Impact of Privatization of Ports on Relative Efficiency of Major Ports of India

Date01 August 2016
Published date01 August 2016
AuthorDeepankar Sinha,Mrinal Kumar Dasgupta
DOI10.1177/0015732516646212
Subject MatterArticles
/tmp/tmp-17edNyVAwv2ZzH/input Article
Impact of Privatization
Foreign Trade Review
51(3) 225–247
of Ports on Relative
©2016 Indian Institute of
Foreign Trade
Efficiency of Major Ports
SAGE Publications
sagepub.in/home.nav
of India
DOI: 10.1177/0015732516646212
http://ftr.sagepub.com
Mrinal Kumar Dasgupta1
Deepankar Sinha2
Abstract
In this article, an attempt has been made to identify the effect of liberalization on
the efficiencies of container terminals of major ports of India. In India, the liberaliza-
tion process started since 1991. As a result, many of the major ports, administered
by the union government of India privatized their container terminals. In this study,
the efficiency of privately managed terminals, under major ports, has been com-
pared with public container terminals using data envelopment analysis (DEA). In this
article, output-oriented DEA using DEAP (Data Envelopment Analysis (Computer)
Programme) software has been carried out where the inverse of turnaround
time per thousand twenty equivalent units (TEUs) has been taken as the output.
The results of the study show that though the efficiency of containers terminals are
affected by privatization to a great extent, they depend on other factors too.
JEL: R42
Keywords
Liberalization, privatization, container terminals, efficiency, DEA, turnaround time
Introduction
Till the introduction of the liberalization process in the 1990s, Indian policymakers
were guided by the philosophy of self-reliance and public sector dominance.
The port sector was also no exception. All major ports were owned and operated
1 Research Officer, Indian Maritime University, Kolkata Campus, Kolkata, West Bengal, India.
2 Associate Professor, Indian Institute of Foreign Trade, Kolkata, West Bengal, India.
Corresponding author:
Deepankar Sinha, Associate Professor, Indian Institute of Foreign Trade, Kolkata 700 107,
West Bengal, India.
E-mail: dsinha@iift.edu

226
Foreign Trade Review 51(3)
by the government. India’s share of world trade fell from 2.2 per cent at independ-
ence in 1947 to 0.4 per cent in the mid-1980s. India’s ports in the 1980s suffered
from obsolete technology, low loading rates, chronic congestion and delays, and
poor connectivity with the hinterland. After pursuing a strategy of self-reliance for
more than 40 years, initiative was taken for wide-ranging economic reforms in
1991. Following the reforms of 1990s, the Indian economy has enjoyed a strong
growth with the average annual growth exceeding 8 per cent since 2003. Even
amidst the global recession, its real GDP grew by 8.8 per cent in 2010. Although
there was a slowdown after 2010, mainly due to the effect of global recession, the
overall performance of the country was very impressive. At the same time traffic
through Indian ports registered an impressive growth from 164.45 million tonnes
in 1990–1991 to 972.61 million tonnes in 2013–2014.
The liberalization of transport and telecommunications sectors was expected to
reduce both fixed and variable trade costs that manufacturing firms faced when
shipping their goods abroad. The volume of traffic through the Indian ports increased
many times after the introduction of the liberalization process. The volume of traffic
through private as well as public terminals also increased, although at a varying rate.
However, it could not be said with certainty that the liberalization-led private
terminals were more efficient than the government-managed (public) terminals in
India. This was because of lack of studies in this regard. Little effort was made to
measure the change in the efficiency level of the Indian ports during this period. The
aim of this article is to fill this gap by exploring the effect of privatization by
comparing the relative efficiencies of the major ports of India at the beginning of the
liberalization process with that of post-liberalization era. The outcome of this article
would aid the decision makers to reaffirm or review their liberalization policy and
suggest alternatives to make Indian ports more effective.
Literature Review
Port Privatization: Theory and Evidence
In line with the worldwide trend to privatize the operation and often the ownership
of airports, highways, water supply, ports and similar utilities, governments in
developed and developing countries are turning over port operational responsibil-
ity and port assets to private enterprises. According to Yorke and Haarmeyer
(1993), in most cases the public sector retained responsibility for essential statu-
tory functions such as general navigational safety regulations and contract moni-
toring and enforcement, whereas in all the cases the theoretical underpinning for
privatization remained the same. A number of studies and surveys provided evi-
dence that privatization generally led to improved performance over public sector
operations. World Bank, in its analysis of the divestiture of the container operations
at Kelang Port Authority (KPA), Malaysia’s principal port (Yorke & Haarmeyer,
1993), indicated that the weaker institutional incentive structure associated with
publicly owned and operated ports means that they will be less able to control
costs, slower to adopt new technology and management practices, and thus, will be
generally less responsive to port users than private port operators.

Dasgupta and Sinha
227
However, economic theory failed to provide unequivocal propositions on the
issue of the relative efficiency of public vis-à-vis private enterprises (Liu, 1995).
Based on the principal–agent theory, private ownership should be more efficient
than the public one. It was believed that the transformation from public to private
ownership, even without change in the competition, would be associated with
improved efficiency (Hartley & Parker, 1991; Parker, 1994). However, a number
of economists (for instance, Estrin & Perontin, 1991) argued against the strength
of the opinion in favour of private ownership and suggested that principal–agent
problems may also arise in the private sector as a result of capital market imper-
fections. Thus, the question of the relative efficiency of alternative forms of own-
ership was an empirical one (Liu, 1995).
The empirical studies that investigated the association between port ownership
structure and port operation efficiency seemed to provide more evidence that
there was no clear-cut relationship, or even a negative correlation, between the
type of ownership and port efficiency. For example, Liu (1995) used the stochastic
production function to calculate technical efficiency and compared the influence
of public and private ownership on inter-port efficiency differences. Based on the
observations of output and inputs for 28 ports in UK, Liu (1995) failed to show
that port ownership had a significant effect on port performance. Notteboom and
Van den Broeck (2000) used the Bayesian Stochastic Frontier Model, developed
by Van Den Broeck et al. (1994), to compare the efficiency level of a set of 36
European container terminals, supplemented with four Asian container ports.
After comparing the efficiency levels among the studied terminals, no relation-
ship was found between the type of ownership, operations of a terminal and the
efficiency level. Coto-Millán et al. (2000) covered the efficiency problem in port
industry by using a stochastic frontier cost function to estimate the economic effi-
ciency of Spanish ports through panel data of 27 Spanish ports. They found that
the type of organization had a significant effect on economic efficiency, but ports
with autonomy were less efficient than the rest.
Contrary to these studies, some studies argued that port ownership had an
effect on port efficiency. For example, Estache, Gonzalez and Trujillo (2002)
illustrated the efficiency effects of Mexico’s ports by using panel data of 44 obser-
vations from 11 independent port administrations. The efficiency scores based on
the statistical results showed that the reform of decentralization and privatization
taken at Mexico ports had generated large short-term improvements in the aver-
age performance of the port industry. Cullinane, Song and Gray (2002) employed
both the cross-sectional and panel data versions of the stochastic frontier model to
assess the relative efficiency of selected Asian container ports. Based on their
purely subjective appraisal of the obtained efficiency levels of selected ports from
the above two models, Cullinane et al. (2002) concluded that there seemed to be
some support for the opinion that privatization should have some relation with the
improvement in efficiency.
Moreover, Baird (2000) argued that an outright sale of port land, combined
with a transfer of operation and regulation functions to the private sector, would
not definitely increase the operational efficiency, or may even be counterproduc-
tive. Due to the specific nature of port investment (long-term payback and high
capital cost), an almost total dependence on the private sector to provide both port

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Foreign Trade Review 51(3)
infrastructure and superstructure would result in significantly delayed investments
(Tongzon, 2005). Thus, full port privatization would impede the improvement on
port performance while some extent of private sector participation could increase
the efficiency level, which implies that the extent of private sector intervention in
the port sector had an inverted U-shaped...

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