develop a competitive port ecosystem

BOX 3.7

Lesson 7: Broaden access to the finance and public support needed to develop a competitive port ecosystem

China’s initial port reforms gave local governments the incentive to develop their ports. In addition to delegating regulatory and operational responsibilities to the local level, the Ministry of Transport also allowed a portion of port profits to be reinvested. The subsequent clear separation between regulatory and operational functions allowed port state-owned enterprises to focus on maximizing efficiency and to adjust pricing and service offerings. Local governments diversified sources of funding for port development early on by forming joint ventures to attract foreign direct investment, which also brought in new technology and modern management practices. State funding was provided for port development, but the importance of direct state funding diminished over time and was replaced by commercial financing sources. State support shifted to ensuring connectivity with the hinterland, improving environmental performance, and transforming the port-city ecosystem. Tax incentives for the relocation of industries to new port areas also enhanced their economic attractiveness.

Many emerging economies still have relatively weak banking systems and poorly developed stock exchanges, and local investors may be reluctant to finance ports because of strict and sometimes uncertain regulatory regimes. Experience from China shows that it is possible to move from a regime in which port developments are financed wholly from the central government budget to one in which ports have access to a wide range of financial instruments with different maturities, collateral requirements, and risk-reward ratios. Opportunities beyond traditional finance (government grants and bank loans) are therefore worth investigating. The net should be cast wide, going beyond national boundaries to tap into international expertise and financing.

In the past, many countries have used the landlord port-concession system to attract capital and management expertise in the same transaction. This is still a popular, well-tested model. But Chinese experience has shown that it is possible—and in some cases may be desirable—to decouple the two, allowing ports in other countries to access often-cheaper capital from investors that do not necessarily want to become involved in port management.

This leaves open the question of where the necessary management expertise will come from. One option is joint ventures to which the overseas partners contribute management skills rather than financial resources. In the past this expertise has usually been acquired through short-term management contracts, but such arrangements have proved to be unattractive to the most desirable partners because of their short duration and low returns. A longer and more rewarding arrangement, such as a joint venture, might prove more attractive and—as China has shown—would satisfy the need for continuous upgrades of port operations.

Another option would be for international aid packages to include the transfer of know-how and management skills through joint ventures or longterm mentorship arrangements paid for by the donor countries.

which attracted not only finance, but also knowledge, skills, and equipment for port management and operations. Foreign aid also increased, with the World Bank being an important partner. Its first transport loan to China was to support the ports of Guangzhou, Shanghai, and Tianjin.

Recognizing that local governments needed incentives to invest and improve the operational efficiency of the ports in their jurisdictions, the MoT altered its financing arrangements to allow a portion of port profits to be used by the local port authority for improvements. Success of the port also meant more profits for the local port authority to use for further improvements, thus creating a virtuous circle.