By Jonathan Beard, Partner, Infrastructure Advisory Ernst & Young

Asia’s substantial infrastructure investment needs have been well-documented by the Asian Development Bank and other multilateral development institutions. The potential role to be played by private sector capital and expertise in addressing these needs has been equally well presented.

Unfortunately, much work remains to be done, especially in Asia, where we continue to see untapped potential – not so much in terms of limited private capital, but rather in terms of poor project preparation and execution. Many of the market fundamentals for successful public-private partnerships (PPPs) are in place; however, too often, the public sector fails to deliver on its side of the ‘partnership’.

This is especially true in the ports space, which does have a well-established global track record of successful PPPs. Across the world, private sector expertise and capital has played a positive role in supplying much needed capacity, raising productivity, improving service quality and spreading best practices.

Nonetheless, in nearly all instances, the flip side to private sector success has been a public sector successfully discharging its side of the partnership.  From the provision of critical land-side infrastructure and hinterland connectivity, to regulation, project preparation and transparency of procurement, government institutions have to step up to the plate.

Generally buoyant demand conditions provide tailwinds for PPP port development across much of emerging Asia. However, in too many instances, these favourable market dynamics are diluted by poor project preparation and poor procurement execution. Now, add in the Covid pandemic and public and private sector stakeholders face further challenges – and also opportunities.

The impact of Covid

With tariff wars creating a hostile environment for international trade, companies were already rethinking some of the principles that for years have shaped their supply chain strategies. The Covid pandemic has intensified this rethink, placing a greater emphasis on transparency, security and resiliency, including near-shoring, re-shoring and diversification.  This supply chain restructuring presents both challenges and opportunities for port planning and development.

In addition, most ports suffered a precipitous fall in cargo volumes and revenue in the first quarter of 2020, before enjoying a strong rebound. Therefore, an immediate challenge has been dealing with fluctuations in demand, not only for cargo handling but also empty repositioning.

Governments in Southeast Asia saw their fiscal positions eroded, with funds diverted to Covid response and less public sector capital available for infrastructure investment. In certain instances, this has slowed the rollout of new port investment; however, in other instances, it has sharpened the focus on activating the private sector both for greenfield development and asset recycling for brownfield projects.

The pandemic has also focused attention on digitalisation and automation. Automated container terminals have been less prevalent in emerging Asia than, for example, in Europe. Labour flexibility and productivity have tended to be higher in many of the Asian terminals, reducing the incentives for automation. However, this is shifting, especially in markets where labour shortages are emerging or where traditional terminal operations are nudging productivity limits. In competitive markets, liner requirements for ever higher quay face productivity cannot be ignored.

Covid health and safety restrictions have also shown how a port that depends primarily on technology rather than people, and flows of data rather than paper, is less susceptible to disruption. Similarly, an automated facility is often better able to scale its operations up or down as required – invaluable in a world of fluctuating demand.

Therefore, the pandemic has spurred automation and digitalisation. Set against this has been the financial pressure on many ports, which may feel they have to put planned infrastructure development or investment on hold until things improve and the path to recovery becomes clearer.

Digitalisation

Before Covid, digitalisation was already becoming a priority for an industry hampered by centuries-long love of paper processes. The work-from-home phenomenon has shown shipping lines, ports, terminal operators and other trade participants that developing good digital products and processes is the right thing to do.

This has accelerated the development of “digital trade communities” or “smart port initiatives” – enhancing the connectivity of participants in the trade ecosystem, via the deployment of digital technologies. This not only improves the transparency, resiliency and efficiency of supply chains, it can also increase the in situ capacity of port infrastructure, i.e., optimising the capability of current assets and deferring the need for new infrastructure investment.

Other digital adoptions can further optimise port performance, be it the use of machine learning, AI, data analytics or digital twins. Terminal operators, port authorities and other stakeholders in the port ecosystem collect vast amounts of data but very rarely tap into it or leverage its full potential. This is a missed opportunity. Every port operates as a central part of an ecosystem, with different businesses and organisations working alongside each other. They all have an interest in getting the port to work optimally, but the insights and incentives that would make this happen are inadequate or absent.

Focused digital investment can deliver significant and immediate benefits from the quay side to the bottom line. It can optimise the management and planning of what occurs in the port waters, improving the performance of all players in the wider port ecosystem. The port can become more competitive and resilient – better able to adapt to the changing world of trade. This includes removing delays and inefficiencies that result in lost productivity and increased costs across the port ecosystem, and making far better use of existing capacity.

Successful private sector participation

Nonetheless, the fundamentals for successful private sector participation, remain largely unchanged, albeit with some adjustments for a “post-covid” world. We will not run through an exhaustive list, but the key areas are the following:

  • A level playing field – This may appear to be stating the obvious, but too often, private sector participants are asked to partner with a public sector entity that is both operator and regulator or that has varying interests in potential competitors. This can also include significant, unnecessary variations in concession terms between competing projects and a lack of consistency in the triggering of new capacity.
  • Establish and follow a clear programme for future development – When and how will new entrants be permitted into the market? Container shipping is increasingly a game of scale economies – bigger vessels, bigger liner companies, bigger liner alliances, more complex port calls and box exchanges, and bigger terminals. In major port markets, operators will want opportunities to scale up via contiguous expansion. Multiple operators may encourage competition, but can also lead to fragmentation – whether it be for supporting land-side infrastructure and services or scaling up quay-face capacity to better accommodate larger vessels and a wider variety of vessel sizes. There is a balance to be struck here, between competition (i.e., a variety of operators) and scale. Too much capacity can be as damaging as too little capacity: the potential size of the market needs to be considered as does its characteristics – import / export cargo or transhipment cargo or both?
  • Regulating prices – Regulation of prices via competition has many advantages, but in several markets, it is simply not possible. Where volumes are small or at early stages of market development, multiple operators and concessions may be unfeasible. Clear and simple price regulation is preferred, with a transparent and independent process of adjustment and appeal both upwards and downwards. A critical concern should be prices for importers and exporters, since they may have little choice in terms of port selection. For ocean-transhipment, there is rarely a need for price regulation, since it is an internationally competitive market – shipping lines have a choice of transhipment hubs.
  • Align incentives – Large upfront payments and guaranteed lease payments may be attractive to the port authority or other public sector body, but there are advantages if both sides are incentivised to maximise throughput by placing greater emphasis on revenue sharing linked to cargo volumes.
  • Beware the defensive incumbent – Likewise, large upfront payments may be bid on new projects by incumbent operators, to keep out new entrants, artificially constrain capacity and preserve a monopoly position. Again, upfront payments may be seductive to the public sector, but may undermine wider economic goals, if bidding evaluation criteria overly reward “money today” without rewarding the development of new capacity and throughput.
  • Develop credibility in the market and a clear pipeline where scale of market permits – In larger emerging markets, there is sometimes a temptation to “swing for the fence” and promote overly optimistic national development plans, littered with ambitious and often contradictory expansion and development goals. Unfortunately, these are rarely delivered, and simply undermine market credibility. Whilst major markets do benefit from a national plan, this should be combined with a realistic road map – where there is little track record of PPPs, building up credibility is critical. “Walking before running” will deliver better results.
  • Digital should be front and centre – From project procurement through to design, implementation and operations, there are a range of technologies that should be considered, be it mandating building information modelling (BIM) for design and construction, automated operations, use of IoT sensors for better asset management, or positioning within a wider smart port strategy of collaboration and co-operation. There is no one size fits all, and levels of adoption or sophistication will vary by market, but thinking digital from day one, will help drive performance and “future proof” development.
  • Green should be front and centre – Many digital technologies offer improved sustainability, but in addition, development should also mainstream “green port” thinking and de-carbonisation, whether it be use of sustainable power for terminal operations, or tooling up as a multi-fuel port to support and attract port calls from vessels using cleaner or renewable energy in their operations.

The potential for Southeast Asia port development through PPPs is clear, but we need to learn from the region’s successes and failures, and execute accordingly if that potential is to be truly realised.