Port economics;

An introduction

Dr. P.W. de Langen

Internet: www.porteconomics.nl
1

Terminal operators (I)

Primary clients: shipping lines
Secundary clients: shippers and forwarders. In
some cases direct contracts with these clients.
additional clients: hinterland transport firms
(road, rail barge).
Tariff structure: contracts for a substantial period.
Peculiarity: shipping lines charge Terminal
Handling Charges to shippers. These are in general
higher than what they pay the shipping line.
In general not operating at full capacity, due to
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indivisibilities in supply.

Terminal operators (II)

High fixed costs
Labour costs are about 50% of total costs. For
some firms, labour costs are fixed in practice.
Three potential bottlenecks: seaside, landside and
storage capacity.
Aim: peakshaving in order to maximise
utilisation of assets.
Coordination with shipping lines very relevant
For this reason (and others) frequent vertical
integration.
3
Emerging internationalisation

Port service providers

Towage (and mooring)
Paid by shipping line
Small part of overall port costs: risk of monopoly
pricing
Regulated
Competition can become destructive

Pilotage
Regulated, mostly a single service provider
Paid by shipping line
Increasing pressure to introduce competition

Other port services: ship supply, bunkering etc

Trend to more concentration
4

Carriers
Scale is a central driver
Many niche markets, both in terms of
commodities and ship design
Contracts with shippers/intermediairies
Two types: tramp shipping and liner shipping
Aim: minimise port-port costs. This implies
they are less concerned with hinterland costs.
Some carriers (esp. in the container market) also
offer door-to-door services. This is termed
carrier haulage.
More concentration in industry
5

Forwarder
Non asset owning transport intermediary
Added value: volume discounts so cheaper for
shippers with small volumes
Added value: professional management of
transport flows
Added value: professional management of logistics
Engaged in hinterland transport for merchant
haulage transport.
Many small forwarders exist: limited concentration
6

Port authority
Revenue: port dues (paid by shipping lines)
and land lease (paid by terminal operators,
other tenants).
Different levels of involvement. In most
cases responsible for safety in the port,
vessel guidance, port planning and
expansion.
Potential monopoly position
7
Particular institutional position

Hinterland modes

Road
Rail
Inland Shipping
Pipeline
(shortsea/feeder)

Different roles of different modes

Hinterland modes
Rail: strategic role for serving
contestable hinterland
Road: similar accessibility to
contestable hinterland
Inland waterways: limited market
coverage
Pipeline: for industrial users

Road

Fast and flexible

Frequently scale diseconomies.
No scale economies; why not?
Infrastructure: dedicated?
What will be the effect of road pricing
on scale economies in road transport?
10

Rail
Infrastructure and services both
relevant
Infrastructure: state subsidies, unfair
competition
Services: state owned operators,
gradually more competition
Services: key is volumes
Services: concept is shuttle trains: no
shunting

11

Inland waterway

Slow
Strong for bulk cargo
Imbalance
For containers
multi-modal
Cooperation between operators
Waiting time in port bottleneck
Awareness
Rising performance

12

Contestable vs captive hinterland

Captive: all regions where one port has
a structural cost advantage and as a
consequence a dominant market
position (say >50%).
Contestable: all regions where no
single ports has a significant cost
advantage, with as a consequence
competition between ports and no
dominant market position.

13

Analysing port hinterlands

Port A

Assumption: equal hinterland accessibility

(only distance matters)
equal hinterland costs

Port B
equal hinterland costs

Port C
Sea Land

14

Other factors that determine

hinterland costs
Scale economies in handling
Presence of infrastructure (road, rail,
barge)
Infrastructure pricing
Congestion on infrastructure
Quality of services (also related to
scale)

15

Cost advantage to hinterland

Advantage port A
locations
Constant costs

Scale economies due

To bundling (equal for
Both ports)

Cost
Advantage
Port A
($/ton)

Port A
200

km
Cost
Advantage
Port B
($/ton)

Port B
150

100

50

50

100

150

200

Distance advantage to closest port (km)

16

Cost advantage in hinterland

Cost advantage > 5 $/ton
Cost advantage 2-5 $/ton
Cost advantage 1-2 $/ton

Port A

Port B
Inland
node

Port C
Sea Land

17

Europe: large contestable hinterland

Contestable
hinterland

18

The relevance of scale economies

Scale is very relevant in pipeline, inland
barge and road transport
Unit costs decrease substantially when
volumes rise
Path dependent development, with firstmover advantage
Scale is also an organisational issue!
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Example: Austria after introduction

of new infrastructure
Effect Rhine-Main-Donau canal on market shares ports
45.0%

40.0%

35.0%

Rotterdam
Antwerpen
Bremen
Hamburg

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

20

0.0%
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Clustering in seaport
Cargo handling is the core of a port cluster
related are activities in transport, logistics,
production and trade
The relevant region comprises of the direct
port area, surrounding logistics nodes and
business districts

21

Clusters as unit of analysis

Firms, countries, industries and (increasingly)
networks are widely used units of analysis.
A cluster is a relatively new unit of analysis, that
differs from the ones mentioned above.
A definition of a cluster is: A population of
geographically concentrated and mutually related
business units and institutes centred around a
distinctive economic specialisation.

The cluster is a good unit of analysis for

analysing ports
22

The logic behind clustering

Clusters develop because firms choose to
locate in each others proximity. This offers
economic advantages, because of three
reasons:
Joint labour market
Input/output relationships
Knowledge spill-overs

Furthermore, clusters offer opportunities to

reduce transaction costs and develop
networks
23

Clustering in value chains for

different commodities
.
Commodity
Dry bulk
Liquid bulk
Fruit
Containers

Transport
Storage,
transport
management
Storage,
transport
management
Storage,
transport
management
Storage,
transport
management

Logistics
Blending

Production
Steel
production

Trade
Commodity
trading

Blending

Oil refining
chemical
production
Juice
production

Commodity
trading

Postponed
manufacturing

Trading of
import products

Sorting and
re-packing
Assembling

Fruit auction

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Employment in the port cluster

Cargo handling

7,060

Logistics

12,822

Multipurpose

952

Oil transhipment and storage

1,323

Labour Pool

941

Warehousing

1,499

Full container

2,965

Other logistics

10,000

Bulk (ore, coal, grain)

1,269

Roll on / roll off

333

Port industries

28,000

Other stevedoring

600

Oil refineries

4,734

Chemical industries

7,735

Transport

29,497

Food

2,049

Navigation

2,755

Other industries and suppliers

13,482

Inland navigation

3,058

Others (pipe, rail, road)

7,532

Trade (approximation)

6,000

Intermediaries

6,920

Trade activities in port area

3,000

Cargo control

896

Port related trade located in city

3,000

Salvage / towage

1,542

Ship chandlers

1,023

Institutes

4,296

Others

2,057

Municipal Port Authority

1,258

Shipbuilding

3,714

Customs

1,177

Others

1,861

Source: RMPM, 2001, RMPM, 1999 and Dutch Chambers of Commerce, 2001

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The port cluster in Rotterdam

total port employment, divided in different systems
40000
35000
30000
25000
20000
15000
10000
5000
0

stevedoring

transport

logistics

production

trade
26

External environment

Cluster
structure

Cluster
behaviour

Cluster
performance
27

Cluster structure and cluster performance

Cluster structure
Agglomeration effects
Internal competition
Cluster barriers
Heterogeneity

Cluster
governance

Cluster
performance
NPV of value added

28

Internal competition in
Rotterdam
Internal competition is in general fierce, but
limited for

the landlord
pilotage
Mooring
cargo handling

Firms indicate that internal competition adds to

the competitiveness of a cluster and fosters
specialisation
29

Internal competition:
problematic
Exists only when the MES (minimum
efficient size) is small compared to the
market
Leads in many cases to unstable situations
due to very low marginal costs and very
high fixed costs
Therefore, in many cases, natural internal
monopolies exist in many seaports.
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The importance of governance

The better the governance, the more competitive the
(port) cluster
Firms are efficient, because of a selection mechanism.
This mechanism is absent for governance!Therefore, we
cannot assume that effective governance arises
automatically.
This argument shows the strategic importance of
developing valuable governance structures
Economic competition is increasingly becoming
competition over different systems of production
(Hollingsworth et. al. 1997, p.38).
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Variables for the quality of

governance in seaport clusters

The presence of trust

The presence of leader firms
The presence of intermediairies
Solutions to Collective Action Problems
(CAPs)

32

Cluster governance
Cluster structure

Presence of intermediairies
level of trust
Embedded leader firms
Solutions to collective
action problems

Cluster
performance
NPV of value added
33

Variables for quality of cluster governance

Trust

Intermediaries

Low coordination
costs

Leader
firms

Solutions
to CAPs

Scope of coordination
Beyond price

Sub-variables
-Infrastructure
For collective
Action
-Role public
Organisations
-Community
argument
-Voice
-Leader firms

Quality of
Cluster governance
34

The presence of trust

Trust lowers transaction costs
trust enables cooperation and specific
investments
Trust enables innovation

35

The presence of leader firms

Leader firms have positive external effects
for other firms in the cluster, with regard to
Innovation
Internationalisation
Creating solutions for CAPs

36

The presence of intermediaries

Intermediairies lower transaction costs
Intermediairies enable cooperation and
innovation

37

Solutions for CAPs

A CAP exists when collective benefits exceed
collective costs and free riding can not be
prevented.
The quality of solutions for CAPs depends on

the presence of an infrastructure for collective action

The legitimacy of a community argument
The presence of leader firms (large firms)
The role of public actors in the cluster
The use of voice

Issues for a CAP solution include: specific

incentive structures, individualising collective
benefits, financial arrangements
38

CAP issues in port clusters

Port marketing and promotion
Interest representation
Innovation
Training and education
Port information systems
Labour pool
Knowledge development and diffusion

39

Collective action regimes

Solutions for CAPs cannot be addressed in general.
Different governance issues can be identified and for
each of these issues the governance regime differs.
A regime involves not just any informal group that
comes together but a group with access to
institutional resources that enable it to have a
sustained role in making governing decisions
(Rosentraub and Helmpke).
Regimes are not automatically efficient and by nature
relatively inert
40

Investments in collective action

Iv = voluntary investments
I* = optimal amount of investments
Costs and
benefits of
investments
for the cluster

Underinvestment, negative effect port performance

Marginal cost
of investments
Marginal benefits
of investments

Iv

I*

41

Investment level

I* depends on composition of
port cluster
I* = optimal amount of investments in
CARs

Marginal
costs and
benefits
Marginal costs of investments
(assumed the same)

I*2

MR2, port cluster

with dominant firm
(e.g. single user
port)

MR1, port with large

number of firms

I*1

Investment level

42

Level of voluntary investments depends

on leader firms, associations, trust etc
Iv = voluntary investments
I* = optimal amount of investments
Costs and
benefits of
investments
for the cluster

Benefits of high Iv

Marginal cost
of investments
Marginal benefits
of investments

Iv1

Iv2

I*

Investment level

43

Factors that determine the level

of voluntary investments in
CARs
Organizational infrastructure
Leader firms
Trust

44

An infrastructure for
collective action
In many cases, collective action requires a specific
organisation, collectively owned by members
Such an organisation can be termed an association
Thus, specific associations play an important role
in the governance of clusters
In different clusters the organisational structure of
the associations differs. This can have a huge
impact on the competitiveness of the cluster.
45

The role of the (public) PA

The PA is the perfect institutional arrangement to charge
port users for investments in CARs that are in the interest
of all port users.
Ports are special in this respect: other clusters lack such an
actore positioned to act as cluster manager.
Goals of PA
Increase level of investment in CARs
Secure investments are cost-effective
To make investments cost effective, public private
partnerships, joint responsibility and joint funding are
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relevant.

The perfect institutional

structure of P.A.s
Ideally P.As should have the following
characteristics
Self-sustaining
Autonomy with regard to price setting and
investment decisions
Revenues related to performance of port cluster
Goal: maximise performance of port cluster
Freedom to create direct charges when
possible.
47

Implications for P.A.s

P.A.s should not be private, unless there is no need
to create effective collective action regimes.
This is only the case for single / limited user ports.
Cases from the UK: Felixtowe, London and
Liverpool
P.A.s should have the jurisdiction over one port
cluster
National/statewide port authorities are not effective
Multiple municipal port authorities for adjacent port
facilities are also not effective.
48

Some best practices in PAs acting as

cluster managers

Rotterdam: education and innovation system.

Hamburg: Marketing
Amsterdam: seaport/airport cooperation
Barcelona: port community system
New York and LA/Long beach: hinterland
access
Los Angeles: environmentally friendly road
transport
Melbourne: supply chain solutions for customers
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