector transitions will be a continuous process. Governments and the private sector are always looking for ways to improve their performance and the conditions in which they perform their roles, and at times they are at odds over what is “best”. Governments are becoming more attuned to seeking a proper balance between what is needed to safeguard the public interest and what the private sector needs to be competitive. The private sector doesn’t want to be a victim of onerous regulations and at the same time wants as much market share as possible.
So along those lines, I would say the next “transition” activity will be generally on how to alleviate concerns about anticompetitive behavior. Even after restructuring, the result is often an oligopolistic environment; that is, in antitrust parlance, the market is highly concentrated, meaning that a very few players control the market. Therefore, countries are still susceptible to anticompetitive behavior by port operators, yet port restructuring has generally outpaced the development of the regulatory frameworks necessary to assure fair competition. The restructuring efforts will thus go from port restructuring to developing competition regulation frameworks and tools to monitor and control for anticompetitive behavior.
What about the role of ports ? do you see any new or changing role for them?
Port costs represent perhaps about 6 ? 10 percent of the total production and distribution costs of an exporter. But port cost is much more important than its percentage of total costs would suggest because it is one of a very few controllable costs that a producer has. Also, recent studies show that cutting transport costs in countries by 50 percent can double the trade flow. So ports will continually be challenged to reduce costs. Often, they will seek “seamless” processes within the terminal operation to reduce idle time of equipment and workers. Terminal operators are installing computerized process control systems to optimize equipment staging within the terminal. When a crane lifts a container and lowers it to the quay surface, there should be a minimal of waiting time by the crane operator or the chassis driver during the exchange. Reducing this time at each exchange point in the terminal means ultimately that the operator increases capacity and reduces capital investment requirements in both equipment and installations.
The emphasis of just-in-time logistics means that such efficiency gains must be felt throughout the logistics chain. Port authorities will have a greater role in pressing government to make the necessary changes to approach seamless processing of cargo in ports and across borders. Additionally, port authorities can make it easier for their customers to do business; they can encourage seamless transaction environments as well by streamlining documentation requirements and conveying them electronically. This not only refers to cargo processing documentation within the terminal and with Customs, but also to conducting billing and receivables transactions. Port authorities can establish internet “portals” to facilitate the many port related transactions between banks, shippers, carriers, insurance companies, freightforwarders and customs brokers, Customs, and the port authority.
Of particular importance will be the need for improved security systems in ports. The events of the year 2000 in my country demonstrate the potential vulnerabilities of a country’s infrastructure, and ports will need to play a lead enforcement role in cargo, vessel, and immigration security matters. Governments are pressing Customs in both ports and airports to inspect a greater percent of import and export cargoes. In my country, for example, legislation was recently introduced requiring 100 percent inspection rates in all of our ports, which in practical terms is impossible. Such inspections are detrimental to the seamless logistics chain that shippers seek to lower costs and will require ports to substantially increase investments in additional capacity.
As a substitute to 100 percent inspections, ports are introducing new technologies such as “smart seals” on containers, x-ray scanning systems, and radiation detection devices to facilitate security control; image-based biometric technologies will also be used for identification of employees and other personnel in the port areas, and these can be applied without much effect on the cargo processing chain. The intent is to increase the likelihood that illicit cargoes are detected and the probability that containers selected for inspection are indeed carrying illegal cargoes.
These technologies, however, are not failure proof; for an effective security system, they should be accompanied with information technologies that collect a wide variety of data and fuse the data in a way that has more reliable risk assessment results. My company has assisted in the development of a spatial-neural net technology that enhances the “hit rate” of risk profiling systems.
Even though port services will be provided by the private sector, landlord port authorities will continue to play an important role in trade facilitation and security. Moreover, this is a necessity if the port is to maintain necessary efficiencies and contribute to the competitiveness of a country’s exports.