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Modernising Trust Ports


 Modernising Trust Ports [second edition]


I. Introduction

This is the second edition of Modernising Trust Ports (MTP). The first was published in 2000 by the then Department for the Environment, Transport and the Regions, and followed a review of the trust ports sector that focused principally on corporate governance and accountability.

That review highlighted a need for a general improvement in the openness and accountability with which trust ports conduct their business, and prompted the Department to stipulate governance guidelines which it expected all trust port boards to use as the benchmark of best practice — Modernising Trust Ports. A similar exercise was undertaken with respect to municipal ports. The general improvement sought by the Government has been widely in evidence in the years since then, and the sector should be congratulated for the considerable strides it has taken in this direction.

In 2006 the successor Department for Transport embarked upon a thorough review of ports policy, in light of devolution in the UK planning and political systems, and the evolution of global trading patterns. The review looked among other things at the future of the mixed ports sector, including the outlook for trust ports in the coming decades. This was set against the backdrop of the decision by the Office of National Statistics (ONS) in 2001 to classify the largest trust ports as public corporations, which had the effect of placing those ports’ borrowing on the Department’s accounts, and the relevant ports' subsequent applications, now on hold, to remove themselves from perceived public sector controls through the pursuit of appropriate Harbour Revision Orders (HROs). The Orders would disapply certain apparent controls which the Department retains over the ports, namely the power of compulsory privatisation and of central or local government to appoint a majority of the board members.

So as well as looking at the future of the sector in general, the Department wishes to make sure that appropriate safeguards and practices are in place to ensure an efficient, accountable and competitive trust port sector.

To that end the Department commissioned a study from its consultants PricewaterhouseCoopers LLP. The ensuing report1 confirmed that existing levels of performance were solid among the trust ports surveyed, but made a series of recommendations with the aim of strengthening the sector, and building on the improvements made so far by enhancing efficiency, transparency and delivery of stakeholder benefits. In the Ports Policy Review Interim Report, issued in July 2007, the Department stated that it would refresh the guidance offered in Modernising Trust Ports alongside a resumption of the work to address the outstanding question of the accounting status of the larger English and Welsh trust ports2.

The following guidance represents a new benchmark for best practice, and is issued after full consideration of the PwC trust port advice, and subsequent discussion with the industry, including among others the British Ports Association (BPA), UK Major Ports Group (UKMPG), the Chamber of Shipping (CoS) and the Royal Yachting Association (RYA). Much of what follows is a restatement of that which Modernising Trust Ports established in 2000, but brought up to date, and supplemented with new guidance on, among other things, reporting, KPIs and stakeholder policy.

1 Available on the Department's website at: http://www.dft.gov.uk/pgr/shippingports/ports/trust/

2 Ports Policy Review Interim Report, July 2007, para. 30.

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4 which can be found at: http://www.frc.org.uk/documents/pagemanager/frc/Combined%20code%202006%20OCTOBER.pdf

The Department recognises the wide range of ports within the sector and that some parts of this guidance would not necessarily be appropriate for, in particular, the smaller ports. The Department nevertheless expects all trust ports in England and Wales to take steps either to comply with the guidance or to state openly where and why they have decided not to. Overall compliance will be monitored by the Department on behalf of the Secretary of State for Transport.

ii. Background

As part of the review, the provisions of Modernising Trust Ports have been compared against those of the Combined Code on corporate governance. The latest edition of the Combined Code was issued by the Financial Reporting Council in June 2006.3 The document sets out standards of corporate governance expected of publicly listed companies, and has evolved over the years since the Cadbury Report in 1992, and final report of the Hampel Committee in 1998. It represents a valuable resource for those seeking to achieve best practice and accountability in their corporate governance arrangements. At points throughout this guidance we have drawn attention to relevant specifications of the Combined Code, and sought to include them in these standards.

There are over a hundred trust ports in the UK (Annex B) of which only a small number could be classed as being of national significance. Most trust ports were set up, and remain, specifically to serve regional and local interests. They represent a broad cross section of undertakings. Trust ports are independent statutory bodies, each governed by its own, unique, statutes. There are no shareholders or owners. Any surplus is ploughed back into the port for the benefit of the stakeholders of the trust port.

The use of the term ‘trust’ in this document needs to be clear. Trust ports are not trusts in the legal sense, nor are trust port boards trustees in that sense. But we have not found a sensible replacement for the term 'trust port', the concept of which is well understood in the sector.

iii. Coverage

These standards are designed to provide a benchmark of best practice for all trust ports in England and Wales. As a benchmark, they apply whatever the size, turnover or type of port. However, as stated in the introduction we recognise that in a diverse sector, a degree of proportionality is required in the extent of compliance we expect to see.

The core principles of openness, accountability and fitness for purpose form a common thread running through these standards and should feature in the direction and management of all ports in the trust sector. In Chapter 2 on reporting requirements, we introduce the approach of 'comply or explain', to allow room for ports in certain circumstances to explain why, in a specific case, a particular standard has not been met. In the few places where a particular standard is aimed solely at a certain size of port this is made clear in the text. For all others, these standards should be read as applying to the sector as a whole.

The Government considers that private company ports and municipal ports should also seek to act in accordance with the guidance, while recognising of course the differences in structures and that certain aspects of the guidance will not be directly applicable.

It is accepted that smaller ports will not necessarily be able to comply with all the standards in the guidance.

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4 Available on the Department's website at: http://www.dft.gov.uk/pgr/shippingports/ports/opportunities/

Although it is aimed specifically at trust ports, all ports are encouraged to use the relevant elements of this guidance as a benchmark, as all ports on whom Parliament has devolved statutory powers and duties in the public interest should be accountable for their use. Municipal ports should, however, focus on 'Opportunities for Ports in Local Authority Ownership'4. Given the similarities between the two sectors, it provides useful supplementary reading alongside this document, and vice versa. The aim is to encourage the continued development of an open and accountable relationship between all ports, their users and local communities.

The Government intends that these standards should be considered by all trust ports in England and Wales. Ports policy is a devolved matter in Scotland and Northern Ireland, and the Scottish and Northern Ireland Executives respectively will consider the extent to which they wish to adopt these standards for trust ports within their territory.

Nothing in this guide should be taken as overriding the current fiduciary, statutory or legal obligations laid upon board members, officers and employees of trust ports. It does not have the force of law. However it should be taken as a pointer indicating changes which may be appropriate to a port's working practices. If a port identifies changes to local legislation which are necessary in order to comply with the guidance, the Harbour Authority should give consideration to seeking a Harbour Revision Order which would make those changes.

1.1 Stakeholders and beneficiaries

1.1.1 The Department’s 2006-07 review of trust ports tended to confirm the fundamental principle which underpins their existence. Trust ports are independent statutory bodies, run by independent boards, for the benefit of stakeholders.

1.1.2 There are some parallels with a trust in the legal sense, where a fund, or property, is owned and managed by one party for the benefit of another. In that context the beneficiaries of the trust, in whose interests the trustees work, are usually clearly and definitively identified. The benefit too, is easily recognised, taking the form of an income or, eventually, the enhanced property or fund itself. In a conventional trust, those who stand to benefit are normally at least one step removed from the fund or property that is managed by the trustees.

1.1.3 In contrast, some of the beneficiaries of a trust port are often intricately bound up in the port's operation, perhaps as users or employees of the port. The classes are varied and numerous, and there is a degree of ambiguity about what form of benefits should accrue, and to whom. One of the aims of this revised guidance, particularly this first chapter, is to establish greater certainty and transparency in this respect.

1.1.4 Modernising Trust Ports described a trust port as 'a valuable asset presently safeguarded by the existing board, whose duty it is to hand it on in the same or better condition to succeeding generations. This remains the ultimate responsibility of the board, and future generations remain the ultimate stakeholder'. Through the running and maintenance of this asset, though, others stand to benefit. Although not an exhaustive list, the following may all be considered stakeholders or 'beneficiaries' of a trust port:

Port Users The local community Local and regional economies and authorities Port employees

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Related interest groups The national economy and Central Government Local and regional businesses

1.1.5 As stakeholders, or 'beneficiaries' in the port, the interests of these groups must at all times be the guide by which trust port boards direct the port. There are bound to be conflicts of interest from time to time between — and in some cases within — the various stakeholder groups. It is the duty of the boards, at all times, to strike a balance that fully respects the interests of all stakeholders, not just one group, in the light of objectives of the port, including commercial considerations, and what constitutes the 'common good' for all stakeholders (current and future) and the port itself.

1.1.6 In order for trust ports to fulfil that obligation, they must have a firm idea of what constitutes the objectives of the port. It is the responsibility of the boards, having identified their stakeholders and consulted them, to arrive at a clear description of these objectives.

1.1.7 In some cases stakeholders will have more than one form of relationship with the port. Users of the port for example, can often be primarily customers with whom ports will have purely commercial relationships. They may also have other forms of relationship though and trust port boards should hold this in mind as they manage the port.

1.1.8 Trust ports should always deal with stakeholders in an accountable manner. A responsibility lies too upon the stakeholders who, in the absence of shareholders, should monitor the port’s performance and hold the board to account for the benefits the board has identified as accruing to stakeholders.

1.2 Commercial Accountability and Target Level of Return

1.2.1 Trust port boards should transact port business in the interest of the whole community of stakeholders openly, accountably and with commercial prudence. Trust ports should be run as commercial businesses, seeking to generate a surplus which should be ploughed back into the port, or otherwise directed towards the interests of the port's stakeholders. The Government expects trust ports to be operated efficiently and effectively, and to generate a commercially acceptable rate of return.

1.2.2 Modernising Trust Ports set out a target level of return in line with the Treasury's then Green Book recommendation of 6% for public sector services and 8% for publicly provided commercial services. More recent Green Book guidance "unbundles" the discount rate to 3.5% in real terms, based on social time preference, while taking account of other factors separately which were in practice often implicitly bundled up in the old 6% and 8% real figures.. In particular, the Green Book now recommends explicit adjustment to address the systematic underestimation of costs and overestimation of benefits that historically afflicted public sector appraisals. The Green Book recommendations are primarily aimed at public sector investment in public sector owned businesses, rather than commercial operators in a competitive open market. All trust ports should set themselves a target level of return for existing activities and new projects, determined by the board. The target level of return should reflect the need to provide a contingency and, in addition, make optimism bias adjustments commensurate with the perceived level of risks associated with any particular activity or investment.

1.2.3 In pursuing that target level of return, it is in the interests of all stakeholders that a trust port should set its dues, evaluate its investments, and charge for its services, at commercial and competitive rates, neither exploiting its status as a trust port to undercut the market, nor abusing a dominant position in that market.

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1.2.4 Harbour dues must be set at a level that allows for proper maintenance of the trust port's harbour and/or conservancy duties, and geared to attaining the target level of profitability. Harbour Authorities in general have a duty to publish standard dues tariffs.

1.2.5 There should be no presumption that dues levied on a specific group or type of user should be exclusively reinvested in improving services and facilities on offer to that user. Users are first and foremost customers of the port, and the proceeds from their custom should be utilised prudently to maximise benefit to all stakeholders and in the best and most effective interest of the future of the trust port.

1.2.6 Investment policies too should be fair and equitable. A trust port's investment policy should be set out in broad terms in its accounts and strategy, for the benefit of stakeholders. A board should act not only to protect the commercial position of the port, but also to take investment opportunities which offer maximum benefit across the whole stakeholder group. Having regard to such wider stakeholder benefit may legitimately result in longer term investment planning, or other actions which bring additional benefits for stakeholders.

1.2.7 Ports of all complexions have the potential to compete with other users to offer services within the port area. As with dues and investment policies, it is essential that this competition be seen as fair and open. While it is legitimate to impose charges relating to services contributing to safety (including pilotage), protection of the environment or general well-being of the port user, charges should not be imposed for services that port users do not need. Boards should recognise that different users have different service level requirements. This should be recognised in levying charges. Where it is practical and cost effective, ports should offer a service tailored to the individual user's needs.

1.2.8 Having determined service levels, the board should be able to demonstrate that it has met these without incurring unreasonable cost. Boards should seek to obtain value for their stakeholders by:

challenging the way in which services are provided or obtained and whether they are needed;

comparing performance of in-house service provision with external options and agreeing performance measures derived in conjunction with users and suppliers on a regular basis;

consulting all stakeholders (including staff) on current performance, options for improvement and suitable performance measures and targets; and considering the competitive position (how well does a service bear comparison with the best available elsewhere? Is there a case for working in partnership with other providers to obtain good value?).

1.2.9 Users should be consulted about the provision of services and those services provided in-house should be the subject of market testing to ensure that this is the best option for the trust port and its stakeholders. The board should be able clearly to demonstrate in its annual efficiency statement that where it is providing in-house services, it does so to a standard that does not incur unnecessary costs for stakeholders, and should, subject to not breaching commercial confidentiality, explain its commercial decisions clearly.

1.3 Performance Indicators

1.3.1 Given that trust port boards hold the local monopoly right to justify an asset (which can deliver public goods as well as private benefits), and that there are no formal shareholders to scrutinize performance, it is especially important that trust ports actively demonstrate their levels of efficiency, and strive for improvement where necessary. It must be possible for a trust port's stakeholders to measure the performance of the port in a straightforward manner, to compare it with relevant market competitors, where these exist, and with the port's own historical performance. A great many trust ports already do this, but the Department believes that greater benchmarking across the sector would be valuable.

1.3.2 Annex A sets examples of performance indicators which, where appropriate, can assist a stakeholder in determining a port's performance year on year. They constitute indicators of both financial and operational efficiency, and also of wider impacts, which can be calculated relatively easily and aim to demonstrate the overall economic contribution that the port makes to the economy.

1.3.3 The relevant indicators could include: Financial  Profitability  Return on Capital Employed (RoCE)  

Weighted Average Cost of Capital (WACC) Gearing

Operational  Labour productivity  Profitability of land holdings  

Channel Depth Management Berth Utilisation

Wider Impact  Gross Value Added/Net Value Added  


Annex A

Performance Indicators

Financial

Profitability (Profit (EBITDA*)/Turnover)

While not a measure of efficiency and rather a blunt measure of performance that does not take into account port size or asset base, profitability is important in assessing a company’s health. Year on year data also allows effective identification of changes in performance.

* ie Earnings before interest, tax, depreciation and amortisation.

Return on Capital Employed (RoCE)

RoCE is a widely used measure of a company’s success in generating return against an asset base and it therefore indicates how effectively the ports assets are being utilised. One way of looking at RoCE is the number of pence each pound of useable asset generates. For an individual port in isolation RoCE is not a particularly useful indicator but it can be a very useful comparator. Year on year data can assist in examining longer term changes in performance.

Weighted Average Cost of Capital (WACC)

It is possible to benchmark RoCE against WACC, which is the blended cost of financing a company’s operations and represents the average cost of debt and equity funding weighted by the proportion of the company’s capital structure that those two components constitute.

Gearing (Total Debt/Total Assets)

This can assist a company in assessing its financing position and it is also a useful comparator across sectors, potentially indicating whether there may be in/efficient financing and investment levels ie if gearing is very different between similar companies. For trust ports low gearing may not indicate inefficiency but may simply be a function of not having to pay a dividend since in the absence of further investment cash would instead be retained within the company.

Operational

Labour productivity (EBITDA/Man hours per annum)

A measure of operational performance can be gained from labour productivity. Undertaking this broad calculation allows a comparison across all ports. Man hours per annum can be obtained by the ports from Health and Safety Reports or other records.

Profitability of Land Holdings (EBITDA/Number of Hectares)

Number of hectares relates to the land the port owns and uses, owns and rents to others, and rents off-site for its own use. This is another indicator of asset utilisation.

Channel Depth Management

Channel depths could be reported alongside strategic justification for planned dredging, deepening and widening activities. In one sense channel depths alone are not a particularly useful indication but the strategic justification will give a transparent explanation as to why a particular approach has been taken. Channel depths are easily available as should be the justification and therefore how well the port is responding to the market.

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Berth Utilisation (Time Berth in Use/Time Available)

Information on berth utilisation is recorded by ports that manage berths as this is an important tool in their management. An indicator on berth utilisation would provide a measurement that could reflect various operational performance issues such as under-utilisation, capacity issues etc that a port may be experiencing. It would also raise further issues in terms of, for example, a port which is not open 24/7, but could increase opening times to accommodate capacity requirements rather than invest in a new berth.

Wider Impact

Gross Value Added/Net Value Added

(Gross Value Added = Employee costs + EBITDA/Number of employees)

(Net Value Added = Employee Costs + EBITDA – DA)/Number of Employees).

GVA and NVA can be used as measures of the value added by a company. In effect, both measures the ‘retained wealth’ created by a company and its employees ie wages plus the profit made from undertaking its activities. This is also a proxy measure of the local economic impact of the port, assuming there is a high level of local employment and procurement. NVA subtracts the costs of depreciation and amortisation which takes into account the costs associated with its assets. These two indicators fit well with the wider stakeholder remit that trust ports have, in that they assess the wider impacts of a port’s activity. We accept that that they are also quite crude in that they do not take into account some subtleties that affect a port.

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Annex B

List of Trust Ports

England and Wales – non-fishery

Berwick Harbour Commissioners Blyth Harbour Commissioners Brightlingsea Harbour Commissioners Caernarfon Harbour Trustees Cattewater Harbour Commissioners Chichester Harbour Conservancy Cowes Harbour Commissioners Crouch Harbour Authority Dart Harbour & Navigation Authority Dover Harbour Board Falmouth Harbour Commissioners Fowey Harbour Commissioners Gloucester Harbour Trustees Great Yarmouth Port & Haven Commissioners Harwich Haven Authority Kings Lynn Conservancy Board Lancaster Port Commissioners Langstone Harbour Board Littlehampton Harbour Board Port of London Authority Lymington Harbour Commissioners Maldon Harbour Improvement Commissioners Maryport Harbour Commissioners Milford Haven Port Authority Neath Harbour Commissioners Newport (Gwent) Harbour Commissioners Orford Town Trustees Padstow Harbour Commissioners Poole Harbour Commissioners River Yealm Harbour Commissioners (Newton Ferrers) Sandwich Port & Haven Commissioners Shoreham Port Authority Teignmouth Harbour Commissioners Tyne Port Authority Warkworth Harbour Commissioners Whitehaven Harbour Commissioners Yarmouth (IOW) Harbour Commissioners

England & Wales – Fishery

Bridlington Pier & Harbour Commissioners Flamborough North Sea Landing Harbour Commissioners Hope Cove Harbour Commissioners Looe Harbour Commissioners Mevagissey Harbour Trustees Mousehole Harbour Commissioners Newlyn Pier & Harbour Commissioners North Sunderland Harbour Commissioners (Seahouses)

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Polperro Harbour Trustees Port Isaac Harbour Commissioners Portloe Harbour Commissioners Saundersfoot Harbour Commissioners Sennen Cove Harbour Commissioners Staithes Harbour Commissioners Wells Harbour Commissioners

Scotland – non-marine works

Aberdeen Harbour Board Brownies Taing Port Trust (Lerwick) Collieston Harbour Trustees Cromarty Firth Port Authority Inverness Harbour Trustees Lerwick Harbour Trustees Montrose Harbour Trustees Peterhead Port Authority River Nith Commissioners (Dumfries) Urr Navigation Trustees (Palnackie)

Scotland – marine works

Non-fishery

Balintore Harbour Trustees Rosehearty Harbour Commissioners St Margarets Hope Pier Trust (South Ronaldsay) Skerray Harbour Trustees Urr Navigation Trustees (Dalbeattie)

Fishery

Annan Harbour Trustees Avoch Harbour Trustees Burnmouth Harbour Trustees Cruden Bay Harbour Commissioners Eyemouth Harbour Trustees Fraserburgh Harbour Commissioners Gardenstown Harbour Trustees Mallaig Harbour Authority Pennan Harbour Trustees Port Seton Harbour Commissioners St Abbs Harbour Trust St Andrews Harbour Trustees Scrabster Harbour Trustees Stornaway Pier & Harbour Commissioners Tarbert (Loch Fyne) Harbour Trustees Ullapool Harbour Trustees Whitehills Harbour Commissioners Wick Harbour Trustees

Status Unknown

Cromarty Harbour Trust Dunbar Harbour Trust



Annex C

Suggested list of Stakeholders - This is not exhaustive.

Boat owners within the Port and Haven - afloat and ashore (in boatyards)

Business’ whose work is connected with the river i.e. marinas, sailing club, boatbuilders.

Periferal business’ - public houses, shops and eating establishments.

Sandwich Town Council.

Dover District Council.

Tripper boats.

Environment Agency in flood defence.

Nature reserves

Property owners abutting the river who will have riparian responsibilities.

Employees of the P&H.




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Modernising Trust Ports