Portugal needs to privatise its ports to reap the full benefits of its location. The latest in our series on reforming Europe’s economies

LISBON'S harbour mixes pleasure with business. Bars and restaurants sit alongside industrial machinery and colossal container ships. The combination works: shiny cranes gleam in the sunset as tourists and locals eat and drink at the water's edge. But Portuguese ports are a less happy blend of private and public control. The newish government is set to take a fresh look at ports as part of a wider programme of IMF-mandated structural reforms. What should it do?

Passing through seaports can be expensive, accounting for a big chunk of goods' wholesale costs. Price-sensitive shippers will seek out prime ports, looking for value, speed and reliability. Port efficiency is in turn linked to ownership structure.

In general, private-sector involvement improves things. Typical benefits include shorter queuing times, cheaper container unloading, longer opening hours and higher capacity utilisation. Until 1984, Portugal's ports sat at the state-controlled end of the ownership spectrum (much of the country's aviation infrastructure still does). Since then, they have gradually moved to an intermediate public-private “landlord” model. This can work well: the government owns the land and water access, while private firms finance, build and operate tugboats, cranes and warehouses.

This liberalisation process has made Portuguese ports better—investment has increased capacity and productivity has improved. But further improvements are needed, according to Rui Marquez and Carlos Cruz of the Technical University of Lisbon, if Portugal is to compete effectively for container ship business.

These ships keep on getting bigger. The bulkiest vessels can carry 14,000 twenty-foot containers—a cargo that would require a train 85km (53 miles) long if transported by rail. The result is huge economies of scale: the cost per container on an Asia-to-Europe trip has fallen from around $1,000 to below $300, according to one study.

Big ships will stop at only four or five destinations in Europe, raising the stakes for ports trying to win their custom, according to Neil Davidson of Drewry Shipping Consultants. To lure them, ports need deeper harbours and bigger cranes to unload the cargo. They also need to offer an attractive onward route to final customers. This can be overland using trucks, or by sea if the port offers connections with lots of smaller ships. For Portugal, this means competing to serve the cities of Seville and Malaga by lorry or train, or acting as a shipping hub by battling with rival ports in Spain and Morocco.

Portugal should be well-placed to compete. Its coast is right on the enormously busy Asia-Europe shipping route (see map). Its highest-capacity container port—Terminal XXI at the Port of Sines—can handle the biggest ships. It is well within reach of southern Spain, with onward rail and road connections that have been made much better in recent years. But despite improvements between 2009 and 2010, the port is still a minnow by European standards. To make further gains, especially in the ultra price-sensitive transshipment market, Portugal needs to steer past two obstructions: powerful service providers and unionised workers. Getting private firms to compete at ports is tricky. Setting up an unloading business requires significant investment—a single crane can cost €8m ($11m)—meaning that expected returns have to be decent. To attract operators, port authorities typically grant long contracts—20 to 30 years—often to just one or two firms. The competition safeguard is that these contracts are won as part of a transparent tendering process. The problem is that incumbents are hard to budge. They can use the need to invest in new equipment to bargain for a contract extension. As a result, current players get deals extended without the tendering process being rerun. There is little switching at the end of contracts. The consequent dulling of competition is a feature of the Portuguese system. A second drag is the absence of a competitive labour market. Port workers are highly unionised and have huge bargaining power because of their ability to block imports and exports. In 2005 port workers successfully foiled European Commission plans to liberalise labour at ports. In January, 600 dockers across Portugal went on strike for five days in response to plans to close a company operating at Aveiro, a second-tier port.

Charting a new course

Other countries' experience suggest three ways to bolster Portugal's seaport performance. First, more competition is needed at the ports: contracts should be extended only after transparent retendering, with new competitors invited to bid. This can reap real benefits: in the Netherlands service costs dropped by a quarter after a new tugboat operator entered. Second, the unions must be tackled. Encouraging more firms to provide services would again improve things: in Hong Kong seven companies provide loading services and six offer ship repairs.

Finally, Portugal should reconsider its role as a port landlord. Selling up has worked in Britain, Australia and New Zealand. Private owners would be better at taking on vested interests. A sale could raise around €1 billion for the cash-strapped exchequer. And since efficient ports often lead to a strong export sector, according to the United Nations, it could have wider benefits, too.