Mistaken ‘public sector logic’

Apparently, the debate about the case for regulations concerning the granting of concessions to private sector companiesTender in ports has resurfaced in the process of the development of an EU ports strategy. For policymakers it may be appealing to address this issue with the, in my view mistaken, ‘public sector logic.’ In this perspective, the port authority, as part of the public sector, needs to make sure all land lease / concession contracts are granted through open competitive (tender) processes, as this provides all interested parties with an equal opportunity. While this seems appealing, this frame in my view is problematic.

The alternative frame is to regard state owned port development companies (PDCs) as developers of vital port business ecosystems consisting of private companies active in terminal operations, logistics, manufacturing, and others. The central challenge of the PDC is to attract private sector investments. And while competitive bidding may be a very effective method to select the best private company in many cases, it does not work in all cases.

Especially for attracting companies in manufacturing and logistics, ports often compete for attracting private sector investments with other ports and other locations like dry ports and logistics/industrial zones (in the EU and outside it). In this competition, the ability to meet the requirements of potential investors in terms of timing and decision-making may be critical. Regulation preventing direct granting of port land leases could seriously undermine the competitiveness of a port. For instance, it would be painful for a port to lose an investor willing to build a biofuels plant as a result of the ports inability to swiftly sign a land lease agreement. In the majority of such cases, private investors do not bid for access to a market (like the container terminal market), they seek land in a ‘business ecosystem’ for their investments. Thus, limited regulation to a specific set of ‘port markets’ may be a sensible approach.

However, even in specific port markets, policymakers need to consider the importance of treating existing investors well. There may be a need to modify such agreements, by adding land, extending the lease, or agreeing on relocating activities. The main goal of the port development company generally would be to attract additional investments from existing customers. As in the previous case, tight regulation limiting the PDC’s ability to do so is not helpful.

In short, while competitive processes are useful tools, it is important to give PDCs flexibility regarding to decide when to deploy them, and when not. Regulation that requires the PDC to justify their decision to not use them seems sensible, stronger regulation through imposing open competitive processes is, in my opinion, not.