Developing a Framework for Privatization of the Ports in Suriname: Focus on PPP options

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Developing a Framework for Privatization of the Ports in Suriname:

Focus on PPP options

Thesis Master of Business Administration 2009 – 2011 (MBA Intake 6)

DAVID MENDEZ

PARAMARIBO, December 2011

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Acknowledgement

This thesis is the result of (the completion of) my Business Administration study at the FHR Lim A Po Institute. It has been very hectic and not easy to gather data for this research. Some of the data was based on ground breaking work, while other existed, but not in a form that was suitable for my thesis. This is the reason why I had to analyze, translate and even shape the data that is presented in this thesis. To study and work fulltime has taught me time management and how to use time to its full potential. It has also put an enormous pressure on my social life. For this reason I first want to thank my mother, wife and kids, family and friends whom have supported me during these past eighteen months. I have not always had the time I would have liked to spent with them, but I will make it up soon.

Next, I would like to thank Stephen D‟Alessandro who has been my supervisor for this thesis. He has helped me structure my thoughts, especially during the process of writing the first proposal.

Stephen has been to Suriname and also knows much about the country. This has led to interesting discussions about Suriname which I have enjoyed very much. Our discussions about reality and believes were very inspiring.

My special thanks go out to Mr. R. Vijzelman who was one of the most valuable interviewees to take part in my research. Without his help, my work would have been incomplete.

Furthermore I thank all other interviewees for taking part in this research, and I hope that

the information I have gathered can be used by them in order to improve their scope on their business.

Last but not least I would like to thank the institute and especially Mr. Hans Lim A Po for giving me the opportunity to study and for his dedicated support over the past two years to ensure a successful ending. Without this support I would never have come this far.

David Mendez, December 2012

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Abbreviations

ABS General Bureau of Statistics MAS Maritime Authority of Suriname IPS Integra Port Services

SPS Suriname Ports Services BOO Build-Own-Operate-.

DBO Design-Build-Operate-

DBFO Design-Build-Finance-Operate- DBB Design-Bid-Build-.

DB Design-Build-

BOT Build Operate Transfer IMF International Monetary Fund DP World Dubai Ports World PPP Public Private Partnership

HBS Port Management Company (Havenbeheer Suriname)

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Abstract

Port management is not something new to the world, and also not to Suriname. For decades now, Suriname has been part of a strategic route with a flourishing import and export possibility for investors. With the increase of industry in Suriname, also comes an increase of transport by sea, since in many cases this proves to be more economically sound than transport by air. In this regard it has become important to develop a correct strategy of port management that will bring in more profits to the economy of Suriname and at the same time create a sustainable path of activities for ports of Suriname. The success of the privatization process is solely dependent on the relationship that has been forged between two stakeholders, the public and the private sector.

The port of Suriname uses the landlord model. In this research I will argue that another

framework within the public-private-partnership (PPP) can also provide benefits for Suriname.

The practical development of port management is an important aspect of current development of our major controlled ports. This means that the development of any port strategy, if there is any, should bear in mind the land mass and general access that Suriname has to the Caribbean in the North, Guyana in the West, French Guyana in the East and even Brazil in the South. Since these are the countries surrounding Suriname, no port development program should merely look at the development of a port in Paramaribo, the capital, alone nor regard this as the only route of goods transports to and from Suriname.

The focus of this research, however, is not to develop a framework for monopolism of transport, but to emphasize the use of the private capital influx to Suriname. This development has close links with the current development of port infrastructure and brings in the new era of port

authority and port management for Suriname. A BOT model makes provisions of port incentives for most port operators who allow innovation. The successes from this form of model seem to be numerous. The model usually attracts the private sector in financing, developing and renovating the infrastructure at the port. The commercial risks that are affiliated to the private company tend to be reduced as compared to the landlord model. The BOT model gives the government

opportunities and also enables the aspect of additional revenue and development.

My contribution to this line of development is merely to establish a basic framework.

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Chapter 1: Introduction

1.1 An Overview

Privatization involves transferring the ownership of an enterprise, business, public service or an agency from the public to the private sector (Filipovic, 2005). The process engages the transfer of any function of the government to private sectors including law enforcement and revenue collection. Various developed and developing countries apply the process of privatization to improve their economic performances according to Parker and Kirkpatrick (Parker &

Kirkpatrick, 2005). The authors also noted that both developed and developing nations have been promoting this process back from the 1980s. Although the latest reviews indicate that the impacts of privatization have been positive so far, consideration for the variances between its effects in both developed and developing economies has been minimal. My study therefore will focus on assessing the privatization of the Suriname Ports. In essence, the report will entail the requirements needed for each stakeholder (i.e. private and government) to facilitate this partnership process. The report will furthermore develop a framework that will guide the government in prioritizing the most suitable Public Private Partnership (PPP) option based on its objectives and goals. Through this structure, the government will assess the advantages and disadvantages of each Public Private Partnership (PPP) option, consequently choosing that option that fits best to their objectives and goals accordingly.

1.2 Problem Definition

Privatization can be broadly applied as a strategy for improving the economic performance in developed and less developed countries (LDC‟s). The most suitable policies applicable to facilitate this process remain controversial particularly in the LDC‟s with the promotion of economic performance of such regions. The success of any privatization process in Surinamese ports will depend on the government choosing the best policy or strategy of PPP to enhance competition plus effective state control as suggested by Hardcastle and his colleagues (Hardcastle et al, 2003, p.23). This does not only suggest that both strategy and policy need to be

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in sink, but also that the failure of a chosen strategy for PPP can be the result of inadequate or insufficient policies. In their studies they have elaborated the relation between PPP and policy;

hence it has become imperative for the government of Suriname to choose right.

1.3 Research Objective

The objective of this research is to develop a basic framework under which the Suriname government can identify the most appropriate public-private partnership (PPP) option to satisfy the needs of port management in Suriname. This framework should be further developed through more in-depth research and analysis in the future. This framework is thus the initialization of such a process and helps establish the scope of issues, considerations and current trends in the development of port management for Suriname.

This research was done by initially establishing the requirements from each stakeholder from the private and public domain and then a structure was developed to guide the government in setting and prioritizing the goals and objectives of the PPP options proposed. Schaeffer and Loveridge would agree that this approach is an essential requirement to determine the best PPP system applicable to every respective geographical contingency of port management (Schaeffer &

Loveridge, 2002, p.169).

1.4 Theoretical Framework Assumptions

Since port developments are part and parcel of the economic development in Suriname the research provides a snapshot of the development of port management in Suriname. As such it has become imperative to indicate the factors and conditions that should be considered while following the arguments proposed in this thesis. This research was based on the following assumptions.

 That the government has a long term vision and approach for privatization of national assets.

 That the perspective in development of these port management assets is to generate profit and re-invest in maintenance and upgrade of port infrastructure.

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 That political parties can agree on the long term approach to the privatization of national port management assets.

 PPP is perceived as the most strategic option that is accepted and promoted by all key stakeholders.

 That all other factors are kept constant so that the selected PPP option will meet the setout objectives and goals

 That the study participants provide relevant, unbiased, accurate information.

1.5 Research Questions

In identifying the suitable PPP framework to facilitate the privatization of the Suriname ports, the regional government should have access to the diversity of options available to facilitate strategic public-private partnership. Policy makers must also know and understand the required policies and controls in establishing the agreement between private and government agencies.

The following research questions therefore were applied in providing a comprehensive understanding of this research work and the issues involved:

1.5.1 Major Research Questions

 What are the short, medium and long-term requirements from each of the partnership stakeholders (i.e. private and government)?

 What are the public-private partnership options available?

 What are the advantages and disadvantages from each PPP option?

1.5.2 Minor Research Questions

 How do the Suriname ports operate and how will this PP partnership benefit the stakeholders?

 What are the success factors for this PP partnership process?

 Are there factors/issues that can constrain this public-private partnership process in Suriname?

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1.6 Research Methodology

Comprehensive and adequate information was required in seeking the solution to the problem of this research. This research has therefore applied qualitative research methods to facilitate the information needed. Diverse data collection methods were applied in gathering data to generate both international and local information concerning PPP. Data was generated from primary and secondary sources. Surveys were used in order to collect the primary data, with interviews and questionnaires as the major data collection tools. Secondary data was generated from library and internet: materials included books, articles and academic journals, among others. Research experts were solicited to apply such mixed data collection techniques to derive crucial and sufficient information. Hence the tools and methodology used were based on scientific investigation of the subject matter. Thus the approach for this research was also used as a tool to establish a fresh perspective on port authority in Suriname.

1.7 Limitations

Just like all other studies, this research was liable to a number of constraints that if not properly managed could have been very damaging to the effectiveness of the results. Understanding the probable limitations in advance therefore helped the researchers to be adequately prepared on how to tackle such challenges once they arose. Accurate and up-to-date data gathered by researchers moreover was very helpful in finding the solutions to the said research problem.

1.7.1 Budgetary Constraints

Gathering and processing research information can be extremely expensive. In order to equip the researchers with adequate expertise on this topic, skills and knowledge of conducting extensive surveys needed for collecting the primary data, comprehensive training was be essential. Beiske admits that such activities in addition to acquiring the research materials plus other relevant expenses required considerable amounts of funds (Beiske, 2007, p.33). Suriname does not have the funds for such research.

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The specialized knowledge regarding PPP options for ports, and sufficient data is lacking. To add to this problem: if there is data, unwillingness prevails to share the data.

1.7.2 Time Constraints

Pressures to develop an effective privatization strategy may affect the balancing between that objective and client satisfaction at the Suriname ports. This may impact the need to make quick decisions in order to improve the performance levels of the ports. Sometimes the researchers may feel the allocated time to conduct the research, especially as it regards fieldwork to gather the primary data, is limited. According to Beiske (2007, p.33), this may lead to working under pressure and conducting surveys hurriedly to meet the research deadline, consequently leading to gathering unreliable data. In greater context the validity of the data may become misconstrued and therefore less sensitive to real live patterns.

1.7.3 Data Reliability

Valuable data for any research results is highly dependent on the critical accuracy of data gathered. Data compromises could affect the ability for data to provide relevant solutions. The accuracy level could suffer due to such factors as using leading questions, conducting biased interviews and applying unrepresentative samples in addition to receiving wrong or inappropriate answers. According to Beiske, „although efforts of ensuring the data accuracy by employing representative samples and objective interviews will require additional costs for the research project, such expenses are worthwhile to avoid making poor decisions/conclusions and the probable costly mistakes‟ (Beiske, 2007, p.35). This indicates the importance of the integrity of all data that is gathered for research purposes.

Researchers can employ the triangulation methods to increase research validity. In general researchers take their account, themes and descriptions back to study participants to verify whether it represents their reality. This will involves asking the members to verify whether their descriptions are realist, complete and accurate. The individuals could similarly ascertain whether the interpretations and themes provided by the data are representative and fair. Triangulation

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may further involve conducting an external audit in validating the research design and the data collection techniques and plans.

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Chapter 2: Literature Review

2.1 Introduction and Background

This Chapter deals with some theoretical background information on the research topic. First, the theoretical information on Public-private partnership (PPP) was dealt with. I described the PPP and the discussions among authors. Then, background information was given on different models of PPP with regards to ports. The existing strategy of the port management in Suriname is also addressed.

According to some authors, public-private partnership involves an arrangement between the private sector and government to allow public services to be under the obligation of the private sector, traditionally or partially (Bennet, 2007; Filipovic, 2005; Cook & Yuichiro, 2003). This process can also occur through vouchers or contracts (Bennet, 2004). The popularity of PPPs‟

application has been increasing as the governing model for public goods or services delivery. In addition, PPPs have increasingly emerged as the default solution to the governmental challenges and needs particular for the infrastructure. The trend might accelerate as the governments face fiscal deficits and seek alternative means of financing and delivering government services (Forrer et al, 2008, p.475). This because the PPP system can only increase so far and will stretch thin as discussed below.

Governmental leaders consider PPPs as the means for securing unique technical expertise, innovation, management and funding from the private sector in addressing the challenging public policy problems (Forrer et al, 2008). This is obvious when one relates it to the public and private partnership that this system generates. The expanding domain relating to services and goods offered by PPPs, for example, comprise the private hospitals, schools, roads and infrastructure, wastewater treatment, security services and emergency response. Thus, creation of effective PPPs may face structural and technical challenges. As the PPPs‟ application continues to develop over time, one thing that has become critical among the policy makers revolves around the value of accountability. This type of accountability is transferred from private to public sector. For example: the involvement of the private sector has been evident in infrastructure projects that

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occur through the help of a contract, build and design facilities, while the government takes over later to run and maintain such structures. In structuring the PPP, the government must select an option since its implementation should occur under an entire reform strategy (Booth & Skilling, 2007, p.46).

Choosing an effective PPP option therefore will require the following considerations:

 The applicability of the PPP

 Technical limitations and the sector goals

 Institutional challenges and issues

 Regulatory and legal limitations

 Financial, commercial and the financing requirements or constraints

 The market‟s local and international interest

 The ability to get stakeholders to align and agree

 Special sector requirements based on the characteristics of a population or system

After putting all such considerations to mind, the government should compare the reform objectives list with such consideration. It will also be critical to compare the objectives with the features of every contract in addition to the advantages and disadvantages, probable outcomes and the prerequisites. Such an analysis will be essential in enabling the government to determine the most effective PPP option that will most likely succeed in satisfying the most fundamental project objectives (Schaeffer & Loveridge, 2002, p.169). The effectiveness of the PPP may also be a result a lack of considering these issues.

The government should prioritize that option that has an increased coverage, efficiency improvements, improved services plus a reduction of the government subsidy and increased client satisfaction (Schaeffer & Loveridge, 2002). Conducting a cost-benefit assessment will be critical through consulting several potential partners to secure insight into the lack of appeal or having an appeal of options under consideration. Governments select various PPP options to facilitate services in diverse projects or sectors based on their successes and failures elsewhere.

The PPP models classify in four broad forms based on the increased private sector engagement and risk assumption involving supply/management contracts, turnkey projects, concessions, lease and the private asset ownership.

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2.1.1 Concessions Model

The government will award the concessions to the private company through franchise or BOT (i.e. Build-Operate-Transfer) contractual arrangement. The private sector will be fully responsible in delivering the port services in particular areas inclusive of maintenance, operation, management, collection and construction. All the capital investments will be the private company‟s obligation, providing all assets required but they will be under the government ownership during the period of concession. The government will take the role of developing the performance standards while ensuring the private firm‟s compliance. The government will seize from the port service provision to price and service quality regulation. The private body will collect tariff directly from customers. In some exceptional cases, the government will be required to provide financial support to the private company in funding its expenditures. All capital investments to upgrade, build and expand the project will be the responsibility of the private entity using its resources and paid-tariffs. The concession project period will be between 25 to 30 years to enable the operator to have adequate time for recovering the invested capital and generate appropriate returns (Felsinger, 2005, p.34). This model has been applied in other contexts and countries such as in the México (Baird, 2000). For example in Mexico the Rosario Waterway concession (Taley 2009, p.128).

Successes Failures

 Attract private financing  Complex contract

 Provide incentives to port operators for improved efficiency &

effectiveness

 Government must upgrade its regulatory capacity in terms of performance and tariff monitoring

 Private company had power to prioritize and innovate effectively

 Long-term contract complicating the bidding process and design of the contract

 Politically controversial & difficult to organize

 Limited competition

 High risk-operator invest on new contracts only

Source: A. Baird and P. Kent (2001).

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2.1.2 Build-Operate-Transfer, Turnkey and Related Arrangements

Build-Operate-Transfer, Turnkey and related arrangements will operate as a specialized concession where the private company will fund and develop the new port project based on the performance standard established by the government. The government will select from the Build-Operate-Transfer (i.e. BOT) contractual options including design-bid-build, design-build, design-build-finance-operate (i.e. DBFO), build-transfer-operate (i.e. BTO) and build-own- operate (i.e. BOO). The private company will have the ownership of the port assets. On completion of the contract however, the government will assume the port ownership (Felsinger, 2005, 37).

This categorization suggests the following:

 Build-Own-Operate-The developer/private firm will build and operate the Suriname ports without transferring ownership to the government.

 Design-Build-Operate- Ownership will never transfer to the private company but a single contract will be let-out for designing, constructing and operating the port project.

 Design-Build-Finance-Operate- Designing, financing, building and operational roles combine and transfer to the private company.

 Design-Bid-Build- The private contractor will make bids based on the specifications proposed whereby the winning bid contractor will take charge of the port project until completion after which the government will be responsible for managing and maintaining the project.

 Design-Build- The government will take the ownership of the infrastructure while bearing the role of maintaining, operating and financing the process (Felsinger, 2005, 37).

These elements of BOT have their own risk to public and private enterprise and seem to be linked to another by contrast. Public risk, for example, seems to be the lowest when there are Build Own Operate concessions, but high for private concessions. A schematic evaluation of this system of operation is as follows:

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 Attract the private financing in developing and renovating the port/infrastructure

 Limited effect on the overall project performance

 Reduce commercial risks affiliated to the private company

 Difficult to link production increases generating from BOT with the

commensurate demand improvements

 Only a single customer-the government  Private debt a costly substitute for the government funding where pay or take agreement is operational

 Direct user fee-common source of revenue

 Competition benefit restricts to the initial/first bidding process

 Additional revenue sources-shadow tolls, vehicle registration fee & lease payments

 Contracts are re-negotiable during their life-cycle

 Financed partly/fully by debts  Tender processes and documents need adequate time and sufficient time Source: A. Baird and P. Kent (2001).

2.1.3 Service Contract

In this PPP option, the government is required to hire a private firm/entity to conduct one or more task as specifically agreed. The project should take between 1-3 years. In the case of Suriname, the government will primarily provide the infrastructure service/contract while offering just a portion of the port operation to its private partner. The private company will have to perform the required service under the agreed cost. The government will use the competitive bidding guidelines in awarding the contract to the firm. The government will pay the predetermined charge to the private company to compensate for the service based on unit cost or one-time fee. It is recommended that a system cost spreading is used, since some investors may not have the capital upfront to participate.

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In this system, the private company will not interact with the port consumers. The government will fund any form of capital investment needed in expanding or improving the system (Booth &

Skilling, 2007, p.46; Felsinger, 2005, 38). Likewise, the advantages and disadvantages of this system can be listed as follows:

 Clearly defined service/s  Unstable if the primary objective is attracting investment

 Easy monitoring of performance  Contractor has no obligation to finance

 Demand level reasonably certain  Contractor effectiveness compromised if other fund-sources fail

 Low risk in expanding the private firm‟s role

 No deeper effects on system operations but only limited and discrete

improvements

 Quick and substantial effect on system efficiency & operation

 Government remains responsible for tariff setting

 Vehicle for managerial capacity development & technology transfer

 Short-term contracts-allows repeat competition at the port sector

 Low entry-barriers to the sector

 Low costs

 Promotes competition

Source: A. Baird and P. Kent (2001).

2.1.4 Management Contract

Using this option, the government will expand the contracted services to incorporate part or all the management and operations of the port sector. The ultimate service provision responsibility will remain under the government but the management regulation and authority will be the private company‟s obligation. The private firm will provide the working capital while fund

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investment remains the government‟s responsibility. As such, the private company will receive a certain predetermined labor rate plus other anticipated costs for operation. Private entity will be free to interact with the port clients while the government sets the tariffs (Felsinger, 2005, p.31).

This model has it strengths and weaknesses as is seen below:

 Multiple gains secured with no asset transfer to the private firm

 Tricky-splits between service

&management responsibility and expansion& financing planning

 Less challenging when developing  High risk-private firm has no

authority/autonomy to institute broad&

long-term change

 Less controversial  Incentive/profit sharing given to private firm-may increase inflation

 Low-cost-requires limited workforce from private company

 Interim arrangements-for improvements

 Increased private firm participation Source: A. Baird and P. Kent (2001).

2.1.5 Lease or Affermage Contracts

This option will operate in conduction with the build-rehabilitate-operate-transfer. The private company will entirely be responsible for the port sector service and quality standard while availing the services at own expense and risk. Only the replaceable or new investments will be the responsibility of the government. The operation period will be 10 years but the period can undergo renewal for up-to 20 years. The private company will be responsible for all the customer debts and losses. In the initial stages however, the government will finance the project while the private firm will operate and maintain the ports. A portion of the tariff will transfer to the government for servicing loans that will help in funding the port system expansion (Felsinger, 2005, p. 33). Overviewing this, shows us the following comparative detail:

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 Private firm‟s profits based on utility costs and sales-incentives for higher efficiency and sales levels

 Revenues generated from customer payments

 Private company offered a fee to cover asset-cost usage but not capital

investment

 Tariff levels were highly sensitive- demand for restructuring & revision of the complex tariff arrangements

 No mobilization of private capital investment

Source: A. Baird and P. Kent (2001)

2.1.6 Government objectives for the PPP process

For selecting a public private partnership option the governments‟ specific objectives are influenced. For example, is it the government‟s priority to reduce the costs of service? Or is the priority to expand coverage? It all depends on the objectives, this also counts for Suriname. For selecting a public private partnership option the governments‟ specific objectives are influenced.

For example, is it the government‟s priority to reduce the costs of service? Or is the priority to expand coverage? It all depends on the objectives, this also counts for Suriname. In Suriname in particular, the best fit model may require project to be subsidized by the government through donations outside of their budget capacity. Fiscal loans are often secured to finance projects of this grandeur.

2.1.7 Prerequisites to implementing a particular form of PPP

An analysis will determine the status of the sector undergoing reform, whereas each form of PPP has a set of prerequisites for successful implementation. For example the deeper the forms of PPP (BOT) that transfer greater risk to the private sector the more sophisticated legal and regulatory structures, as well as availability of local skills to implement and monitor the

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transactions. Skills that are lacking or not properly developed in port sector of Suriname especially in the port management company, because of high political influence .

Reports from Skilling and Booth confirm this perspective from a study they did in 2007 on port authority.

Source: Heather Skilling and Kathleen Booth. 2007 PPP Option Political

Commitment

Cost Recovery Tariffs

Regulatory Framework

Information Base

Government Capacity in Contracting, Managing &

Analyzing

Service Contract Low Low Low Low Moderate

Management Contract

Moderate Moderate Moderate Low Moderate

Lease Moderate High High High High

Concessions High High High High High

Build-Operate- Transfer &

Variations

High Variable High High High

2.2 The Ports Sector and Suriname

Ports connect one region of the world to the other such that every product we come across daily travel to and from the many deep-draft ports that accommodate the ocean-going vessels (Brooks

& Baltazar, 2001, p.1). Ports are located within the coastal areas, great lakes and over the river systems. They involve dynamic and busy transportation hubs that consistently adapt to satisfy the global trade demands, acting as the nexus of the business transactions relating to imported and exported products. The majority of economies rely on ports in promoting international trade, strengthening the national and local economies, providing the higher-paying jobs and increasing the living standards of its citizens. Ports spend huge amounts of funds annually to minimize the

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effects of the port developments and operations within their surrounding natural resources and communities.

There are two main multipurpose ports are operated by HBS (port management company) in Suriname, respectively in:

 Paramaribo

 Nickerie (under rehabilitation)

HBS is a limited liability company a public agency under the Ministry of Transport. Its institutional framework is:

 It has regulatory function

 And it manages and develops the land infrastructure

Suriname lies in a South-American region that comprises of diverse ports.. The workforce consist of employees and employs both on permanent and temporary basis (managing director) around 175 persons (currently 134 men and 41 women, source: http://havenbeheer.com).

It is expected that the workforce will increase over the next 10 years, as a result of the expected yearly growth of 6% GDP of the Surinamese economy (Government Development Plan 2012- 2016), and a projection made in an interview with the managing director of the Port management company, Mr. Roy Defares. The ports in Suriname are in Paramaribo, Paranam, Moengo, Smalkelden (private wharf), Wageningen and Nieuw Nickerie.

Appendix 1 provides a comprehensive table that demonstrates the specific attributes of each port, such as total area, docking area, port facilities, employees, investment, traffic volume, types of cargo that are handled, operations specifics as well as restrictions. In spite of increasing international commodity prices within 2008, Suriname‟s economy retained a 5.2% economic growth in that year which was slightly lower than the previous year of about 5.3% (Pura&

Guttierrez, 2008, p.257). The economic growth was facilitated by the mining, construction, restaurants, hotels, and wholesale/retail commerce. Suriname‟s government has continued focusing on the fiscal policy in enhancing growth while the monetary policy has been targeting inflation. The economy of this region has therefore been growing averagely at 3.9% between

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2005 and 2010, consistently following the number of vessels constantly getting to the main port plus the quantity of shipped cargo.

Over the last few years, Suriname‟s economy has indicated a developing trend that predicts the ports‟ success and sustainability in the future.

Suriname has a small economy, with public service activities, mining and the supporting service activities as the largest contributors. Economic activities amassed a crude USD 1.3 billion in 2005 and increased to USD 3.6 billion in 2010. The Suriname economy is showing a steady growth over the last years. In the period 2005-2009, the average Gross Domestic Product was 4.2% per annum (General Bureau of Statistics, ABS 2010). It is assumed that the long-term growth rate will be 4.4% on average between 2011 and 2025 (IMF). This primarily based on projected exploration of our natural resources in mining.

The future GDP structure can be characterized by the following main tendencies:

• Exploitation mining sector (gold, oil, other minerals) as quick as possible. In particular the interest of investors in our natural resources.

• Main focus on agriculture for the long-term development of the economy

• Development of the energy sector due to expected increased economic activities

• Development of the service sector including tourism, ICT, finance

Such trends have the capacity of accommodating the diverse changes resulting from the society and trading policies. The high adaptability and viable strategies for port management are offering a considerable trade environment that can greatly help in minimizing risks to increase the performance level of the ports (Brooks & Baltazar, 2001, p.11). The adjustments nevertheless cannot effectively take effect without consulting the port‟s framework under which the discussion of processes and policies occurs. Regardless of the prevailing economic challenges globally, the Suriname economy has been developing steadily. In this respect however, there are still lingering questions regarding the best strategies of advancing the Suriname ports

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management to facilitate long-term port success. As the following table indicates, the increasing/growing trend of Suriname economy between 2005 and 2010 implied that sustainability and efficiency of this sector in the future is possible. Although there are potential changes in the future, the trends demonstrate a capacity to accommodate such changes accordingly in relation to societal and trading-policy change. There are important economic indicators resulting from an analysis of the activities in the ports of Suriname over a period of 6 years. These figures were used to develop a premise to support the argument of privatization of ports in Suriname. The first analysis is based on the increase of Gross Domestic Product, calculated for ports in Suriname as shown in the figures from the General Bureau of Statistics (ABS).

Source: Developed from ABS Documentation of National Planning Office and Central Bank of Suriname (2010)

It is important to note that from 2006 – 2010 there has been an increase in the Gross Domestic Product of Ports in Suriname (HBS). This cumulative increase is averaged at 3.9% and shows a normal distribution of increase. What this confirms is the fact that the current pattern of GDP growth indicates that return of investments in ports in Suriname are sure, if all circumstances remain the same.

2010 20009

2008 2007

2006 2005

8 6 4 2

0

Y ear

Individual Value

_X=3.933 U C L=7.125

LC L=0.742

2010 20009

2008 2007

2006 2005

4 3 2 1 0

Y ear

Moving Range

__M R=1.2 U C L=3.921

LC L=0

Chart of Real GDP Growth Port Suriname (%)

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Even more distinctly is the relation between GDP and the number of ships that entered Suriname, respectively;

Source: Integra marine

Clearly, the number of ships entering Suriname determines the growth of GDP. Needless to say that the growth of GDP has strong ties with the commercial approach, employed to achieve this growth. It therefore becomes eminent to target a commercial system of management that generates the most lucrative investment, but also one that facilitates the needs of all stakeholders, while creating a best fit model between profit and risk.

Competitiveness of an economy is divided in microeconomic and macroeconomic competitiveness. The World Economic Forum compiles a yearly competitiveness index.

Suriname has been ranked at 103rd on average out of 134 countries. Suriname is in the competitive index behind other CARICOM member states such as Trinidad & Tobago, Barbados and Jamaica. The average score of Suriname is 3.6 out of a maximum of 7.

200 100

0 -100

-200 99

95 90 80 70 60 50 40 30 20 10 5

1

Residual

Percent

Number of Ships Entering Suriname vs Real GDP Growth (Response is Number of vessels enterin Suriname 2006 - 2010)

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Table Comparable CARICOM economies

Source: GCI, 2008-2009

This proves that Suriname needs to make urgent adjustments to its ports in order to be able to satisfy international competitive rating.

Below are the selected economic indicators over the period 2005-2010 and comparable ports of Caricom nations. Furthermore a global competiveness index of Surinam and Caribbean nations.

Guyana * Barbados

Trinidad &Tobago Jamaica

Suriname 120 110 100 90 80 70 60 50 40

Country

GCI Score

Regional Ports GCI Index2008- 2009 (134)

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Table Comparable type CARICOM economies

Source: GCI, 2008-2009

2.3 The Development of the Suriname Ports

The developments of these ports have been occurring hand in hand with considerable investments from the government, public and private sectors. The investments aim to facilitate the expansion of the psychical infrastructure, cargo modernization in terms of storage and handling, major port rehabilitation, port-operators certification, improving the management of risks, legislation renewal and creating awareness. Investing in all such projects plus other

Guyana * Barbados

Trinidad &Tobago Jamaica

Suriname 120 110 100 90 80 70 60 50 40

Country

GCI Score

Regional Ports GCI Index2008- 2009 (134)

Global Competitiveness Index

Suriname Jamaica Trinidad & Barbados Guyana*

GCI 2008 - 2009 ( 134) 103 86 92 47 115

Basic requirements 73 97 65 33 115

Efficciency enhancers 127 86 80 56 112

Innovation and sophistication factors 117 72 79 51 111

Population (millions), 2007 0.5 2.7 1.3 0.3 0.8

GDP per capita (US$), 2007 4577 4172 15904 13605 1365

* Stage 1 economy

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relevant developmental activities/processes is effective in offering financial support to the ports sector. The investments further assist in expanding the infrastructure linked to the ports including roads, bridges and waterways to ensure the ports are easily accessible. Establishing a formal entity to manage and guide the relevant activities while coordinating and managing the trade facilitation policies effectively however are quit challenging (Pura & Guttierrez, 2008, p.257).

The following graph indicates the growth trend, in terms of freight handing in Suriname ports between the years 2004 and 2008. “The Port Nieuwe Haven, one of the major ports of HBS, has the potential to double its capacity to meet demand as growth in the local economy, together with improved road links into French Guiana and off-shore oil exploration are set to increase trade volumes in the future” this according to DP World CEO Mohammed Sharaf.

Source: Integra Marine

2008 2007

2006 2005

2004 50 40 30 20 10 0 -10 -20

Year

Percentage

Paranam

Paramaribo and Nickerie Average Growth Variable

Time Series Plot of Paranam, Paramaribo and Nickerie, Average Growth

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2.3.1 Modern Management Theory and Practices

Management involves the science or art of achieving organizational goals through people. The concept can similarly incorporate the supervisory function to ensure all the operations carried out within the organization or company work towards the setout goals or objectives. It is the responsibility of managers to ensure increased productivity, efficiency and continuous improvement. The new management theory recommends a process that designs and maintains an environment where the human capital works in teams to attain the selected goals. Managers are thus obligated with carrying out managerial roles of organizing, planning, leading, staffing and controlling the company or sector activities. The management process occurs to any form or organization while also applying to all the managers within all organizational levels. The individuals work towards creating surplus and increasing productivity for effectiveness and efficiency (Olum, 2004, p.2).

According to this theory, management will engage in the development of bureaucracy deriving its significance necessitated by strategic coordination, planning, controlling and directing of the huge and complex processes of decision-making. This subsequently implies that managers should devote to acquiring managerial effectiveness and competence in such areas as human resource management, problem solving, administration and the organizational leadership. The management theory aims towards three major management objectives including ensuring the meeting of targets and goals of an organization, staff health and welfare and the protection of resources and machinery of a company. This theory can guide the PPP process in Suriname in performing five prime functions including planning, staffing, organizing, leading and controlling (Olum, 2004, p.3). In Suriname, where the political influence is high, it is common that the staff, the key personnel in the organization and the management are all appointed by the politicians in charge, this means that the devotion, passion of bringing the organization to the next level as the theory suggest is often missing.

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2.4 Overview on Privatization

Privatization of businesses for the past decades has moved from the novelty act to the global orthodoxy. Besides overselling the benefits of privatization, there have also been exaggerations of its shortcomings (Ross & Bettignies, 2004, p.135). In this regard therefore, the question arises as to how state companies should transfer to the private firms. Privatization represents the symbolic and ideological break that has a history of control by the state over the nation‟s productive assets. This symbolism has been more dominant within the Eastern Europe economies and former Soviet Union. For Suriname privatization is viewed as handing over the business by the government to the private sector for proper management and also to break the political influence in these companies. The majority of the government owned companies in Suriname are operating at a loss, while by privatization the companies will become profitable and the government will be able to receive more income tax.

In these regions, state-owned enterprises (i.e. SOEs) privatization occurs to symbolize a country‟s transition from the communism to democratic capitalism (Megginson, 2000, p.14).

Governments pursue privatization aiming to enhance increased efficiency, expose the SOEs to the market discipline, introduce competition, generate state revenue and foster broader share ownership. In 1984 for example, British Telecom privatization took place through the sale of 51% share of the company to the private investors. The government transferred this company to British Telecommunications Plc. aiming to enable this company to resend to competition within UK and expand its operations internationally.

Another example of privatized sectors in the UK is the electricity generating companies. Since inception in 1948 up to the early 1990s, electricity generation was operated by the Central Electricity Generating Board, on a statutory monopoly basis, which included both generation and transmission. In 1989, the company was divided into four different companies with most shares being sold to the public (Green & McDaniel 1998, p. 275). This removed the previous monopolistic hold, and both private and public power generators were required to sell their electricity in the wholesale market. Other examples of privatization in the UK include the conversion of regional water authorities in to public limited companies (Plcs). This privatization

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act was formulated as a 25 year concession for water supply and sanitation (Hall, Lethbridg, Lobina, Thomas & Davies, 2003, p.3-4). UK waste management has also been increasingly opened up to the private sector breaking it up into smaller but efficient companies. Support services in local government and health such as catering and cleaning and laundry has also been subjected to tendering, where private providers of the services are required to tender for the services.

2.4.1 Public-Private Partnership

PPP is the continuous or progressive agreements between a specific government and the firms within the private sector. The private companies participate in production of the public goods/services and decision-making processes provided by the public sector. The private sector shares risks linking to such production activities. Three fundamental conditions characterize the PPPs emergence (Patterson & Becker, 2005, p.125). To begin with, the relationship between private and public sector firms is long-term. Private sector also cooperates in decision-making regarding the most suitable way of providing goods or services plus the production and the delivery of such products. The relationship between these two parties incorporates the negotiated risk allocation between public and private sectors releasing the government from bearing the largest portion of the risk. PPPs take various forms that reflect diverse degrees of the private involvement inclusive of design-build-operate, build-own-operate-transfer and design-build- finance-operate (Forrer et al, 2008, p.476). An analysis of the port management models that are used is highlighted in a table below.

To give a quick glance at the strong and weak points of Port Management Models in the public service port:

Strength: the Superstructure development and cargo handling operations are the responsibility of the same organization (unity of command).

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Weakness: There is no or only a limited role for the private sector in cargo handling operations There is less problem-solving capability and flexibility in case of labor problems, since the port administration also is the major employer of port labor

The potential lack of internal competition, which leads to inefficiency

Wasteful use of resources and under-investment as a result of government interference and dependence on government budget Operations are not user-oriented or market-oriented lack of innovation.

A quick glance at the Landlord Port:

Strength: A single entity (the private sector) executes cargo-handling operations and owns and operates cargo-handling equipment. The terminal operators are more loyal to the port and more likely to make needed investments as a consequence of their long-term contracts.

Weakness: the risk of over-capacity as a result of pressure from various private operators, also the risk of misjudging the exact timing of additions in capacity. Source: 2007 The International Bank of Reconstruction and Development/The World Bank

2.4.2 Examples of Best Practices

Governments in diverse regions have been having a challenging task in safeguarding the interest of the public through satisfying the various needs of their citizens. The expectations of the citizens have continued to increase in their yearning for more and improved services from the government at reduced costs (Slack & Comtois, 2006, p.1). Citizens‟ confidence in their government hinge on the service quality they receive. One of the best practices that modern governments are employing involves the PPP processes in their efforts to facilitate cheaper and faster services for social progress and prosperity of their citizens. Some examples of such practices in various sectors are:

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2.4.2.1 Sphere Project in West, North and South Europe

These were projects financed by European Communities Commission applying the Build- Operate-Transfer (i.e. BOTs)/Turnkey model. BOT and similar arrangements are a kind of specialized concession in which a private firm or consortium finances and develops a new infrastructure project or a major component according to performance standards set by the government. Figure below illustrates the BOT contract structure. The project employed the

„generic, customizable PC-based simulation system‟ for the management of the small &

medium-sized (i.e. SMEs) ports.

The success and failures of the projects were as follows:

Successes: Developed a framework under which the principles of business processes re- engineering could apply in investigations and re-designing of the logistics Port processes. This was in relation to flow of vehicles, commodities, people and information through the port. This took place under the facilitation of developing the multi-attribute system of evaluation that accounted for the institutional, topographical, technical and stochastic characteristics of the ports and processes linked to the flow of vehicles goods, people and information (Schaeffer

&Loveridge, 2002, p.169). The BOTs have been used to attract private financing to construct or

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renovate the infrastructure. In a BOT scheme agreements tend to reduce commercial risk for the private partner because there is often only one customer, the government. The private partner must be confident however that the purchase agreement will be honored by the government.

Failures: Effectiveness of this framework however required non-interrupted processes, involving series of interrelated activities that collaboratively create customer value. The individual activities in this regard therefore were less important and accorded limited value to port customers. The simple application of this advanced technology to the presently fragmented processes therefore did not generate the anticipated re-engineering benefits (Schaeffer &

Loveridge, 2002, p.169).BOTs have a project-specific application so they are potentially very good for a specific investment, but the overall performance is missing, again every project is not the same.

2.4.2.1 Privatization in Greece-Using Concessions

The privatization that Greek government has been pursuing has implied positive results in transforming its stale economy through the concession model (Lewis &Grimsey, 2007, p.41).

The process also aims to rejuvenate a number of sectors while developing increasingly sustainable financial landscape. Structure of concession contract

Successes: Privatization of railways, casinos, water firms, real estate, marinas plus other infrastructures has been doing beyond boosting the revenue target shortfalls hit by recession. It

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triggered the perception change among investors about Greece while kicking-off additional development of the privatized sectors. This consequently was important for regaining the capital markets trust to return to the bond-market borrowing (Lewis & Grimsey, 2007, p.41).

Concessions are a way to attract private finance to fund new construction or rehabilitate existing facilities. An advantage of the concession arrangement is that it provides incentives to the operator and effectiveness since the gains in efficiency will translate into increased profits.

Failures: The government had trouble in attracting the private capital and injecting the expertise into the state-regulated assets. Civil servants held the freedom to capture the public- assets for personal benefits at the economy‟s expense upgrading of the Governments capacity in relation to their tariffs and performance monitoring. Further, the long term of the contracts (necessary to recover the Key drawbacks include the complexity of the contract required to define the operator's activities substantial investment costs) complicates the bidding process and contract design, given the difficulty in anticipating events over a 25-year period. This drawback may be countered by allowing a periodic review of certain contract terms in the context of the evolving environment. There is additional risk that the operator will only invest in new assets where it expects payback within the remaining period of the contract unless provisions for these events are set out in the contract. Because of the long-term of the contracts, there is room for political controversy.

2.4.2.3 Privatization Projects in Argentina, Chile, Peru and Brazil

Successes: Power privatization revealed a complex relationship performance changes and the private investment. Following the PPP process, these developing nations experienced fewer blackouts, reduced electricity losses and higher labor productivity. Increased productivity consequently resulted to reduced consumer prices by about 40% in a period of 5years in Argentina‟s electricity sector and approximately by 25% within 10years in Chile (Parker &

Kirkpatrick, 2005.p.524).

Failures: Although the private power projects greatly financed the public/state power industries, the sector suffered from under-investment plus difficulties of introducing competition in this sector resulting in costly disputes. This confirms the challenges that can result in

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establishing and maintaining an attractive environment for private investment (Parker &

Kirkpatrick, 2005. p.524).

2.4.2.4 Affermage or Lease Contracts

Under a lease contract, the private partner is responsible for the service in its entirety and

undertakes obligations relating to quality and service standards. Except for new and replacement investments, which remain the responsibility of the public authority, the operator provides the service at his expense and risk. The duration of the leasing contract is typically for 10 years and may be renewed for up to 20 years. Responsibility for service provision is transferred from the public sector to the private sector and the financial risk for operation and maintenance is borne entirely by the private sector operator. In particular, the operator is responsible for losses and for unpaid consumers' debts. Leases do not involve any sale of assets to the private sector. Figure below shows the lease contract‟s typical structure.

Successes: Under lease and affermage contracts, the private partner‟s profits depend on the utility‟s sales and costs. An advantage of this option is that it provides incentives for the operator to achieve higher levels of efficiency and higher sales. A drawback is the risk of management reducing the level of maintenance on long-lived assets in order to increase profits.

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Failures: The key issue in moving from service and management contracts to a lease is that the contractor‟s revenues are derived from customer payments and, the question of tariff levels becomes a sensitive matter. This may require structuring and revising complex tariff arrangements. This leads in the responsibility to seek for capital investment by the government whereas the private investment capital is not mobilized.

2.4.2.5 Local Case Business

Privatization in Suriname is bound to face a number of challenges that may limit the government or the private sector in meeting its goals. One of the major factor that may affect this process relate to labor challenges. Since privatization will occur within this changing global environment, the process affects national economies and businesses. Most of the stakeholders agree which are VSH shipping, Integra marine and the Port management company. At stake is the control of the port in its total. The terminal currently has a container throughput capacity in excess of 100,000 TEU per year, with the potential to double its capacity to meet demand as growth in the local economy, together with improved road links into French Guiana and off- shore oil exploration are set to increase trade volumes in the future this statement is approved by the managing director of the Port management company and the CEO of Integra marine. Integra Marine has sold a “substantial part of his shares” quoting the CEO of Integra marine, to DP world. “Integra marine has the lion share of cargo handling (90%) and break bulk handling (87%) in port of nieuwe haven”, again quoting the CEO of Integra Marine. One of the reasons that DP world got interest in Integra Marine. “In April 2010, IPS was awarded a 15 year concession, with an option to extend for a further 15 years, to manage and operate its terminal within Nieuwe Haven. IPS is the largest terminal operator at the port” quoting the managing director of the port management company.

Suriname Port Services (also owned by Integra marine) is a freehold break-bulk facility about 20 miles upstream from Paramaribo specializing in the handling of mining and logging equipment, off-shore supply and cement. DP World will have a management services agreement for both terminals. The transaction is expected to close in the third quarter of 2011. The price was not disclosed. The labor wages at Integra marine are better their workforce is bigger and more

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skilled, whereas the other terminal competitors is working with contractors (job security is less

“sure”).

Furthermore the government via PPP generates benefits at macro-levels yet raising concerns among consumers concerning the effects such sector reforms will have on workers and their families and within the surrounding communities. Although the private and public stakeholders may be aiming to improve the port‟s efficiency and the financial performance, negative effects are evident in terms of distributing income, political power for example change of management and supervisory board by the ruling coalition. To improve the port the infrastructure towards the port must be modernized and adapted to the demands of the market. No data is available for this matter. The port management company has plans to do a feasibility study to construct a flyover and a “turbo” roundabout . Feasibility of this plan has to assume that the problem of the drain and loading of the landward side of the river will be resolved. Discussions with the Ministry of Public Works on this subject will be resumed soon.(annual report of 2009 of the port management company p.10). Despite all these wishes the port management hired extra people.

At the terminal operators certainly the number of employees did not increase, the managing director of the port management company says. That is because in recent years the terminal operator invested in better technology and superstructures such as port cranes, thus reducing

work force needs and so employee costs (source:

http://lib.ugent.be/fulltxt/RUG01/001/491/026/RUG01-001491026_2011_0001_AC.pdf)

2.4.2.6 The Privatization Framework:

The framework for privatization presents the various requisites for each PPP option to enable the government select that which will meet its needs satisfactorily. Through this framework, the government will know the requisites for each PPP option by examining the advantages and disadvantages of each. Every PPP option provides different benefits, diverse limitations and the contractual period. Suriname government will thus select that which best suits their needs within the government‟s capacity.

Developing a Framework for Privatization of the Ports in Suriname: Focus on PPP options